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.