IRS confers tax-exempt status on Alaska gas line agency

By Alex DeMarban, Alaska Dispatch News - August 10, 2017

The IRS says the Alaska Gasline Development Corp. is a tax-exempt agency, a determination the state is touting as an important development for Alaska’s giant gas-export project.

The IRS decision, issued July 18, means the state agency that owns the Alaska LNG project does not have to pay federal income taxes, setting the stage for potentially large savings for the $43 billion development. The project last year lost key investors amid worldwide competition and low prices for liquefied natural gas, or LNG.

As a political subdivision of the state, AGDC “is not required to file a federal tax return,” said the private letter ruling from Timothy Jones, an IRS senior counsel.

AGDC’s mission of providing the state with “long-term energy solutions and maximizing the value of natural gas” to benefit all state residents, including through revenues from the project, is a government purpose, the letter says.

The state agency, an independent public corporation created by the Alaska Legislature in 2010, announced the ruling in a prepared statement Tuesday.

In the statement, AGDC said that in addition to not having to pay federal income tax, it can also issue tax-exempt debt, like bonds, to help finance the project.

The private letter ruling does not speak to bonds or whether they would be tax-exempt.

Receiving tax-exempt status for debt could require a separate IRS ruling, said Jerry Burnett, the Alaska Department of Revenue deputy commissioner, who has specialized in public financing.

But approval of tax-exempt status for debt of the state agency might not require a separate determination, he said.

“I would say it’s totally dependent on the structure of the project,” he said. Among the criteria: the proportion of state ownership versus private ownership, and the project’s benefit to the Alaska public, factors within AGDC’s control.

Savings on tax-exempt bonds would be “significant over a long period of time,” compared to bonds that are not tax-exempt, Burnett said Wednesday.

The IRS letter says that as long as AGDC’s contracts and transactions with private entities are at “arm’s length,” any involvement and benefit by private entities in the project is “only incidental” to AGDC’s public mission of benefiting state residents by maximizing the value of its gas.

Alaska LNG, proposing construction of an 800-mile gas pipeline, a North Slope plant to remove carbon dioxide from the gas, and another plant in Nikiski to superchill the gas into LNG, has struggled under the weight of its own expense.

The project’s oil company partners, Exxon Mobil, BP and ConocoPhillips, backed out of the project last year following concerns that it couldn’t compete in a world awash with other LNG-export projects.

That left just the state corporation at the helm, and questions whether a state-led project would succeed without the financial muscle and expertise of the three companies.

[Oil producers balk after Alaska LNG called uneconomic]

The agency has been looking for new investment partners and Asian utilities willing to sign long-term contracts to buy gas. The contracts could help secure financing deals.

A study last year by energy consulting firm Wood MacKenzie, while underscoring the concerns about the gas market, also found that a state-led project could be economic under the right circumstances. One such opportunity included securing federal tax-exempt status.

Keith Meyer, AGDC president, called the IRS ruling “great news.”

“The favorable ruling from the IRS will provide significant maneuvering room as we shape the financial structure of the Alaska LNG project,” Meyer said in the prepared AGDC statement that announced the IRS decision.

Keith Meyer is the new head of the Alaska Gasline Development Corp. Photographed June 20, 2016. (Alex DeMarban / Alaska Dispatch News)
Keith Meyer (Alex DeMarban / Alaska Dispatch News)

The IRS ruling doesn’t resolve the critical need for investment partners and gas customers to help support the project, but it is a “helpful” step, said Larry Persily, federal coordinator for Alaska gas projects until 2015 and chief of staff to Kenai Peninsula Borough Mayor Mike Navarre.

Anchorage Rep. Andy Josephson, a Democrat and co-chair of the House Resources Committee, called the ruling unexpected and “good news.” He said that the ruling improves the project’s footing for raising money.

Sen. Cathy Giessel, R-Anchorage and chair of the Senate Resources Committee, said she’s pleased the ruling came through. She has questions, however, including whether AGDC told the IRS it is looking for investors, including from foreign countries.

Giessel said she’d like to see a copy of the AGDC letter that led to the private letter ruling.

Rosetta Alcantra, vice president of communications for AGDC, sent an email to Alaska Dispatch News on Wednesday saying the letter to the IRS is confidential.

“AGDC did not communicate directly with the IRS,” Alcantra said. “The letter that led to the private letter ruling was between AGDC’s tax counsel and the IRS. This correspondence is privileged attorney work product.”