Legislature(2015 - 2016)BARNES 124
03/11/2015 01:00 PM House RESOURCES
| Audio | Topic |
|---|---|
| Start | |
| HB100 | |
| HB132 | |
| Presentation(s): Middle Earth Tax Credits | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| *+ | HB 100 | TELECONFERENCED | |
| + | TELECONFERENCED | ||
| + | TELECONFERENCED | ||
| += | HB 132 | TELECONFERENCED | |
HB 100-UREA/AMMONIA FACILITY TAX CREDIT
1:03:38 PM
CO-CHAIR NAGEAK announced that the first order of business is
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."
1:04:29 PM
TOM WRIGHT, Staff, Representative Mike Chenault, Alaska State
Legislature, paraphrased from the following statement [original
punctuation provided]:
House Bill 100, Mr. Chairman, creates a new corporate
income tax credit for owners of facilities used in the
manufacture and sale of urea and ammonia.
When gas is produced from a state lease the state
receives a royalty. If an "in-state processing
facility" that "manufactures and sells urea and
ammonia" purchases gas as feed stock from a state
lease, a credit is established under this bill. The
amount of the credit is the amount of the royalty paid
to the state. The credit can be used to abate state
income taxes under AS 43.20. The amount of the credit
cannot be used to reduce the taxpayer's liability
below zero.
According to a McDowell study, conducted by Agrium, a
reopened Agrium facility using a single train, would
consume approximately 28 billion cubic feet (BCF) a
year of gas with an estimated 21 BCF coming from state
leases. It is anticipated the total royalty payment
to the state would be approximately $15 million
annually, assuming a wellhead value of $5.70 per MCF.
Benefits from a single train production would result
in 140 direct jobs with a payroll of $14 million.
Approximately 340 total jobs to include direct,
indirect, and induced, within the state with a payroll
of approximately $30 million. It is anticipated all
employees will be Alaska residents.
Plant rehabilitation would cost about $275 million and
require a temporary work force of 440 workers which
translates to a payroll of $75 million over the two
year rehabilitation timeframe.
It would place Agrium as one of the top local
taxpayers in the Kenai Peninsula Borough, with
approximately $2.2 million in tax revenue. This
doesn't include sales tax revenue new jobs will be
generated ... will generate.
In light of the Cook Inlet tax credits, small
producer's tax credits expiring in 2016, a new user of
Cook Inlet gas would continue to encourage additional
exploration and development of gas fields in Cook
Inlet.
1:07:04 PM
REPRESENTATIVE JOSEPHSON asked whether the improvements would be
$275 million or $75 million.
MR. WRIGHT advised Representative Josephson that improvements
would be $75 million.
1:07:37 PM
The committee took a brief at-ease.
1:08:23 PM
STEVE WENDT, Manager, Agrium Kenai Nitrogen Operations Facility,
stated he has been with Agrium U.S., Inc., for 23-years.
1:08:52 PM
ADAM DIAMOND, Manager, Government Relations, Agrium U.S. Inc.,
Headquarters, introduced himself.
1:09:01 PM
MR. WENDT corrected the testimony of Mr. Wright and advised that
rehabilitation costs will be $275 million. He stated that
Agrium is headquartered in Calgary, Alberta, Canada and Agrium
U.S. Incorporated, which owns the Kenai Nitrogen Operations
(KNO) facility in Kenai is located in Denver, Colorado. Agrium
produces all three major NPK fertilizers [NPK represents the
value of the three macro-nutrients used by plants, the macro-
nutrients are nitrogen (N), phosphorus (P) and potassium (K)].
He pointed out that its products are sold worldwide, and the
Kenai Nitrogen Operations (KNO) facility started initially in
1968 with production beginning in 1969. By 1978 it had doubled
in size and he pointed out that Agrium U.S. Incorporated is
considering restarting that 1968 model of a facility. It is
capable of producing approximately one million tons of ammonia
and urea on an annual basis. He offered that when it was
previously open it had approximately 300 employees, was a major
contributor to the Kenai Peninsula Borough property tax rolls,
spent approximately $75 million annually in Alaska for natural
gas of approximately $15 million on an annualized basis went to
approximately 400 vendors in-state. He opined that it was
difficult to close KNO and believes Agrium took every
opportunity to keep the facility open, but were unable to do so.
When KNO shut down it partnered with the Department of Labor and
opened a transition center in Kenai to help transition its
workforce to other jobs and training was involved. The
legislation that has passed in the last few years to incentivize
exploration and production in Cook Inlet has been successful.
In 2007, when the plant shut down, the company considered
selling the plant and subsequently the activity in Cook Inlet
inspired KNO to take another look at restarting the facility.
