Legislature(2015 - 2016)HOUSE FINANCE 519

04/03/2015 01:30 PM House FINANCE

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* first hearing in first committee of referral
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= bill was previously heard/scheduled
<Bill Hearing Canceled>
<Bill Hearing Canceled>
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Heard & Held
Moved CSHB 41(FIN) Out of Committee
Moved CSHB 49(L&C) Out of Committee
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."                                                                                                           
1:31:59 PM                                                                                                                    
Co-Chair  Neuman  MOVED  to  ADOPT  the  proposed  committee                                                                    
substitute  for  HB  100, Work  Draft  29-LS0423\N,  Nauman,                                                                    
3/31/15. There being NO OBJECTION, it was so ordered.                                                                           
REPRESENTATIVE MIKE CHENAULT, SPONSOR, introduced himself.                                                                      
DONALD BULLOCK, COUNCIL,  ALASKA LEGISLATURE HOUSE MAJORITY,                                                                    
indicated there  were changes  between the  original version                                                                    
of the bill and the work draft.                                                                                                 
Co-Chair  Thompson   recommended  and  explanation   of  the                                                                    
differences between the two documents.                                                                                          
Mr. Bullock explained  that there were three  changes in the                                                                    
proposed committee substitute:  it addressed multiple owners                                                                    
of the urea  and ammonia plant; it clarified  that the gases                                                                    
delivered to the facility must  be used by the facility; and                                                                    
it addressed an affiliation issue  to determine the value of                                                                    
the gas for  royalty purposes. He looked at page  2, lines 9                                                                    
through  17,  which  was  new language  to  state  that  the                                                                    
Commissioner of  the Department  of Natural  Resources (DNR)                                                                    
would determine  whether the lessee was  affiliated with the                                                                    
processing  plant, owner  of the  processing  plant, or  the                                                                    
purchaser of  the gas  produced by  the plant.  He explained                                                                    
that Section 1  provided the establishment of  the value for                                                                    
royalty purposes, which was the  contract between the lessee                                                                    
and the plant. The language  was similar to existing law for                                                                    
sales to  utilities and other  fertilizer plants,  and would                                                                    
enhance the  support that it was  an objectively established                                                                    
1:37:42 PM                                                                                                                    
Co-Chair  Neuman asked  about the  use of  the manufacturing                                                                    
component of  the facility. Mr.  Bullock responded  that the                                                                    
credit may be  used for either the  product or manufacturing                                                                    
Co-Chair Neuman  wondered if  the credit  could be  used for                                                                    
heating   of  the   plant.  Mr.   Bullock  replied   in  the                                                                    
Co-Chair  Neuman asked  if  the state  had  a definition  of                                                                    
"manufacturing." Mr. Bullock was  unsure whether there was a                                                                    
definition of "manufacturing.                                                                                                   
Co-Chair Neuman  responded that he believed  that the intent                                                                    
of the word "manufacturing"  indicated a molecular change in                                                                    
the gas  used in the  facility. He stressed that  the credit                                                                    
must not  be used  for an LNG  export facility.  Mr. Bullock                                                                    
responded  that the  discussion had  related to  whether gas                                                                    
continued to  be gas in  the manufacturing process,  or what                                                                    
the  gas made  into a  different substance.  The tax  credit                                                                    
related to  gas delivered  to the  plant which  was combined                                                                    
with nitrogen to  produce the Urea and  Ammonia. He stressed                                                                    
that  a  liquefaction process  would  produce  the same  gas                                                                    
components, however it would be in a liquid state.                                                                              
Co-Chair  Neuman  indicated  that  his  staff  had  produced                                                                    
information from February 23, 2010.  He read from a prepared                                                                    
definition of "manufacturing":                                                                                                  
     Manufacturing  means   chemically  converting   gas  or                                                                    
