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Governor: Tax-exempting bond from railroad could help build gas pipeline Conduit financing would provide tax-exempt benefit, but recourse would be against pipeline owners, not railroad: its assets and indebtedness would not be affected Kristen Nelson PNA Editor-in-Chief
Last year the governor’s Alaska Highway Natural Gas Policy Council told the administration that innovative financing would help move a gas pipeline project forward.
This month Gov. Tony Knowles responded — with what he and the state’s bond advisors are calling a “unique” opportunity — one that could lower financing costs by 2 percentage points, from 8-8.5 percent to 6-6.5 percent. (See related story in the Feb. 10 edition of PNA.)
Owners of the pipeline would save (in 2002 dollars) more than $1 billion over the life of the pipeline because of the lower financing costs.
And the state would get an additional $500 million over the life of the pipeline in higher severance taxes and royalties because of the lower transportation costs and higher well head value for North Slope natural gas. Stevens credited This opportunity exists, Gov. Knowles told the policy council Feb. 7, because “when Congress approved the transfer of the Alaska Railroad from federal to state ownership in 1983, it granted the railroad corporation a unique ability to issue tax-exempt bonds to finance industrial development.
“This law gives a special exemption for the railroad that supercedes restrictions in today’s IRS code. Since this exemption was enacted,” he said, “Congress has again acted to specifically protect the ability of the railroad to issue such bonds. That was in the Tax Reform Act of 1986.
“The visionary behind both of those provisions is our own (U.S.) Sen. Ted Stevens, who foresaw both the value of the railroad as an economic engine to our state and the need for it to have the means to fuel that engine,” he said.
Knowles said the state has asked the producers to “take out their pencils and give this a close look.” The railroad needs legislative authorization to issue the bonds, and Knowles said he is preparing a bill to send to the Legislature authorizing the bonding. (See story on page 4.) Conduit financing Neil Slotnick, deputy commission of the Department of Revenue, said the City of Valdez did this type of tax-exempt financing for the Valdez Marine Terminal in the 1970s. Valdez issued the bonds, he said, but it did not put its own credit or assets at risk.
Instead, payment was guaranteed by the pipeline owners.
“It was merely conduit financing,” Slotnick said.
Why can’t the state do the same thing today that Valdez did in the 1970s? he asked.
The Tax Return Act of 1986 took this type of opportunity away from state and municipalities, with some exceptions, Slotnick said.
States can issue tax-exempt financing, called private activity, but that ability is very limited. “The state could not do tax-exempt financing for a project such as this one without a federal exception to the Internal Revenue Code,” he said. Revenue looked for advice After the policy council issued its report, recommending innovative financing, the Department of Revenue consulted with the experts it typically deals with, Slotnick said. Bond counsel Wohlforth, Vassar, Johnson & Brecht and investment banker Goldman Sachs brought the Alaska Railroad idea forward.
The administration knew about the exception the railroad had to issue tax-exempt bonds, Slotnick said, “but we were not aware of how broad it really was, and how unique it was.”
Ken Vassar of Wohlforth, Vassar was retained to research the legislative history, and Goldman Sachs to advise the state on the economic structure of such a bond issue. Provision unique “This provision that exists in federal law for the issuance of tax-exempt bonds by the Alaska Railroad Corp. is unique,” Vassar said. The Alaska Railroad Transfer Act includes one sentence — with no conditions attached — saying bonds issued by the Alaska Railroad Corp. are treated as though they were bonds issued by the state of Alaska for an essential government purpose, and are not treated as industrial development bonds or as private activity bonds, he said.
“If the railroad issues the bond, the bond is a tax-exempt governmental bond. This is a very unique provision,” Vassar said. “There is no other entity in the state of Alaska, no other entity to my knowledge in the country, that has the ability to provide this financing for this project at this time with these kinds of bonds.”
And there is no limit, no volume cap on this bonding ability, he said.
Before the Tax Reform Act of 1986 “there were a number of exemption provisions for bonds for special projects and special issuers,” Vassar said, some inside the Internal Revenue code and some outside of the code. “It was the intention of Congress when they passed the Tax Reform Act of 1986 to clean that up and to eliminate those provisions. But they left three exceptions. And one of these three exceptions was a specific reference to this sentence in the Alaska Railroad Transfer Act,” Vassar said.
“The railroad is in the absolutely unique position to be able to issue tax-exempt bonds to provide financing for the entire pipeline through Alaska and into Canada and to provide that financing without ownership responsibility,” he said. Reduction in pipeline tariff “What we’re discussing here today may not be the whole answer, but it’s a big part of the answer,” Jeff Brown, vice president of Goldman Sachs, told the policy council Feb. 7. Using bonds issued by the railroad “will drop the interest rate… on the project by about 2 percent. And it’s legal,” he said.
“The tax-exempt finance could actually save in excess of a billion (dollars) present value or as much as 20 cents on the pipeline tariff or in the neighborhood of 10-12 cents per Mcf to the ultimate customer, the oil company. So that certainly is a big factor tipping the scales toward development of the project.”
Companies owning the pipeline would borrow money from the railroad, which in turn would borrow money from the public, Brown said. The railroad corporation’s credit would be protected because investors would only have recourse to the pipeline owners.
Because the interest rate would be lower with tax-exempt financing, pipeline owners will pay “in the area of $120 million a year in terms of a lower annual mortgage cost,” he said. That lowers the cost of transportation “in the area of 10-12 cents per thousand cubic feet… even after tax,” Brown said.
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