Alaska Gov. Tony Knowles has proposed that the state of Alaska finance a $17 billion North Slope gas pipeline using tax-exempt bonds issued by the state-owned Alaska Railroad Corp. The railroad has special authority to provide tax-exempt economic development financing, granted by Congress in 1983 when the railroad was transferred from federal to state ownership.
Congress took away most powers for states and municipalities to issue tax-exempt industrial development bonds in the 1986 tax reform act, but the special provision for the Alaska Railroad was one of three exceptions allowed in 1986, Knowles told the Alaska Gas Policy Council, a citizen advisory board, in Anchorage Feb. 7.
"Our state-owned railroad has the unique ability to do this kind of financing without limit as to amount or geographic scope," the governor said, meaning that sections of the pipeline built in Canada as well as Alaska could benefit from the arrangement.
The railroad would issue "conduit" bonds to provide the financing, meaning that the credit of neither the railroad nor the state would be at risk. Similar conduit tax-exempt financing has been done for years in Alaska for various private projects that qualify under the Internal Revenue Service code.
"This is worth about $1 billion to the North Slope producers, in today's dollars, off the financing costs of the project," Knowles said.
The interest rate on tax-exempt debt would be about 2 percent below the cost of conventional taxable financing, according to Neil Slotnick, deputy commissioner of the Alaska Department of Revenue.
Jeff Brown, a Goldman Sachs Co. vice president who works with Alaska on special financing, said the 2 percent difference could translate to about $150 million per year in lower annual debt service. He said that would translate into a possible reduction of 10 cents to 12 cents per thousand cubic feet on the tariff charge for transporting North Slope gas from northern Alaska to markets in the Lower 48 states.
However, that might not be enough to substantially improve the marginal economics of the project. The tariff has been estimated at about $2.10 per Mcf for a northern partly offshore route to $2.40 per Mcf for a southern route through Interior Alaska in studies of a gas pipeline by three North Slope gas producers, BP Exploration (Alaska) Inc., ExxonMobil Production Co. and Phillips Alaska Inc.
The state of Alaska favors a southern route, which is more costly. The state's financing offer extends only to the southern route, according to the governor's office. But the estimated 10 to 12 cent savings is only about a third of the difference between the gas transportation costs of the two routes.
Knowles told the policy council that the railroad's financing authority, which has never been used for a nonrailroad project, has long been known, but it was only in recent months that the governor asked the Revenue Department and the state's bond counsel to research whether the railroad could finance a very large, unrelated project like a gas pipeline.
The governor said the producers have been briefed on the state's proposal, and that Alaska Lt. Gov. Fran Ulmer was in Washington, D.C., meeting with federal transportation officials.
"So far, their responses have been positive," the governor said.
Gas producing companies involved in the pipeline acknowledged they had been briefed, but declined to comment. One senior manager, speaking on condition his name not be used, said any proposed tax-exempt bond issue for the project would need approval of the Internal Revenue Service before it would be considered in financial markets.
The state's studies of the idea have assumed that a project-financing approach to building the pipeline would be used, similar to that used with other major gas pipelines built in North America in recent years, Slotnick said.
Project financing means that debt is linked to the project itself for repayment, rather than the credit of its owners. Bond holders look to the signing of contracts for use of the facility being financed, in this case contracts from producers shipping gas through the pipeline, as a financial guarantee.
The assumption was also that the producers, or an independent pipeline consortium, would finance about 30 percent of the project as an equity investment, and then finance the remaining 70 percent through offerings of debt, he said.
Essentially, the private pipeline consortium would borrow the money from the Alaska Railroad, which would in turn raise funds by issuing tax-exempt bonds. The pipeline itself would be privately owned, Slotnick said.
Alaska has considered special financial arrangements for a North Slope gas pipeline in the past. In 1979 the state created a state gas pipeline authority to help finance the Alaska Natural Gas Transportation System, a previously unsuccessful effort to build a pipeline from the North Slope.
The state has also carried out tax-exempt financing to build road and port infrastructure to support mine development, and docks and harbors, although none on the scale now envisioned for the North Slope pipeline.
The Alaska Railroad's special tax-exempt provision recognized that the federally owned railroad had not been adequately maintained in recent years and needed substantial investments in new track and other modernization.
