Legislature(2015 - 2016)HOUSE FINANCE 519
04/03/2015 01:30 PM House FINANCE
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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 price. 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 process. Co-Chair Neuman wondered if the credit could be used for heating of the plant. Mr. Bullock replied in the affirmative. 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 liability. 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 beneficiaries. 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 revenue. 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 Agrium. 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 occur. 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 plant. 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 reports. 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 consideration.