     components  of gas  or chemically  combining components                                                                    
     of  gas   with  other   substances  to   form  valuable                                                                    
     compound.   Manufacturing   does    not   include   gas                                                                    
     processing,  gas  treatment, dehydration,  fracknation,                                                                    
     compression, or liquefaction.                                                                                              
Representative Chenault read from a prepared statement:                                                                         
     House  Bill  100 creates  a  new  corporate income  tax                                                                    
     credit for owners of  facilities using a manufacturer's                                                                    
     sale of Urea or Ammonia.  When the gas is produced from                                                                    
     a state lease, the state  receives a royalty, and if in                                                                    
     instate processing facility  that manufactures or sells                                                                    
     urea or ammonia purchases the  gas as feed stock from a                                                                    
     state lease,  the credit is established.  The amount of                                                                    
     the credit  is the  amount of the  royalty paid  to the                                                                    
     state, the credit  could be used to  abate state income                                                                    
     taxes under  AS 43.20, but  of the credit could  not be                                                                    
     used to  reduce the  tax payer's liability  below zero.                                                                    
     According  to  a  McDowell  study,  a  reopened  Agrium                                                                    
     facility   using   a   single  train,   would   consume                                                                    
     approximately 28 BCF a year  of gas, with 21 BCF coming                                                                    
     from state  leases. It was  anticipated that  the total                                                                    
     royalty payments  to the  state would  be approximately                                                                    
     $15 million annually. The benefits  from a single train                                                                    
     production  would result  in  approximately 140  direct                                                                    
     jobs with  a payroll of approximately  $14 million, and                                                                    
     approximately  340   total  jobs  to   include  direct,                                                                    
     indirect, and  induced within the state  with a payroll                                                                    
     of approximately  $30 million. It was  anticipated that                                                                    
     all of  the employees  would be Alaskan  residents. The                                                                    
     plant rehabilitation would cost  about $75 million, and                                                                    
     would  require  a  temporary  workforce  of  about  440                                                                    
     workers, which  translates into a payroll  of about $75                                                                    
     million over the two year  estimate to rehabilitate the                                                                    
     facility.  It would  place Agrium  among the  top local                                                                    
     tax  payers  in  the   Kenai  Peninsula  Borough,  with                                                                    
     approximately  $42.2   million  in  tax   revenue,  not                                                                    
     including the sales tax revenue  and new jobs. In light                                                                    
     of  the Cook  Inlet tax  credits that  are expiring  in                                                                    
     2016, the  new user  Cook Inlet  gas would  continue to                                                                    
     encourage additional exploration  and developing of the                                                                    
     gas fields in Cook Inlet.                                                                                                  
1:44:31 PM                                                                                                                    
Representative Gara  wanted to  hear from the  Department of                                                                    
Revenue (DOR) about the foregone  tax liability. He remarked                                                                    
that  the  credits paid  to  Agrium  would equal  their  tax                                                                    
Co-Chair Thompson stated that DOR  would be available at the                                                                    
bill's next scheduled hearing.                                                                                                  
Representative Gara understood that  the Agrium plant was an                                                                    
important job  producer on the Kenai  Peninsula. He wondered                                                                    
why the Kenai  Peninsula Borough did not  waive the property                                                                    
taxes   on  Agrium,   rather   than   the  state   providing                                                                    
approximately  $3 million  in  foregone  state tax  revenue.                                                                    
Representative  Chenault responded  that he  was unsure.  He                                                                    
indicated  that the  intent to  bring  jobs back  and to  do                                                                    
further exploration.                                                                                                            
