By Tim Bradner
Alaska Journal of Commerce

JUNEAU — Coal trains could be rumbling daily through downtown Anchorage under a plan approved by the Legislature May 12.

The state-owned Alaska Railroad Corp. now has the lawmakers' permission to issue $2.9 billion in tax-free revenue bonds to finance a major coal gasification project at Agrium U.S. Inc.'s ammonia and urea fertilizer plant in Nikiski, near Kenai. The project also includes construction of a 200-megawatt coal-fired power plant.

Coal from the Usibelli mine in Healy would be shipped to Agrium through the Port of Anchorage under a plan developed by the railroad and Agrium.

However, House Bill 229, given final approval by state lawmakers May 12, also includes a $300 million authorization for the railroad to finance a rail spur line from the existing rail track near Willow to the Matanuska-Susitna Borough's Port MacKenzie, on Knik Arm across from Anchorage.

The long-term hope — for Mat-Su Borough officials, at least — is that the rail spur to Port MacKenzie can be built so that coal can be shipped to Agrium through that port rather than through Anchorage.

The bulk of the financing authorized by HB 229, $2 billion, is for bonds issued for the Agrium plant financing. Another $600 million is for rail improvements and coal loading facilities at the Port of Anchorage, Alaska Railroad officials have said.

The bill is now on the way to Gov. Sarah Palin for her approval. The Department of Revenue, which monitors financing activities of state entities, has previously said it has no objection to the proposal.

House Finance Committee co-chair Mike Chenault, R-Kenai, pushed the bill quickly through the House and Senate. The bill was introduced March 29.

Agrium hoped to have it approved this year so that the option of tax-free financing could be presented to potential investors in the Kenai gasification project this summer, the company has said.

The company hopes to switch its plant from reliance on natural gas, which is in short supply in Southcentral Alaska, to a synthesis gas made through gasification of coal.

“Agrium is in danger of being permanently shut down due to a lack of natural gas feedstock, and that would be a catastrophe for the Kenai Peninsula,” Chenault said. “My community relies on the plant as a major taxpayer and provider, and the project that is on the table calls for gasification that will help the plant operate at optimal capacity.

“Allowing the railroad to bond out the project helps its feasibility and enhances the project's economics, which enable it to move forward,” Chenault said.

Revenue bonds issued by the railroad are linked to the project being financed and its sponsor for repayment, and do not obligate the railroad nor the state, railroad officials told legislators in hearings.

The Alaska Railroad has authority to issue tax-exempt private industrial development revenue bonds, an ability that is almost unique in the nation. Several years ago Congress disallowed the use of tax-free bonds issued by public entities to aid private projects, but the authority given to the Alaska Railroad when it was transferred from federal to state ownership was exempted.

There has never been a tax-free financing by the railroad for a non-rail project, however, so the proposal to finance Agrium's project will be an important test case. The U.S. Internal Revenue Service would have to approve the tax-free status of the bonds before they can actually be sold, however.

Also, the passage of HB 229 does not mean that the financing will actually happen. State law requires legislative approval for all major projects undertaken by independent state corporations, which include the railroad.

The bill does gives the railroad permission to issue the bonds if Agrium's project goes ahead and the company and the railroad decide that use of the tax-free revenue bonds will improve the project's viability.

Agrium's plan is to complete the engineering and environmental work for the project, which are now underway. The company hopes to make a corporate decision on whether to proceed with construction in mid-2008. If the plan proceeds, the new coal gasification plant would be complete and in operation by 2011 or 2012, Agrium has said.

Coal gasification involves a process of controlled combustion that reforms the basic carbon and hydrogen chemical compounds making up coal into a gas, with oxygen also added.

The synthetic coal gas that results is similar to natural gas in its basic chemical composition and can be used as a substitute in the manufacturing of ammonia and urea fertilizer at the Agrium plant.

Gas is short in Southcentral Alaska, and the Agrium plant has been operating seasonally with a shut-down during winter when demand for gas is at peak levels by utilities.

The switch to coal would allow Agrium to resume year-around operations and even increase its output to levels achieved before gas shortages began affecting the plant.

Tim Bradner can be reached at tim.bradner@alaskajournal.com.