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.