Representative Gara wanted to  explore why the borough would                                                                    
not   contribute,   because   they   would   be   the   main                                                                    
1:47:05 PM                                                                                                                    
Representative  Wilson  asked  if the  plant  was  currently                                                                    
open.  Representative Chenault  replied that  the plant  was                                                                    
not open.                                                                                                                       
Representative Wilson  wondered if  the state  was currently                                                                    
losing  money. Representative  Chenault  responded that  the                                                                    
state  was  not  losing  money,  and  was  not  gaining  any                                                                    
Representative  Wilson  queried  the benefit  to  the  state                                                                    
related  to  the  reopening  of  the  plant.  Representative                                                                    
Chenault replied that if Agrium  used gas from state leases,                                                                    
the state would receive royalty.                                                                                                
Co-Chair Thompson asked that someone  from Agrium come up to                                                                    
answer questions.                                                                                                               
STEVE WENDT, MANAGER, KENAI AGRIUM  PLANT, placed himself on                                                                    
the record.                                                                                                                     
ADAM  DIAMOND, MANAGER,  GOVERNMENT RELATIONS,  AGRIUM U.S.,                                                                    
placed himself on the record.                                                                                                   
Representative  Wilson wanted  to  understand what  benefits                                                                    
were  lost because  of the  plant closure.  She specifically                                                                    
queried   the  plant's   contribution  to   the  state   and                                                                    
community. Mr. Diamond responded that  at the time the plant                                                                    
was  open there  were approximately  300 employees,  and the                                                                    
state received royalty revenue from gas.                                                                                        
Mr.  Wendt  furthered  that  at  the  height  of  the  plant                                                                    
operation,  Agrium  employed  over  30  employees;  used  in                                                                    
excess of 15 billion cubic  feet annually; paid royalties on                                                                    
the  great  majority  of  the gas  on  anything  from  state                                                                    
leases; and used nearly 400  in state vendors, and spent $15                                                                    
million annually.                                                                                                               
Representative Wilson wondered if  there was any other state                                                                    
revenue, besides  the revenue from  the gas, as a  result of                                                                    
reopening  the plant.  Mr. Diamond  responded that  the over                                                                    
300 contractors  would provide between  $15 million  and $20                                                                    
million to the state.                                                                                                           
Co-Chair  Thompson   asked  Agrium   reps  to   discuss  the                                                                    
fertilizer usage  for farmers.  He stated  that the  cost of                                                                    
fertilizer quadrupled  after the plant's closure.  Mr. Wendt                                                                    
responded  that they  had provided  fertilizer for  in state                                                                    
agricultural usage. He stated that  it was important for the                                                                    
local  fertilizer  users,  however  was a  small  impact  on                                                                    
Agrium itself.                                                                                                                  
1:52:04 PM                                                                                                                    
Representative Pruitt asked why  Agrium shut down. Mr. Wendt                                                                    
responded that it was due to a lack of gas.                                                                                     
Representative  Pruitt  noted  that there  was  currently  a                                                                    
surplus  of gas,  but wondered  if Agrium  would be  able to                                                                    
stay open  if there was  suddenly a  lack of gas.  Mr. Wendt                                                                    
responded   that    through   previous    legislation   that                                                                    
successfully incentivized capital  investment in Cook Inlet.                                                                    
He stated  that there were continually  new gas discoveries,                                                                    
and he believed that the  discoveries were enough to reopen.                                                                    
He stated  that Agrium  would invest  $275 million  to bring                                                                    
