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Alaska Railroad sees money in gas Company would use tax-exempt bond issuance fee for gas line to finance track upgrades Larry Persily Petroleum News Juneau Correspondent
The Alaska Railroad Corp. says it would need to upgrade its track and traffic capacity to handle the heavy load of a natural gas pipeline construction project, and it figures it could help pay for the work by charging a fee to project developers if they use the corporation’s tax-exempt bonding status to finance the pipeline.
The fee could be worth tens of millions of dollars if project sponsors are able to use the railroad to issue billions of dollars of bonds for the proposed project, estimated to cost up to $20 billion.
Charging a fee to issue so-called conduit bonds for a natural gas pipeline assumes the Internal Revenue Service would agree with the state’s assumption that the railroad corporation can issue tax-exempt debt for such a privately owned project. Tax-exempt bonds could be attractive to project developers because of the lower interest rates charged on such debt.
Railroad officials have discussed the possibility of negotiating a fee in exchange for letting developers save money with lower interest rates, but “only in the most general sense,” said Patrick Gamble, the corporation’s president and chief executive officer.
The heavy, constant loads of steel pipe and other construction material would put a strain on tracks and could clog busy summer traffic, Gamble said. Better tracks would mean trains could go faster, resulting in more handling capacity, he said. Improved communication links also would allow the railroad to handle pipeline freight at the same time as heavy summer passenger traffic, Gamble said. Track upgrades needed Regardless of whether the pipeline project moves ahead, the railroad has a five-year plan for upgrades, starting in 2004, with federal funds to cover much of the work, but not all of it, Gamble said.
If North Slope producers or others decide to build a natural gas pipeline, and pay a fee to the railroad corporation for issuing bonds, the extra money would pay to speed up the corporation’s track improvement plan, he said.
Although the railroad is owned by the state, it does not get state money for its capital improvements. “We’re told to go out and be profitable so we don’t have to draw on the state,” the CEO said.
There is some sentiment, however, that the railroad — because it is owned by the state — should not charge a fee if it issues bonds for a natural gas project, Gamble said.
“We view it completely different. We are a private corporation for all intents and purposes,” Gamble said, explaining that the state law governing the corporation tells it to be entrepreneurial. Any money made on the bond deal would benefit the state and its residents by paying for needed track improvements, he said. Valdez issued such bonds in the ’70s The city of Valdez did much the same thing when it sold bonds to help finance construction of the trans-Alaska oil pipeline terminal more than 25 years ago. Valdez charged the oil companies a 1 percent fee for issuing voter-approved, tax exempt bonds for the terminal, raising about $13 million for the city over the years, said John Kelsey, a former Valdez mayor and city council member.
“They’d logically be entitled to a reward,” Kelsey said of the railroad corporation.
The natural gas pipeline developers, not the railroad, would be responsible for the bond payments, just as the oil companies, and not the city of Valdez, are responsible for the debt service on the oil terminal.
Charging a fee to issue bonds for a natural gas pipeline assumes the Internal Revenue Service agrees with the state’s assumption that the railroad corporation can issue tax-exempt debt for such a privately owned project.
A provision in the law that transferred the railroad from the federal government to the state more than 20 years ago might allow the railroad to serve as a conduit for issuing bonds exempt from federal taxation on the interest paid to investors. If allowed to finance the project with tax-exempt debt, the companies could save as much as $1 billion in interest payments over the life of the bonds, according to estimates prepared by the state in 2002. Corporation’s bonding authority uncertain Federal law, however, is unclear on whether the corporation’s tax-exempt bonding ability extends beyond railroad projects. The law says the corporation may issue tax-exempt debt even when the money is used to finance business activities that normally would not qualify for a tax exemption, but it is uncertain how far the provision might extend.
The clearest answer would be to ask Congress to give the railroad explicit authority to issue tax-exempt debt for the gas line project. Another option would be to seek a ruling from the Internal Revenue Service, based on the existing law.
Gamble said the railroad has been asking around to learn “what’s kind of normal for an issuer fee.” He attended a recent course on public finance in Washington, D.C., and said he learned 0.5 to 0.75 percent would be within the range of market-rate fees for assisting in such financing, though he was quick to state that is not the railroad’s official position or a starting point in negotiations.
“We realize we would have to go to the table with the state and producers,” Gamble said.
In addition to a fee for issuing the bonds, the corporation would want to talk about arbitrage — the income made from investing bond sale proceeds before needing to spend the money on construction work. Arbitrage, the spread between the interest owed on the borrowed money and the income earned on investing the money until it’s needed, could be substantial on such a large project. All subject to negotiation Gamble posed the question: “Should the railroad get that or should the state get that? Our argument is that would be up for negotiation as well.”
Whether North Slope producers or other potential gas pipeline developers would want to use railroad bonds would depend, in part, on whether Congress passes the pending energy bill that includes federal loan guarantees for the project. Because a developer generally could not have both a federal loan guarantee and the savings of tax-exempt financing, the companies would need to decide which is more advantageous to their finances.
A federal guarantee could knock half a percent or more from the interest rate on private, taxable debt, with some industry estimates putting the savings at closer to a full percent.
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