He remarked that it is encouraged by new gas discoveries and the
potential for KNO to restart. He asked that the committee
consider taking a subsequent action to support KNO thereby
creating an additional market for gas, and additional incentives
for explorers and producers in Cook Inlet. He pointed out that
with the assistance of the legislature, KNO will make the Kenai
project the most compelling project it can make before its board
of directors - as it will have to compete with other projects
for a limited amount of capital that Agrium would be putting
forward.
1:14:05 PM
REPRESENTATIVE HERRON asked Mr. Wendt why that site was
initially chosen.
MR. WENDT opined that the Cook Inlet gas resource was
significant and that UNICAL desired to monetize that resource.
1:14:57 PM
MR. DIAMOND advised that Agrium Kenai Nitrogen Operations
Facility (KNO) supports HB 100. He highlighted that in order
for any facility to benefit from HB 100 they would have to be
operating, and would have to be purchasing gas from state leases
thereby generating state revenue in the form of royalty
payments. In the case of KNO, the plant is not open as it would
take an upfront commitment on the part of Agrium of
approximately $275 million to get the plant to that point. He
further highlighted that there is nothing in HB 100 that will
directly impact the royalty payments the state receives as the
royalty number is there as a reference to ensure that the bill
would remain revenue neutral or revenue positive to the state.
He said that KNO recognizes the budget situation in Alaska is
tenuous at this point and it is important to note that HB 100
would not impact any existing revenue stream in the case of KNO.
The plant is not operating and its Alaska income tax bill is
currently approximately $30,000-$40,000. He opined that there
is not a current stream of revenue this will impact. In fact,
he suggested, that if this helps the project proceed it would
generate a significant new revenue stream in the form of royalty
payments from the gas.
1:16:54 PM
REPRESENTATIVE HAWKER questioned whether Mr. Diamond would
guarantee it will not make this business decision without this
credit, and whether he will guarantee it will make this business
decision with the credit.
MR. DIAMOND advised that this credit will help the project, but
he could not guarantee whether it will or will not push it over
the edge as that decision is over his pay grade. He highlighted
that there is a limited amount of capital expenditures a company
has and this project will compete with other projects. He
advised that he is trying to put the best project before those
decision makers, and the bill will absolutely help the process.
1:17:57 PM
REPRESENTATIVE HAWKER asked whether there are other corporate
operations outside of Alaska, and will the corporate operations
be solely inside Alaska if the plant is reopened.
MR. WENDT replied that there are corporations worldwide as
Agrium U.S. has facilities in: Alaska; Kennewick, Washington;
Sacramento, California; Border, Texas; Northland, Ohio; and
Conda, Idaho; are the major manufacturing facilities associated
with Agrium U.S. Inc.; and it has an extensive retail outlet
system through the lower-48.
REPRESENTATIVE HAWKER noted that Agrium has extensive worldwide
holdings and the credit it is proposing in the bill is credit
against its Alaska State Corporate Income Tax. He noted that
the taxable income is determined by factors within Agrium's
control relating to its apportionment of its income and expenses
on a worldwide basis to Alaska. He asked whether its corporate
tax allocation policy would result in the legislature granting a
credit in Alaska for earnings that were actually attributable
under an allocation policy to activities outside the state.
MR. DIAMOND responded that the credit being discussed here would
be against the state income tax and that income tax is
determined partially based on U.S. Federal Tax, which would vary
depending on how well Agrium does. In the event Agrium has a
good year the state apportionment will be higher and conversely
if it has a bad year it would go the other way. He advised that
on initial conversations with Agrium's accountants it
anticipates the Alaska State Income Tax would be in the
neighborhood of $3-$4 million annually.
1:20:29 PM
REPRESENTATIVE HAWKER advised Mr. Diamond that he did not answer
the question because that taxable income ... is that determined
on an Alaska statewide water's edge basis, or is that an
allocation of its various ... allocations are a multiplicity of
factors in the case of Agrium with payroll gross revenue and
assets. He explained that the state corporate income tax
allocation is not resultant from Agrium's discreet activities
within the State of Alaska. He pointed out that it is important
for him to understand where that taxable income is coming from
and whether the legislature is giving a credit that is
subsidizing taxable activity outside the State of Alaska.
MR. DIAMOND advised he does not have the answer but will take
the question back to Agrium and provide him with an answer.
1:21:25 PM
REPRESENTATIVE JOSEPHSON pointed to the McDowell Group study
"The Economic Benefits of Reopening the Agrium Kenai Nitrogen
Plant," assumes that gas used by Agrium will be new gas. He
asked the dynamics of the Cook Inlet market and why that
assumption is made.