the plant back to near new condition for a 20 year run.                                                                         
Representative Pruitt  asked what would prevent  Agrium from                                                                    
reopening, without  the tax credit,  if there was  plenty of                                                                    
gas in the basin. Mr. Diamond  replied that there would be a                                                                    
significant capital expenditure to  reopen the plant. Agrium                                                                    
had a  limited capital budget,  and there had  been internal                                                                    
dialogue regarding which projects  would bring the best rate                                                                    
of return.  He stressed that  the company was  attempting to                                                                    
provide  the most  attractive offer,  in order  to make  the                                                                    
project as attractive as possible for a reopening.                                                                              
Representative  Gara  queried  the estimated  corporate  tax                                                                    
under  legislation; the  corporate tax  that was  previously                                                                    
paid on  an annual basis;  and the corporate tax  that would                                                                    
have been  paid without  the bill.  Mr. Diamond  deferred to                                                                    
Mr. Tamaki.                                                                                                                     
MR. ALAN  TAMAKI, VICE PRESIDENT,  TAX, AGRIUM,  stated that                                                                    
the plant  had been closed  for so  many years, that  he did                                                                    
not have  that information available. He  estimated that the                                                                    
tax saved under the credits  was approximately $2 million to                                                                    
$3 million, and he assumed that  sum was similar to what was                                                                    
paid under  previous operation. He  stated that  the current                                                                    
payment was approximately $40,000 to $50,000.                                                                                   
Representative  Gara  recalled  that  the  estimated  unpaid                                                                    
generated corporate  tax was  $3 million  to $4  million. He                                                                    
wondered if that  was incorrect. Mr. Tamaki  deferred to Mr.                                                                    
Diamond. Mr.  Diamond responded  that the  previous estimate                                                                    
was  $3  million to  $4  million  annually, and  the  Alaska                                                                    
Division of Tax had agreed with that estimate.                                                                                  
1:57:26 PM                                                                                                                    
Representative  Gara  stated that  there  were  a number  of                                                                    
other ways that businesses  finance projects, other than tax                                                                    
waivers. He wondered  why Agrium did not  request a property                                                                    
tax waiver from the borough.  Mr. Diamond stated that Agrium                                                                    
was looking  for a  positive benefit to  both the  state and                                                                    
Co-Chair Neuman asked how much  gas would be used. Mr. Wendt                                                                    
indicated 28 bcf would be  used annually, and three-quarters                                                                    
of that gas  would come from state leases.  The state leased                                                                    
gas  would  generate  $12  million to  $15  million  in  new                                                                    
revenue from the state.                                                                                                         
Co-Chair Neuman queried the daily  rate. Mr. Wendt responded                                                                    
that it would be 80 million cubic feet (MCF) per day.                                                                           
Co-Chair Neuman queried current  royalty rate in Cook Inlet.                                                                    
Mr. Wendt responded that it was approximately 12.5 percent.                                                                     
Representative   Gara   did   not   approve   of   lobbyists                                                                    
approaching  the   table  to  provide   responses.  Co-Chair                                                                    
Thompson  announced that  he would  ensure that  it did  not                                                                    
Representative Wilson noted that  there was currently no gas                                                                    
produced from  the plant.  She wondered  if the  state would                                                                    
simply  not receive  as much  tax from  the production.  Mr.                                                                    
Diamond responded  affirmatively. He reported that  the bill                                                                    
did not  require any  expenditures from  the state,  and did                                                                    
not reduce any existing state revenue stream from Agrium. T                                                                     
Representative  Wilson noted  that the  state was  currently                                                                    
receiving zero revenue from Agrium. Mr. Diamond agreed.                                                                         
Representative Wilson queried the  number of years the plant                                                                    
