Walker talks finances, LNG in Kenai

KENAI — Gov. Bill Walker reiterated a call Monday for a fix to Alaska’s budget deficit while also signing into law a tax credit designed to encourage fertilizer company Agrium to reopen its Nikiski plant.

With the sponsor, Speaker of the Alaska House of Representatives Mike Chenault, R-Nikiski, looking on, Walker signed the bill after speaking at a joint Kenai and Soldotna chambers of commerce luncheon in Kenai on Monday.

“This one is different than the other ones we’re doing up north,” Walker said. “This (tax credit) is one (in which) the benefit to Agrium will be three, four, five million dollars with a maximum of five years, and the benefit on the revenue side is four, five times that.”

The Legislature passed the bill, HB 100, on April 17. It extends a corporate tax income credit to urea and ammonia manufacturers who use methane from natural gas to make fertilizers and other products. Effective July 1, 2017, the company would receive a tax credit equal to Agrium’s potential gas supplier’s royalty payment to the state, making the credit budget neutral.

According to the fiscal note on the bill, Agrium would consume approximately $15 million in royalty gas but only have corporate tax liability of between $3 million and $4 million. Because the bill will not allow the tax liability to drop below zero, the state’s payments would be capped there.

Agrium’s return is not a given, but a representative of the Calgary, Alberta-based company said in a previous Clarion interview the company was in talks with potential gas suppliers in Cook Inlet.

The company’s return to Alaska would benefit not only the Kenai Peninsula’s economy — rippling outward with added jobs and taxes to the local government — but also around the state, Walker said.

“The benefits of Agrium go far beyond the actual people doing the work,” he said at the luncheon. “It benefits Alaska significantly. And then there’s the value-added opportunity.”

With the administration at work on a new fiscal plan proposal for the next Legislature to consider, Walker said he has “moved from optimistic to hopeful” about a budget fix. After the Legislature’s failure in the last session to pass any new sources of revenue for the state budget, opting instead to draw down on the state’s Constitutional Budget Reserve to fill the budget deficit, Walker issued a number of vetoes to the state’s fiscal year 2017 budget, including appropriating half the earnings of the Permanent Fund.

 

The vetoes have not been popular, but he saw them as necessary to address the budget deficit, he said.

 

“It will be devastating if we go through all of our savings and then sit down and try to fix this,” Walker said at the luncheon.

 

He also participated in an afternoon worksession with the Kenai Peninsula Borough Assembly to discuss options and challenges for the budget. Assembly members asked questions about Walker’s proposals for fixing the budget, ranging from whether the governor’s administration would consider incentivizing alternative energy development to whether a budget fix could wait a year or two to see if oil prices rose again.

 

To the latter question, Walker said he would like to wait but didn’t want to take the risk.

 

“I’m willing to take the political risk associated with what I’m doing rather than the fiscal risk to the state’s future,” Walker said. “…if we wait a couple of years and we’re wrong and (the price of oil) doesn’t bounce back up, at that point we need probably $120 oil to fix the budget, (and) then obviously the impact will be zero dividend and income taxes multiple times higher.”

 

Another major source of discussion was the future of the Alaska LNG Project. Since the governor’s administration announced its intention of pursuing a state-led project at the end of August, a number of questions about the future structure and execution of the project have arisen. One of the concerns among the three producer partners — BP, ExxonMobil and ConocoPhillips — was how to reduce the cost of the project. Walker said one way to do that would be to leverage the state’s position to obtain tax-exempt status for the income generated by the project and tax-exempt financing for the bonds to fund the project.

 

Walker said in an interview that he was “very confident” the state could obtain the exemption for the pipeline from the Internal Revenue Service based on a precedent on a previous pipeline project planned for Valdez.

 

“We’ll go through a new application process — it’s not complicated — to basically say income of the entity would be exempt from federal taxes, which is a pretty significant exemption,” he said. “It had to show it was a political subdivision of the state in order to qualify. … in our scenario, we aren’t a subdivision of the state. We are the state. So I would think it would be even clearer for the state.”

 

If it were tax-exempt, though, one of the casualties could fall on local governments in loss of payment in lieu of taxes, or PILT. Walker assured the assembly during the Monday worksession that some form of a PILT program would exist if the project goes forward.

 

One thing is certain, he said: The state is not giving up on the project. The producers have signaled their intention to continue their involvement, if not as partners, and approximately $600 million of preliminary work has already gone into the planning. If the project does not go forward, “I’m going to lose on the field, not forfeit in the dugout,” he said.

 

“It’s by far the biggest get-well card in our hand by far, by magnitudes,” Walker said.

 

“We’re in a pretty good position from the standpoint of being able to carry on where the work will be done at the end of this year, not incurring more risk at all or more financial obligations … there’s two things you need for a successful LNG project. You need gas, and you need a market. We certainly have that, so we’ll see.”

 

Elizabeth Earl is a reporter for the Peninsula Clarion. She can be reached at elizabeth.earl@peninsulaclarion.com.

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