MR. WENDT stated he was not sure he understood Representative
Josephson's question regarding the dynamics of Cook Inlet. He
advised that through incentives the legislature previously put
into place there is considerable increased activity, equipment,
and manpower, working in Cook Inlet to explore and produce not
only from existing fields but looking at new fields. He advised
they are meeting regularly with all of the producers in the
state and found that although they'll need to be proved up with
infrastructure put in place to put into production that there
are potentially significant new discoveries in state.
1:22:57 PM
REPRESENTATIVE JOSEPHSON stated he is not unsympathetic to this
bill and asked whether this is a matter of the industry priming
the pump, turning the valve, and producing the gas Agrium needs,
or whether that (indisc.) has already been purchased and the
state is earning royalty on it.
MR. WENDT responded that the majority, if not all, of the gas
Agrium hopes to put under contract would be new gas that is not
currently being produced and the state is not currently
receiving a royalty.
1:23:43 PM
REPRESENTATIVE HAWKER pointed out that Agrium is essentially
looking for a subsidization from the State of Alaska for a
project specific activity within the borders and confines of the
state. He asked whether Agrium considered a mechanism that
would assure the legislature that the credit was generated by
the investment and income producing assets in the state. He
suggested a restrictive physical asset investment tax credit so
the state is not subject to the vagaries of literally multi-
state and, in this case, worldwide income tax allocations.
MR. WENDT said he could only comment on HB 100, and that he has
not looked at other options.
1:24:43 PM
REPRESENTATIVE SEATON stated there is a situation where
ConocoPhillips is not operating at full volume as it does not
have enough gas. He pointed out that if ConocoPhillips had
access to the additional gas then corporate income tax would be
paid on that gas, the state would receive the royalty, and the
$0.17 per MCF production tax. He said he is trying to ascertain
how the state indicates it is going to utilize the gas so that
it doesn't generate any corporate income tax. He offered a
scenario that Donlin Creek wanted to put in a gas line and build
it and then asked how the state would be in position to tell
Donlin Creek that it will have to pay corporate income tax, yet
Agrium does not. He reiterated Agrium's comments saying, the
amount of gas used and the royalty amount is always going to
exceed its net income tax liability. He related that basically
the state would be saying that for ten years Agrium doesn't have
to pay any net income tax, and questioned how that relates to
any other potential use of the gas.
MR. WENDT answered that for Alaska there are additional benefits
to Agrium coming on line in that Agrium previously was a
supporter and a supplier to the local agricultural community and
it would be a positive impact on food security within the state.
He offered that Agrium provides urea to the aviation industry in
the state, and that all of the agricultural industry and
aviation industry products were at a reduced cost to them
because of transportation, et cetera. He pointed out that
Agrium would become a Kenai Peninsula Borough tax payer, and
would provide jobs which are substantial to the state. He
opined there are a number of reasons Agrium would have a
positive impact on the state.
1:28:07 PM
REPRESENTATIVE SEATON related that in a previous conversation
Mr. Wendt had indicated Agrium would be a big carbon dioxide
user and could use pipeline quality gas rather than liquefied
natural gas quality carbon dioxide. He reminded Mr. Wendt that
he had indicated he would provide the committee with the gross
amounts of carbon dioxide Agrium could utilize in the Cook Inlet
area in its manufacturing process thereby alleviating the huge
expense for the gas treatment plant on the North Slope. He
commented that another potential benefit to the state, in one of
the proposals that had come forward, was looking at pipeline
quality with gas coming down from the North Slope instead of the
carbon dioxide all taken out on the North Slope.
MR. WENDT acknowledged that he does not have the number today
and further stated his notes indicate that he does owe the
committee that information and would get back to the committee.
He advised that "Yes," Agrium can take natural gas off the
pipeline that contains percentages of carbon dioxide and use
that with no problem in its plant. He said that a previous
governor set up a pipeline task force of which Agrium is a
member. He described that it has been through many iterations
now that the standard has gone so many different directions ...
this has back as far as 2007, where Agrium has continued to have
interest in gas pipeline from the North Slope. He remarked that
Agrium has provided information to the state, or these
committees, each time they have made a request for information.
He posited that Agrium continues to be interested in being
considered a potential customer.
1:31:09 PM
REPRESENTATIVE SEATON pointed out that there are two different
kinds of projects the state has been looking at and one of the
holdups on one of those projects is that it would have higher
carbon dioxide levels than normal. He noted that it would be a
substantial benefit to the state on that project, if it comes to
fruition, of being able to use carbon dioxide in Agrium's
manufacturing project. In that regard, he said, Agrium should
provide the information to the committee in its proposal.
1:31:55 PM
CO-CHAIR NAGEAK held over HB 100.