Legislature(2015 - 2016)BARNES 124

03/11/2015 01:00 PM House RESOURCES

Audio Topic
01:02:26 PM Start
01:03:38 PM HB100
01:32:03 PM HB132
01:48:09 PM Presentation(s): Middle Earth Tax Credits
02:41:19 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Heard & Held
-- Public Testimony --
+ Middle Earth Tax Credits Presentation TELECONFERENCED
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
Heard & Held
-- Will Reconvene at 6:00 p.m. Today --
            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                                                               
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                                                                        
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                                                               
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.                                                                                               

Document Name Date/Time Subjects
3.11.15 HRES HB 100 H.pdf HRES 3/11/2015 1:00:00 PM
HB 100
3.11.15 HB 100 Fiscal Note.pdf HRES 3/11/2015 1:00:00 PM
HB 100
3.11.15 HRES HB 100 - Sponsor Statement.pdf HRES 3/11/2015 1:00:00 PM
HB 100
3.11.15 HRES HB 100 Agrium Overview.pdf HRES 3/11/2015 1:00:00 PM
HB 100
3.11.15 HRES AK Corp Tax Forms 6000 and 6300.pdf HRES 3/11/2015 1:00:00 PM
3.11.15 HRES HB 100 Corp Income Tax Credit Overview.pdf HRES 3/11/2015 1:00:00 PM
HB 100
3.11.15 HRES HB 100 - AS 38 05 135.pdf HRES 3/11/2015 1:00:00 PM
HB 100
3.11.15 HRES HB 100 Agrium McDowell Group Econ Impact Final Report 5 22 13.pdf HRES 3/11/2015 1:00:00 PM
HB 100
3.11.15 HRES HB 100 Agrium McDowell Group Econ Impact Final Report Refreshed Jan 2015.pdf HRES 3/11/2015 1:00:00 PM
HB 100
3.11.15 HRES Middle Earth Presentation - DOYON March 2015.pdf HRES 3/11/2015 1:00:00 PM
3.11.15 HRES Middle Earth Presentation - Ahtna Natural Gas Overview.pdf HRES 3/11/2015 1:00:00 PM
3.11.15 HRES CSHB 132 - Version P.pdf HRES 3/11/2015 1:00:00 PM
HB 132
3.11.15 HRES CSHB 132 Summary of Changes CS version P.pdf HRES 3/11/2015 1:00:00 PM
HB 132
3.9.15 HRES Committee Letter to Gov HB 132.pdf HRES 3/11/2015 1:00:00 PM
HB 132
3.11.15 HRES DNR Paul Decker Frontier Basins Presentation.pdf HRES 3/11/2015 1:00:00 PM
3.11.15 HRES HB 132 L Willis Testimony 3.6.15.pdf HRES 3/11/2015 1:00:00 PM
HB 132
HB 100 HRES LOS - M Stynsberg.pdf HRES 3/11/2015 1:00:00 PM
HB 100
HB 100 HRES Homer Electric Company LOS.pdf HRES 3/11/2015 1:00:00 PM
HB 100
3.11.15 HRES HB 100 AK Garden & Pet Supply Inc LOS.pdf HRES 3/11/2015 1:00:00 PM
HB 100
3.6.15 HRES HB 132 - H Heinze comments 3.17.15.pdf HRES 3/11/2015 1:00:00 PM
HB 132