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Tax exemptions key to gas authority Tax savings would lead to lower tariff for natural gas line Larry Persily Petroleum News Juneau Correspondent
Expectations of tax-exempt status are a key part of the Alaska Natural Gas Development Authority’s business plan. An exemption from state and municipal property taxes and state corporate taxes. An exemption from federal corporate income tax on its “profits,” or the money left over after expenses. And an exemption from federal income taxes on the interest earned by investors who buy bonds to finance the proposed multibillion-dollar project.
The exemption on Alaska corporate and property taxes is the easiest of the bunch. As a state entity, the gas authority is exempt from paying state income tax on any corporate profits it might make in owning a natural gas pipeline from the North Slope to Valdez. And state law also governs municipal and state taxes on oil and gas property in Alaska.
The property tax exemption would be a major savings to the project, with state and municipal property taxes estimated to average $85 million a year over the life of a 30-year project, according to the Alaska Department of Revenue. That assumes a $12 billion project for a North Slope gas treatment plant, a 2-billion-cubic-foot-per-day pipeline to Valdez and an LNG tanker terminal. Downside to property tax exemption Though the state doesn’t lose anything if the gas authority is exempt from federal taxes, the downside to an exemption from state and municipal property taxes would be the loss of a potential long-term revenue stream to the state and communities dealing with falling oil tax revenues.
The state, however, would continue to collect royalty revenue and production tax payments from North Slope gas producers that own the gas and would either sell it to the state authority or pay to ship it down the pipeline.
The issue of federal taxation is not as easy as state tax-exempt status.
Any federal exemptions depend on what the bond money is used to build, what any profits are used for, and whether the operation meets the public-purpose criteria of the Internal Revenue Service. Tax exemptions would reduce tariff If all of the exemptions come through, it could mean a substantial reduction in what the gas authority would need to charge for carrying gas through a state-owned pipeline from the North Slope to tidewater, said Harold Heinze, chief executive officer of the operation. A lower pipeline tariff would make Alaska gas more competitive on world markets, he said.
“If we’re not tax exempt … the economics of this are very questionable,” Andy Warwick, chairman of the state gas authority board of directors, told board members Oct. 21.
Just eliminating state and municipal property taxes, state income taxes and federal corporate income taxes could knock out as much as 70 cents per thousand cubic feet from the tariff, Heinze said in a slide presentation he put together for board members in September.
“I stopped paying property and income taxes. I did what I always dreamed of in the corporate world,” Heinze said of his fiscal model presentation. Heinze worked 23 years for ARCO subsidiaries, the last three years as president of ARCO Transportation Co.
He acknowledges the federal tax exemption is not automatic, but is something the state authority needs to understand so that it doesn’t miss any opportunities in planning for a possible state-financed pipeline, liquefaction plant and LNG shipping terminal. Business plan the key Adopting a business plan that maximizes any tax exemptions is essential, Warwick told the board at its Oct. 21 meeting in Anchorage. “The question is how do we design this so that we are tax exempt.”
The gas authority has asked the governor and Legislature for funding for various legal work, including research into the federal tax-exemption issues. “The position I’ve taken is this is something you get an expert opinion on,” Heinze said last month.
The question to the IRS, he said, would be: “If we are performing a public service … and if we do make a margin, and if we use that margin for public good, is that a taxable event?”
The public would benefit He compares the gas authority to the Alaska Housing Finance Corp., which does not pay federal corporate taxes on its investment earnings. It uses those earnings to subsidize housing loans and provide housing services for Alaskans, and returns some of its income to the state.
The gas authority, Heinze said, could use some of its money to help cover the costs of in-state natural gas projects. Regardless of whether there are any profits, or how that money might be used, just the fact that the gas authority would provide transportation for a natural resource might be enough to qualify for the IRS tax exemption, he said.
Promoters of federal tax-exempt status for the state gas authority point to a January 2000 IRS opinion for the Alaska Gasline Port Authority, which worked the past several years to build a publicly owned pipeline and LNG terminal, much the same as the state authority is trying to do. The port authority is comprised of the North Slope Borough, the Fairbanks North Star Borough and the city of Valdez.
That IRS letter stated: “Based solely on the representations made” by the port authority, the entity would not be subject to federal corporate income taxes.
The ruling was based on the port authority’s representation that Alaska municipalities would be the primary or significant purchasers of the gas. However, the numbers do not support that representation. The state gas authority is looking to move 2 bcf per day through the line, and the total in-state gas use for municipal and private utility residential, commercial and power generation is just 200 million cubic feet per day, or 10 percent of the project’s volume.
The Department of Revenue’s 2002 report on state ownership noted, “If the underlying facts have not been fully or accurately described in the letter to the IRS, the IRS is not bound by the ruling.” Bond debt another issue The ruling did not address tax-exempt financing.
Tax-exempt bonds could bring substantial savings to the project’s financing costs. A January 2000 Department of Revenue report on state ownership and financing of a natural gas project estimated tax-exempt interest rates would be about 25 percent lower than taxable bonds.
However, the authority could encounter significant problems in winning IRS approval for tax-exempt status for 100 percent of its project bonds, with Heinze acknowledging the financing may need to be a blend of taxable and tax-exempt debt.
Under federal law, states may issue tax-exempt bonds for public projects such as schools, roads and harbors. Bonds for such private-use projects — such as a gas pipeline or private office building — are limited for each state in federal law. The current limit on tax-exempt, private-activity bonds for Alaska is $225 million a year, far short of the billions needed for the gas project.
Another problem is that the state already uses its entire limit in private-activity bonds. The Alaska Industrial Development and Export Authority, Alaska Housing Finance Corp., Alaska Student Loan Corp. and municipalities rely on those tax-exempt bonds each year.
The Department of Revenue report noted that perhaps some of the costs of the LNG marine terminal might qualify for tax-exempt financing as a public-use facility, depending on an IRS ruling on the issue. Otherwise, the pipeline project would have to pay taxable financing rates, the report said. Similar battle in Anchorage Anchorage and the IRS already are embroiled in a dispute over just such a tax-exempt financing issue.
Anchorage sold $108 million in tax-exempt bonds seven years ago to finance the purchase of one-third of the Beluga natural gas field. Although Anchorage’s Municipal Light and Power uses gas from the field, much of the gas is sold for private utility use.
The IRS determined the deal constituted a municipal investment in a private gas field and, as such, the municipality did not qualify for tax-exempt financing of the entire project.
The municipality is appealing the ruling to the IRS.
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