Legislature(2015 - 2016)BUTROVICH 205

03/21/2016 03:30 PM Senate RESOURCES

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Audio Topic
03:30:08 PM Start
03:30:53 PM Confirmation Hearing
03:48:00 PM HB100
04:16:11 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
Consideration of Governor's Appointee:
Board of Fisheries, Israel Payton
-- Public Testimony on Appointee --
Moved CSHB 100(FIN) Out of Committee
-- Public Testimony --
+ Bills Previously Heard/Scheduled TELECONFERENCED
        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                                                               
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                                                               
-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                                                               
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                                                               

Document Name Date/Time Subjects
BOF-Resume-Israel Payton.pdf SRES 3/21/2016 3:30:00 PM
Board of Fisheries
BOF-Comments on Payton-John McCombs.pdf SRES 3/21/2016 3:30:00 PM
Board of Fisheries-Payton
HB0100-Comments-Allen Houtz.pdf SRES 3/21/2016 3:30:00 PM
HB 100
BOF-Comments on Payton-Karen McGahan.pdf SRES 3/21/2016 3:30:00 PM
Board of Fisheries-Payton
BOF-Comments on Payton-Richard McGahan.pdf SRES 3/21/2016 3:30:00 PM
Board of Fisheries-Payton