Legislature(2015 - 2016)BUTROVICH 205
03/21/2016 03:30 PM Senate RESOURCES
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| Audio | Topic |
|---|---|
| Start | |
| Confirmation Hearing | |
| HB100 | |
| Adjourn |
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ teleconferenced
= bill was previously heard/scheduled
| += | HB 100 | TELECONFERENCED | |
| + | TELECONFERENCED |
HB 100-UREA/AMMONIA/GAS-LIQ FACILITY; TAX CREDIT
3:48:00 PM
CHAIR GIESSEL announced consideration of HB 100. [CSHB 100(FIN),
version 29-LS0423\S, was before the committee]. She noted that
public testimony was left open on March 2. Finding no one to
testify, she closed public testimony. She invited Mr. Alper to
the table and asked if the administration supports the bill.
3:48:55 PM
KEN ALPER, Director, Tax Division, Department of Revenue (DOR),
Juneau, Alaska, said the administration has no position on HB
100, but it does have a lot of things going for it that might
help with their efforts in trying to fix some things going on in
Cook Inlet. One of the pros in the bill is that there is no cost
to the state unless the project moves forward. Unlike many of
the other tax credits it is not tied to the expenditure; it's
tied to the completion of the project and then the project
itself purchasing gas that is produced from an Alaska lease.
That producer then would pay royalties to the state and the
amount of that royalty would be what determines the tax credit
that the owner of the facility (most likely Agrium) would be
eligible for.
MR. ALPER related that in previous hearings they heard one of
the big problems in Cook Inlet is supply. People who want to
produce gas don't have secure markets, and a project like this
would provide a tremendous new market for gas production in Cook
Inlet, which might resolve some of those concerns over whether
to make the investment in expanding production capacity.
SENATOR STOLTZE asked Mr. Alper if he is offering his own
opinions today since the administration didn't have a position
on HB 247.
MR. ALPER replied that he had not spoken to the Governor about
this bill that is known informally as the Agrium Bill, but in
his opinion, passing this bill could provide some certainty for
the Cook Inlet market. And frankly, as they look through HB 247,
if there was more certainty over having the ability to sell gas,
the state might not need to provide the same level of credit
support for some of the marginal projects, because they know
that they could make the investment in the platforms and so
forth, because they know they would have a market through the
Agrium facility to buy the gas.
SENATOR WIELECHOWSKI said he asked Agrium if they opposed taking
away tax credits in Cook Inlet and their answer was that the tax
credits are critical for this project to go forward. He asked
Mr. Alper if he disagreed with that.
MR. ALPER answered that he was trying, on the fly, to link the
two. If Agrium testified that this is a $250 million capital
project, that's an investment they will make and then they will
need to buy a large amount of gas, about 24 bcf/year. For the
people that would be producing that gas - if what Janak Mayer
testified to in the HB 247 hearing is accurate - the biggest
uncertainty is building something new and big and not being able
drill all the wells needed as fast as possible to pay for it,
and that's where the economics of the project start turning
upside down. If you can drill as many wells as you need to make
the project pencil out, the underlying economics (the cost of
gas in Cook Inlet) should support the project on its own merits.
So, he would not agree that the current tax credit regime would
be needed, but he didn't see where it is necessarily relevant to
this bill (HB 100).
3:53:24 PM
SENATOR MICCICHE said Mr. Alper had stated that this measure was
at no cost to the state, but asked if this tax credit is put
into place that it only potentially brings significant earnings
to the state.
MR. ALPER replied that as he understands the bill's
construction, the credit would be against the corporate income
tax for the owner of the facility once it's in operation. So, it
would mean that the investment would have to have been made and
they would have to be buying gas from an Alaska lease (some of
it is paying royalty to the gas). The absolute upside of the tax
credit would be the amount of royalty the state was receiving
from the gas that was being credited against. So, the consultant
brought in by Agrium has estimated that the total amount of gas,
given certain assumptions about the price of gas, would amount
to about $15 million a year in royalty payments to the state.
Therefore the tax credit for this project couldn't exceed
roughly that $15 million a year, and then based on some modeling
of Agrium's corporate income tax liability, it's estimated to be
in the $3 million to $4 million range. So, the state would not
be cashing them out at $15 million; they would simply be
crediting back the entire $4 million. The way the bill is
written, this credit can't be cashed or rolled forward; all it
can do is reduce one's corporate income tax liability in the
current year to zero and not beyond that.
