Legislature(2015 - 2016)HOUSE FINANCE 519
04/03/2015 01:30 PM House FINANCE
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| Audio | Topic |
|---|---|
| Start | |
| HB100 | |
| HB41 | |
| HB49 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| + | HB 80 | TELECONFERENCED | |
| + | HB 15 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| *+ | HB 155 | TELECONFERENCED | |
| *+ | HB 100 | TELECONFERENCED | |
| += | HB 41 | TELECONFERENCED | |
| += | HB 49 | TELECONFERENCED | |
HOUSE BILL NO. 100
"An Act establishing a credit against the net income
tax for an in-state processing facility that
manufactures urea or ammonia; and providing for an
effective date."
1:31:59 PM
Co-Chair Neuman MOVED to ADOPT the proposed committee
substitute for HB 100, Work Draft 29-LS0423\N, Nauman,
3/31/15. There being NO OBJECTION, it was so ordered.
REPRESENTATIVE MIKE CHENAULT, SPONSOR, introduced himself.
DONALD BULLOCK, COUNCIL, ALASKA LEGISLATURE HOUSE MAJORITY,
indicated there were changes between the original version
of the bill and the work draft.
Co-Chair Thompson recommended and explanation of the
differences between the two documents.
Mr. Bullock explained that there were three changes in the
proposed committee substitute: it addressed multiple owners
of the urea and ammonia plant; it clarified that the gases
delivered to the facility must be used by the facility; and
it addressed an affiliation issue to determine the value of
the gas for royalty purposes. He looked at page 2, lines 9
through 17, which was new language to state that the
Commissioner of the Department of Natural Resources (DNR)
would determine whether the lessee was affiliated with the
processing plant, owner of the processing plant, or the
purchaser of the gas produced by the plant. He explained
that Section 1 provided the establishment of the value for
royalty purposes, which was the contract between the lessee
and the plant. The language was similar to existing law for
sales to utilities and other fertilizer plants, and would
enhance the support that it was an objectively established
price.
1:37:42 PM
Co-Chair Neuman asked about the use of the manufacturing
component of the facility. Mr. Bullock responded that the
credit may be used for either the product or manufacturing
process.
Co-Chair Neuman wondered if the credit could be used for
heating of the plant. Mr. Bullock replied in the
affirmative.
Co-Chair Neuman asked if the state had a definition of
"manufacturing." Mr. Bullock was unsure whether there was a
definition of "manufacturing.
Co-Chair Neuman responded that he believed that the intent
of the word "manufacturing" indicated a molecular change in
the gas used in the facility. He stressed that the credit
must not be used for an LNG export facility. Mr. Bullock
responded that the discussion had related to whether gas
continued to be gas in the manufacturing process, or what
the gas made into a different substance. The tax credit
related to gas delivered to the plant which was combined
with nitrogen to produce the Urea and Ammonia. He stressed
that a liquefaction process would produce the same gas
components, however it would be in a liquid state.
Co-Chair Neuman indicated that his staff had produced
information from February 23, 2010. He read from a prepared
definition of "manufacturing":
Manufacturing means chemically converting gas or
components of gas or chemically combining components
of gas with other substances to form valuable
compound. Manufacturing does not include gas
processing, gas treatment, dehydration, fracknation,
compression, or liquefaction.
Representative Chenault read from a prepared statement:
House Bill 100 creates a new corporate income tax
credit for owners of facilities using a manufacturer's
sale of Urea or Ammonia. When the gas is produced from
a state lease, the state receives a royalty, and if in
instate processing facility that manufactures or sells
urea or ammonia purchases the gas as feed stock from a
state lease, the credit is established. The amount of
the credit is the amount of the royalty paid to the
state, the credit could be used to abate state income
taxes under AS 43.20, but of the credit could not be
used to reduce the tax payer's liability below zero.
