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Knowles wants tax-exempt bonds for gasline; could shave $1 billion off cost Railroad authority to issue bonds which would be used under Knowles plan Allen Baker PNA Contributing Writer
Tax-exempt bonds issued by the Alaska Railroad Corp. could be used to shave $1 billion off the cost of a natural gas pipeline to the Lower 48, Gov. Tony Knowles says.
Estimates prepared by the state Department of Revenue and Goldman Sachs provide the savings figure, in today’s dollars, which would come over the life of the project, Knowles said.
In a speech prepared for a Feb. 7 meeting of the Alaska Highway Natural Gas Pipeline Policy Council, Knowles said that when the state took ownership of the railroad in 1983, Congress granted the railroad the ability to issue tax-exempt revenue bonds to finance industrial development.
The special exemption granted by Congress at the behest of Sen. Ted Stevens supercedes restrictions in today’s tax law, Knowles said.
Although the railroad would issue the bonds, neither the railroad nor the state would own the gasline, or be responsible for the debt, Knowles maintains. That would be the responsibility of the private companies that build, own and operate the line. Bill to go to Legislature Knowles said he was prepared to send the Legislature a bill to provide the railroad with state authority to issue the bonds to get the pipeline built. And he said he was asking the producers to give the idea a close, hard look.
The method has been used in Alaska previously, the governor said, notably when the city of Valdez issued tax-exempt bonds for $1.265 billion for construction of the terminal for the trans-Alaska oil pipeline.
For that project, as with most revenue bonds, the project and its revenues constitute the sole source of money for paying off the debt, though the credit capacity of the oil company pipeline owners also provided security, according to a recent report on state financing of a gas pipeline from the Department of Revenue.
But the financial markets likely would finance no more than 70 percent of the project with this kind of debt, the report said. The state could ask the producers to put up the equity share as a prepaid tariff, it suggested.
In its report, Revenue noted that “Even though there almost certainly would be an economic benefit from tax-exempt financing, whether the resulting structure is attractive to the producers or pipeline companies is an open question.”
For while tax-exempt bonds offer a lower interest rate (the report suggest a discount of roughly 25 percent, i.e., 6 percent financing with tax-exempt bonds if taxable bonds cost 8 percent), state ownership would eliminate the benefit to the private owner of accelerated depreciation.
Thus in the early years of ownership, taxable borrowing would be more beneficial to a private owner, since far more of the value of the line could be deducted from taxable income. The report said that “under one set of reasonable assumptions, tax-exempt financing is economically advantageous, but it would take 13 years for an owner to realize a cost advantage from tax-exempt financing.”
Revenue bonding for a gas pipeline is not a new idea, the report notes.
“Authority for revenue bonds was approved for the Alaska Pipeline Financing Authority in 1978,” it said, although the amount was limited to $1 billion.
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