was hoping to remain open.  Mr. Diamond responded that there                                                                    
was an estimate of a 20 year run.                                                                                               
2:03:24 PM                                                                                                                    
Representative   Pruitt  asked   if  Agrium's   opening  was                                                                    
dependent on  the legislation. Mr. Diamond  replied that the                                                                    
credit would not guarantee that  the plant would reopen, and                                                                    
would  inhibit the  plant  from  reopening. The  legislation                                                                    
would  only provide  an attractive  factor  in the  decision                                                                    
making.  He  hoped that  the  legislation  would provide  an                                                                    
attractive investment for the company.                                                                                          
Representative  Pruitt  surmised  that the  legislation  was                                                                    
only a  factor in considering reopening  Agrium. Mr. Diamond                                                                    
agreed with that summation.                                                                                                     
Representative Gara asked if the  plant may open without the                                                                    
tax credit. Mr. Diamond responded affirmatively.                                                                                
Representative  Gara asked  if there  was investment  monies                                                                    
available inside the company.                                                                                                   
DAVID IZETT,  SENIOR LEGAL  COUNSEL, AGRIUM,  responded that                                                                    
Agrium  was currently  looking at  a number  of alternatives                                                                    
for capital.                                                                                                                    
Co-Chair  Thompson  assumed  that  the  credit  would  be  a                                                                    
positive  factor in  determining  the  plant reopening.  Mr.                                                                    
Izett replied in the affirmative.                                                                                               
2:07:03 PM                                                                                                                    
Representative  Gara   wondered  if  Agrium   would  respond                                                                    
positively to an only 50  percent tax discount.  Mr. Diamond                                                                    
responded that he would put  the most attractive position in                                                                    
front of Agrium.  He could not indicate what  would or would                                                                    
not  enhance the  decision. He  reiterated  that the  credit                                                                    
would have a  positive impact on the decision  to reopen the                                                                    
Co-Chair Thompson wondered how long  the plant would need to                                                                    
reopen, if the  legislation passed in the  current year. Mr.                                                                    
Wendt replied that  there was a hope to  begin production on                                                                    
July 1, 2017.                                                                                                                   
Representative Guttenberg asked how  Agrium was assured that                                                                    
they  were not  repeating  its previous  mistake. Mr.  Wendt                                                                    
responded that  it was being  very careful in  examining the                                                                    
reopening.  The  evaluation  team  was  looking  at  reserve                                                                    
Representative Guttenberg wondered if  the company was still                                                                    
concerned  whether  there was  enough  gas  to produce.  Mr.                                                                    
Wendt replied in the affirmative.                                                                                               
Representative  Guttenberg  asked  that   if  the  bill  was                                                                    
passed,  he wanted  to know  the  earliest start  date of  a                                                                    
reopening. Mr. Wendt responded July 1, 2015.                                                                                    
HB  100  was  HEARD  and   HELD  in  committee  for  further                                                                    

Document Name Date/Time Subjects
CSHB 15 Sponsor Statement.pdf HFIN 4/3/2015 1:30:00 PM
HB 15
CSHB 15 Ver. JUD Explanation of Changes.pdf HFIN 4/3/2015 1:30:00 PM
HB 15
CSHB 15 Ver. JUD Sectional.pdf HFIN 4/3/2015 1:30:00 PM
HB 15
HB15 Supporting Document 1 - BITAD Alcohol monitoring technology utilized by Alaska DOC.pdf HFIN 4/3/2015 1:30:00 PM
HB 15
HB15 Supporting Document 2 - US Dept. of Justice Electronic monitoring and recidivism.pdf HFIN 4/3/2015 1:30:00 PM
HB 15
HB15 Supporting Document 3 - Electronic Monitoring Requirements.pdf HFIN 4/3/2015 1:30:00 PM
HB 15
HB15 Supporting Document 4 - Electronic Monitoring Terms and Conditions.pdf HFIN 4/3/2015 1:30:00 PM
HB 15
HB15 Supporting Document 5 - DOC House arrest and EM program indigent form.pdf HFIN 4/3/2015 1:30:00 PM
HB 15
HB15 Supporting Document 6 - Use of electronic monitoring in the Alaska.pdf HFIN 4/3/2015 1:30:00 PM
HB 15
HB80_Sectional_Letterhead.docx HFIN 4/3/2015 1:30:00 PM
HB 80
HB80_Sponsor Statement.pdf HFIN 4/3/2015 1:30:00 PM
HB 80
HB80_Testing Requirement Briefing Memo.pdf HFIN 4/3/2015 1:30:00 PM
HB 80
HB 41 NEW FN DFG Sport Fisheries.pdf HFIN 4/3/2015 1:30:00 PM
HB 41
HB 100 Support additional.pdf HFIN 4/3/2015 1:30:00 PM
HB 100
HB 41 Letters.pdf HFIN 4/3/2015 1:30:00 PM
HB 41