According to a McDowell study, a reopened Agrium
facility using a single train, would consume
approximately 28 BCF a year of gas, with 21 BCF coming
from state leases. It was anticipated that the total
royalty payments to the state would be approximately
$15 million annually. The benefits from a single train
production would result in approximately 140 direct
jobs with a payroll of approximately $14 million, and
approximately 340 total jobs to include direct,
indirect, and induced within the state with a payroll
of approximately $30 million. It was anticipated that
all of the employees would be Alaskan residents. The
plant rehabilitation would cost about $75 million, and
would require a temporary workforce of about 440
workers, which translates into a payroll of about $75
million over the two year estimate to rehabilitate the
facility. It would place Agrium among the top local
tax payers in the Kenai Peninsula Borough, with
approximately $42.2 million in tax revenue, not
including the sales tax revenue and new jobs. In light
of the Cook Inlet tax credits that are expiring in
2016, the new user Cook Inlet gas would continue to
encourage additional exploration and developing of the
gas fields in Cook Inlet.
1:44:31 PM
Representative Gara wanted to hear from the Department of
Revenue (DOR) about the foregone tax liability. He remarked
that the credits paid to Agrium would equal their tax
liability.
Co-Chair Thompson stated that DOR would be available at the
bill's next scheduled hearing.
Representative Gara understood that the Agrium plant was an
important job producer on the Kenai Peninsula. He wondered
why the Kenai Peninsula Borough did not waive the property
taxes on Agrium, rather than the state providing
approximately $3 million in foregone state tax revenue.
Representative Chenault responded that he was unsure. He
indicated that the intent to bring jobs back and to do
further exploration.
Representative Gara wanted to explore why the borough would
not contribute, because they would be the main
beneficiaries.
1:47:05 PM
Representative Wilson asked if the plant was currently
open. Representative Chenault replied that the plant was
not open.
Representative Wilson wondered if the state was currently
losing money. Representative Chenault responded that the
state was not losing money, and was not gaining any
revenue.
Representative Wilson queried the benefit to the state
related to the reopening of the plant. Representative
Chenault replied that if Agrium used gas from state leases,
the state would receive royalty.
Co-Chair Thompson asked that someone from Agrium come up to
answer questions.
STEVE WENDT, MANAGER, KENAI AGRIUM PLANT, placed himself on
the record.
ADAM DIAMOND, MANAGER, GOVERNMENT RELATIONS, AGRIUM U.S.,
placed himself on the record.
Representative Wilson wanted to understand what benefits
were lost because of the plant closure. She specifically
queried the plant's contribution to the state and
community. Mr. Diamond responded that at the time the plant
was open there were approximately 300 employees, and the
state received royalty revenue from gas.
Mr. Wendt furthered that at the height of the plant
operation, Agrium employed over 30 employees; used in
excess of 15 billion cubic feet annually; paid royalties on
the great majority of the gas on anything from state
leases; and used nearly 400 in state vendors, and spent $15
million annually.
Representative Wilson wondered if there was any other state
revenue, besides the revenue from the gas, as a result of
reopening the plant. Mr. Diamond responded that the over
300 contractors would provide between $15 million and $20
million to the state.
Co-Chair Thompson asked Agrium reps to discuss the
fertilizer usage for farmers. He stated that the cost of
fertilizer quadrupled after the plant's closure. Mr. Wendt
responded that they had provided fertilizer for in state
agricultural usage. He stated that it was important for the
local fertilizer users, however was a small impact on
Agrium itself.
1:52:04 PM
Representative Pruitt asked why Agrium shut down. Mr. Wendt
responded that it was due to a lack of gas.
Representative Pruitt noted that there was currently a
surplus of gas, but wondered if Agrium would be able to
stay open if there was suddenly a lack of gas. Mr. Wendt
responded that through previous legislation that
successfully incentivized capital investment in Cook Inlet.
He stated that there were continually new gas discoveries,
and he believed that the discoveries were enough to reopen.
He stated that Agrium would invest $275 million to bring
the plant back to near new condition for a 20 year run.
Representative Pruitt asked what would prevent Agrium from
reopening, without the tax credit, if there was plenty of
gas in the basin. Mr. Diamond replied that there would be a
significant capital expenditure to reopen the plant. Agrium
had a limited capital budget, and there had been internal
dialogue regarding which projects would bring the best rate
of return. He stressed that the company was attempting to
provide the most attractive offer, in order to make the
project as attractive as possible for a reopening.