MR. ALPER said he noticed an error in the narrative of the
fiscal note. It says that the tax credit sunsets after calendar
year 2026, and that should say 2023.
SENATOR WIELECHOWSKI said the fiscal note assumed a corporate
income tax rate of 9.4 percent and asked if the tax rate, in
fact, is 9.4 percent or would they be eligible for any other tax
credits or worldwide apportionment.
MR. ALPER answered that 9.4 percent is the nominal tax rate for
the top income bracket (something over $200,000 a year). He
didn't have a good sense of Agrium's North American business
model, but that modeling work was done by McDowell Group who
came up with the estimate of $3 million to $4 million, and that
seems to be a reasonable estimate.
3:56:28 PM
SENATOR MICCICHE said the reason he asked the question about the
cost to the state is according to the fiscal note, the Agrium
Plant utilizes a single production train and consumed
approximately 28 bcf/year of gas with 21 bcf coming from a state
lease. The fiscal note assumed a wellhead value of $5.70 and the
total royalty payment to the state would be $14.96 million per
year. If you subtract the $3 million to $4 million, that works
out to $13 million to $16 million per year coming in for the
first 6.5 years and then this would sunset and they would move
to the $15 million to $16 million range of revenue to the state.
MR. ALPER said that was correct.
SENATOR WIELECHOWSKI said at the last hearing he asked about the
financials - ROR and NPV with and without the credits - and he
hadn't seen any of that information yet, and legislators are
always trying to figure out whether the company actually needs
the tax credits.
MR. ALPER replied that the DOR had not modeled this project at
all, but these tax credits are different than a lot of the other
existing tax credits simply because they are not cashable at the
spend level. The economics would be much larger and the timing
would be different if the state was paying 20 to 40 percent of
Agrium's expenses as they were incurring them on a yearly basis.
The state's cost in this would be nothing until the project was
actually completed and operations begun. Frankly, he didn't know
if this tax credit would be that significant in terms of
determining whether the project pencils out, given its scale.
3:59:30 PM
ADAM DIAMOND, Manager, Government Relations, Agrium, said he
provided the chair with financial information that was
distributed today and that there is a competitive advantage to
that information, so Agrium doesn't provide it to the public.
SENATOR WIELECHOWSKI repeated his request for rates of return
and net present values and that it is challenging to give up $3
million to $4 million a year to a company without knowing if it
needs the money. Could he sign a confidentiality agreement and
look at their books?
STEVE WENDT, Manager, Kenai Nitrogen Operations Facility, Kenai
Peninsula, Alaska, answered that he would discuss that with
"corporate." He also corrected that there would not be $15
million in his opinion minus the $3 or $4 million. The state
would still retain $15 million, but Agrium would not pay the
additional $3 or $4 million. So, once the bill sunsets, the
state would then be taking in $18 or $19 million, not $15
million.
4:02:03 PM
MR. DIAMOND added for clarification that under the bill the
royalty revenue to the state never goes down. During the entire
life of this bill the state always receives the entire royalty
revenue it is due. It's only the amount of corporate tax on top
of it that is eligible for a limited abatement.
MR. WENDT added that this will be the highest priced gas that
Agrium will purchase by, in some cases, more than three times.
NYMEX price today is $1.82, and their estimate of $5.70 is very
conservative. In the commodity market in January, their primary
product, urea, hit the lowest point it has been at in over 10
years. So, this project is very challenged, and the return on
investment (ROI), generally, is not the 30 percent that oil
companies get, but usually 10 to 15 percent. That is why they
had originally planned to be up and running this year, but the
slow development of gas and the decline in commodity prices has
made it that much tougher for them. So, they have had to look at
other options and continue to work to make it something that can
compete against other internal projects within Agrium that the
board would consider. At this point they are not putting it
forward to the board and the $3 or $4 million they would get is
significant in many ways. Not just financially, but also just as
an important piece to know that the State of Alaska is behind
the project.
4:04:46 PM
SENATOR STOLTZE said the last time an Agrium bill was up about
10 years ago, there was a lot of agricultural testimony and he
didn't see any of that now. He asked if they had outreached to
the agriculture community.
MR. WENDT answered that they had talked to the Farm Bureau as
well as the Salcha Delta Soil and Water Conservation District
and both have submitted letters in support of this bill.
SENATOR STOLTZE said this bill seems to give them a break after
showing performance and asked if that is an accurate assessment.
