CS FOR HOUSE BILL NO. 100(FIN) "An Act establishing a credit against the net income tax for an in-state processing facility that manufactures urea, ammonia, or gas-to-liquid products; relating to establishing the value of the state's royalty share of gas production based on contracts with certain in-state processing facilities that manufacture urea, ammonia, or gas-to- liquid products; and providing for an effective date." 9:06:27 AM REPRESENTATIVE MIKE CHENAULT, SPONSOR, discussed HB 100. He reviewed the basic issues in the bill. DONALD BULLOCK, HOUSE MAJORITY ATTORNEY, introduced himself. 9:09:49 AM 9:09:50 AM AT EASE 9:10:16 AM RECONVENED Co-Chair MacKinnon confirmed that Speaker Chenault would provide the committee with a sponsor statement at a later date. Mr. Bullock discussed the sectional analysis (copy on file): Section 1. Adds a new subsection to AS 38.05.180, the oil and gas leasing statute. Provides for the use of the price established in a contract between a lessee and an in-state processing facility whose primary function is the manufacture and sale of urea, ammonia, or gas to liquids products to be the value of the gas for royalty purposes. Requires the commissioner of natural resources to make a written finding that accepting the contract price is in the best interest of the state and that the price is not unreasonably low. Requires that the lessee is not affiliated with the owner of the processing facility or with a purchaser of more than 10 percent of the products of the plant. Provides a definition for "gas-to-liquid product." Section 2. Adds AS 43.20.052 to AS 43.20 (Alaska Net Income Tax Act) to provide an income tax credit to an in-state processing facility that produces urea, ammonia, or gas to liquids products for sale to third parties. Provides that the credit is equal to the amount of royalty paid on natural gas produced from state leases and delivered to the processing facility. Limits the taking of the credit to an amount that will not reduce the taxpayer's income tax below zero. Prevents any unused credit from applying to a tax in a subsequent taxable year. Requires reporting to the state by the taxpayer of the leases supplying the gas, the names of the lessees, the quantities purchased, price paid, and ownership of the processing facility. Section 3. Repeals AS 43.20.052, the credit provision. Section 6 makes the repeal effective January 1, 2024. Section 4. Makes the credit applicable to gas from state leases that is delivered for use at the processing plant during the period on or after July 1, 2017 and before January 1, 2024. Section 5. Makes sections 1, 2, and 4 take effect on July 1, 2017. Section 6. Repeals the tax credit January 1, 2024. 9:12:54 AM Co-Chair Kelly queried the reason and determination of the credits. Mr. Bullock stated that the credits were to give the company a tax credit based on the amount of gas that they purchased. Co-Chair Kelly surmised that the credit was for the production of the product. Mr. Bullock answered in the affirmative. Senator Hoffman queried a cap on the tax credit. Speaker Chenault detailed that there was a cap on the tax credits. Senator Hoffman wondered if there was a cap on the tax liability. Mr. Bullock was unsure if the percentages were considered, and detailed that the credit calculation was based on the royalty on the gas purchased. 9:16:49 AM Senator Dunleavy wondered how long the plant had been shut down. Speaker Chenault replied that it closed in 2007. Senator Dunleavy asked whether Agrium was owned by people in state, or whether it was a subsidiary. Representative Chenault replied that Agrium was owned by a Canadian corporation. Senator Dunleavy asked if there was anything to prevent the parent company from selling Agrium after two or three year. Representative Chenault did not think there was anything to prevent the company from selling. He explained that they must use state royalty gas in order to qualify for the credit. Senator Dunleavy recalled that the parent company could sell the plant. Representative Chenault agreed. Mr. Bullock stated that the focus of the credit was to produce urea, ammonia, and gas to liquids produced. He stressed that the legislation was not owner-specific. Senator Bishop had not had a chance to fully examine the bill. He was interested in Mr. Bullock's comments pertaining to the increasing price of fertilizer. He was concerned about Alaska's ability to produce its own food. Senator Bishop referred to a small refinery credit. He discussed the price of asphalt in the Interior. He hoped the bill would aid in driving down the price of fertilizer in the Interior. Representative Chenault replied that Agrium had sold to the state at a reasonable price. 9:21:50 AM Vice-Chair Micciche thought there would be approximately $159 million per year in revenue to generate the tax. He remarked that it was a break in corporate income tax. He surmised that it would be $60 million in revenue to the state, but only $12 million in corporate income tax credits. Mr. Bullock was not able to answer the question, he was not familiar with the company's operations. 9:23:20 AM Senator Olson referred to the controversial tax credits in other areas of the industry. He did not want to see a similar situation. He queried the administration's position on the bill. Representative Chenault had not had such conversations with the administration. Under HB 100, it was incumbent upon the company to produce a minimum amount before being able to take advantage of a tax credit. Vice-Chair Micciche referred to a conversation in the Senate Resources Committee, in which the administration indicated it would design tax credits with a similar composition to the one proposed in the bill. He thought the proposed tax could be likened to a "corporate tax holiday". Representative Chenault answered in the affirmative. 9:26:28 AM Co-Chair MacKinnon opened public testimony. 9:26:55 AM AARON PLIKAT, BUILDING TRADES COUNCIL OF SOUTH CENTRAL ALASKA, ANCHORAGE (via teleconference), testified in favor of the bill. He did not think the bill concerned union versus non-union issues. He thought the bill was differentiated from other tax credit formats. Co-Chair Kelly wanted to correct the record to say. He asserted that all the tax credits for the Cook Inlet required investment. Representative Chenault agreed 9:29:23 AM RICK KOCH, CITY MANAGER, CITY OF KENAI (via teleconference), testified in support of the bill. He thought that fertilizer production was not the only issue. He recounted that the urea cost (for use at the airport) had tripled upon the closure of the previous facility. He mentioned Alaska value-added products. He did not think the tax credit proposed in the bill was similar to other tax credit structures. He relayed that d had met with the governor, and the governor had expressed his support. He did not observe a negative component in the legislation. Senator Bishop asked Mr. Koch to elaborate on the significance of the urea used at the airport. Mr. Koch replied that the airport did use urea for de- icing. 9:33:36 AM STEVE WENDT, MANAGER, AGRIUM, KENAI (via teleconference), testified in favor of the bill. He discussed the closure of Agrium due to insufficient supply. Co-Chair MacKinnon asked if the Agrium company operated with a board of directors, and whether they looked at a return on investment. Mr. Wendt affirmed that the board of directors. He thought the bill would enable the company to offset the large initial investment able to compete in the corporation for the limited corporate dollars. Senator Bishop referred to the previous testifier, Mr. Plikat, and wanted to make sure that the jobs would be available. Mr. Wendt stated that the company planned on hiring all Alaskans for the 140 jobs that would be created. He detailed that the company only worked a seven day on/seven day off schedule. HB 100 was HEARD and HELD in committee for further consideration.