Representative Gara queried the estimated corporate tax
under legislation; the corporate tax that was previously
paid on an annual basis; and the corporate tax that would
have been paid without the bill. Mr. Diamond deferred to
Mr. Tamaki.
MR. ALAN TAMAKI, VICE PRESIDENT, TAX, AGRIUM, stated that
the plant had been closed for so many years, that he did
not have that information available. He estimated that the
tax saved under the credits was approximately $2 million to
$3 million, and he assumed that sum was similar to what was
paid under previous operation. He stated that the current
payment was approximately $40,000 to $50,000.
Representative Gara recalled that the estimated unpaid
generated corporate tax was $3 million to $4 million. He
wondered if that was incorrect. Mr. Tamaki deferred to Mr.
Diamond. Mr. Diamond responded that the previous estimate
was $3 million to $4 million annually, and the Alaska
Division of Tax had agreed with that estimate.
1:57:26 PM
Representative Gara stated that there were a number of
other ways that businesses finance projects, other than tax
waivers. He wondered why Agrium did not request a property
tax waiver from the borough. Mr. Diamond stated that Agrium
was looking for a positive benefit to both the state and
Agrium.
Co-Chair Neuman asked how much gas would be used. Mr. Wendt
indicated 28 bcf would be used annually, and three-quarters
of that gas would come from state leases. The state leased
gas would generate $12 million to $15 million in new
revenue from the state.
Co-Chair Neuman queried the daily rate. Mr. Wendt responded
that it would be 80 million cubic feet (MCF) per day.
Co-Chair Neuman queried current royalty rate in Cook Inlet.
Mr. Wendt responded that it was approximately 12.5 percent.
Representative Gara did not approve of lobbyists
approaching the table to provide responses. Co-Chair
Thompson announced that he would ensure that it did not
occur.
Representative Wilson noted that there was currently no gas
produced from the plant. She wondered if the state would
simply not receive as much tax from the production. Mr.
Diamond responded affirmatively. He reported that the bill
did not require any expenditures from the state, and did
not reduce any existing state revenue stream from Agrium. T
Representative Wilson noted that the state was currently
receiving zero revenue from Agrium. Mr. Diamond agreed.
Representative Wilson queried the number of years the plant
was hoping to remain open. Mr. Diamond responded that there
was an estimate of a 20 year run.
2:03:24 PM
Representative Pruitt asked if Agrium's opening was
dependent on the legislation. Mr. Diamond replied that the
credit would not guarantee that the plant would reopen, and
would inhibit the plant from reopening. The legislation
would only provide an attractive factor in the decision
making. He hoped that the legislation would provide an
attractive investment for the company.
Representative Pruitt surmised that the legislation was
only a factor in considering reopening Agrium. Mr. Diamond
agreed with that summation.
Representative Gara asked if the plant may open without the
tax credit. Mr. Diamond responded affirmatively.
Representative Gara asked if there was investment monies
available inside the company.
DAVID IZETT, SENIOR LEGAL COUNSEL, AGRIUM, responded that
Agrium was currently looking at a number of alternatives
for capital.
Co-Chair Thompson assumed that the credit would be a
positive factor in determining the plant reopening. Mr.
Izett replied in the affirmative.
2:07:03 PM
Representative Gara wondered if Agrium would respond
positively to an only 50 percent tax discount. Mr. Diamond
responded that he would put the most attractive position in
front of Agrium. He could not indicate what would or would
not enhance the decision. He reiterated that the credit
would have a positive impact on the decision to reopen the
plant.
Co-Chair Thompson wondered how long the plant would need to
reopen, if the legislation passed in the current year. Mr.
Wendt replied that there was a hope to begin production on
July 1, 2017.
Representative Guttenberg asked how Agrium was assured that
they were not repeating its previous mistake. Mr. Wendt
responded that it was being very careful in examining the
reopening. The evaluation team was looking at reserve
reports.
Representative Guttenberg wondered if the company was still
concerned whether there was enough gas to produce. Mr.
Wendt replied in the affirmative.
Representative Guttenberg asked that if the bill was
passed, he wanted to know the earliest start date of a
reopening. Mr. Wendt responded July 1, 2015.
HB 100 was HEARD and HELD in committee for further
consideration.