MR. WENDT answered that he would agree with that, and also the
fact that the company has put a lot of money - more than $275
million - into keeping this plant in restart-able condition for
this long points to hoping for an opportunity.
SENATOR STOLTZE said that was his observation, but he wanted DOR
to confirm that.
4:07:58 PM
CHAIR GIESSEL said she looks at three things in making policy
decisions:
-how it will affect Alaska families,
-how it will affect Alaska businesses,
-and how it will affect Alaska jobs
The presented information estimates 300-600 jobs during
reconstruction of the plant and 140 operational jobs, she said,
and the analysis says the average wage at the facility is
$104,000 per year compared to the average wage in the area of
only $42,000 a year. So, it meets all three of her thresholds in
her policy decision-making criteria.
SENATOR MICCICHE commented that the folks who supported the
credits in the Cook Inlet Recovery Act and removal of production
tax were primarily focused on supply, which is a pretty narrow
gauge. And while important, it's not just that it doesn't have a
cost to the state; there is no potential for it to have a
significant net positive to the state aside from the employment
and the "trickle-down," and all the other things that happen in
his community.
He asked if 28 bcf/year is about 82 mmcf/day, for operations.
MR. WENDT answered yes.
SENATOR MICCICHE asked him to explain how Agrium functions if
they invest in refurbishing the plant and decide to fire up, and
six months into this contract the commodity price bottoms out,
and they cease operation. What happens to the $3 to 4 million
corporate tax exemption?
MR. DIAMOND replied under that scenario and the reason this bill
was tied to the royalty payments, as DOR testified earlier, the
tax is only eligible up to the amount of royalty revenues. If in
six months they have generated $2 million in royalty revenue to
the state, their incentive in that year could never exceed $2
million regardless of what their income tax is for the year.
That is how the bill makes sure it is revenue-positive for the
state.
SENATOR MICCICHE said he understood that, but he was just
illustrating the difference in tax credits.
4:11:37 PM
SENATOR STOLTZE said he just wanted some clarification: many of
the opponents of previous tax iterations contained the concept
of "show us first and then get the tax breaks," and asked Mr.
Alper if this meets that test.
MR. ALPER replied that this is an excellent example of that type
of tax credit where the state's cost is limited, if not
negligible, before seeing the production.
SENATOR WIELECHOWSKI asked if enalytica, the legislative
consultants, had done any analysis on this and the potential
impact to Cook Inlet gas production.
MR. ALPER answered the problem with Cook Inlet, in some ways is
that right now its gas price is among the highest in the
country. Projects under normal circumstances should pencil out
on their oil, but the real problem is the upfront cost of
spending hundreds of millions of dollars on a new platform or
something without the certainty of being able to sell that gas.
Modeling that sort of stylized project revealed that if all the
money was spent up front on the infrastructure but wells could
only be drilled at one-quarter speed, it would be a highly
stressed project. An Agrium buyer could give them the peace of
mind to make that investment and not have the constrained
financials that come from not drilling enough wells.
SENATOR WIELECHOWSKI asked if that is what enalytica found.
MR. ALPER answered that enalytica looked at three different
scenarios and tried to show how their economics worked before
and after the Governor's bill (he was presenting it in the House
Resources Committee at the time). Enalytica made the case that
Cook Inlet still needs credits to help projects that are
constrained on the market side. His corollary to that is if you
can fix their market problems, maybe the state wouldn't have to
worry about the tax credits problems.
SENATOR COSTELLO moved to report CSHB 100(FIN), version 29-
LS0423\S, from committee with individual recommendations and
attached fiscal note. There were no objections and it was so
ordered.
| Document Name | Date/Time | Subjects |
|---|---|---|
| BOF-Resume-Israel Payton.pdf |
SRES 3/21/2016 3:30:00 PM |
Board of Fisheries |
| BOF-Comments on Payton-John McCombs.pdf |
SRES 3/21/2016 3:30:00 PM |
Board of Fisheries-Payton |
| HB0100-Comments-Allen Houtz.pdf |
SRES 3/21/2016 3:30:00 PM |
HB 100 |
| BOF-Comments on Payton-Karen McGahan.pdf |
SRES 3/21/2016 3:30:00 PM |
Board of Fisheries-Payton |
| BOF-Comments on Payton-Richard McGahan.pdf |
SRES 3/21/2016 3:30:00 PM |
Board of Fisheries-Payton |