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House OKs Agrium subsidy without checking 2014 financing application

  • Author: Dermot Cole
    | Opinion
  • Updated: September 28, 2016
  • Published April 14, 2015

As it studied plans to restart its Kenai fertilizer plant in 2013, Agrium asked the Alaska Industrial Development and Export Authority, which invests and provides financial incentives to Alaska businesses, for help with financing.

"AIDEA is one mechanism that may help support the project via repayable loans," a spokesman for the Calgary-based company, one of the largest fertilizer distributors in the world, said in early 2014.

Agrium described its pitch to AIDEA as a plan for $60 million in financing, which would help advance the restart effort, according to AIDEA. The state agency outlined its requirements for a financing plan and described the review it would undertake before making a decision, an analysis funded by Agrium. The AIDEA board approved a resolution setting out the specifics in January 2014.

"In order to make a decision on the project, the authority needs to conduct certain analyses regarding the project, including confirmation of information and engineering studies Agrium has developed," AIDEA executive director Ted Leonard wrote.

Last September, Agrium told AIDEA it would not need AIDEA's help. A company spokesman said Tuesday it was because "AIDEA wasn't able to offer services to Agrium that met the project needs."

As part of its due diligence work, AIDEA reviewed documents that included information about the company's business, financial and marketing plans. The advance work was to include a $30,000 review of the business and engineering plans and a $70,000 appraisal, both paid for by Agrium.

Legislators have not seen what information AIDEA acquired during its review or received a report from the state agency, but a bill backed by House leaders that would allow Agrium to operate for seven years without paying a corporate income tax won approval from the state House on Monday.

One of those opposed to House Bill 100, Anchorage Democratic Rep. Les Gara, said Tuesday the AIDEA application should have been discussed in committee and examined in detail.

"During testimony in House Finance this year on HB 100 no one emphasized, or perhaps even mentioned that this AIDEA loan was sought before these subsidies were requested," Gara said in a letter Tuesday to AIDEA and Agrium.

"It leads one to the question whether a simple low interest AIDEA loan was all that was needed, and whether that loan request was only withdrawn when more generous, straight state financial payments were offered to Agrium in bills the last two years. I would like more information so the Legislature can determine this as soon as possible," he said.

He said lawmakers should have called on the governor's office to look at "Agrium's financials to determine whether financing, or any subsidy, was needed at all. This decision should not have been made without access to that information."

The bill, now in the Senate, would allow the company to take credits for the first seven years of its operation estimated at $3 million to $4 million a year. House Bill 100 has three committee referrals in the Senate, so it's not clear how far it will advance this year.

Backed by House Speaker Mike Chenault, whose district includes the Agrium plant, the bill won approval on a 30-8 House vote, opposed by seven Democrats and Rep. Lora Reinbold, a former member of the Chenault majority who didn't vote for the budget backed by the majority.

Key issues raised during House debate centered on what the state would gain in royalty revenue and jobs if the plant is reopened and whether the subsidy would be the deciding factor to proceed or stop. A study by the McDowell Group for Agrium stressed that reopening the plant could lead to 140 jobs paying $100,000 a year and the company would pay property taxes, along with employees. An operating facility would create numerous other economic benefits, the study said.

Supporters of the bill said the state would not have the benefit of up to $4 million a year in corporate income taxes for seven years, after which the subsidy would end, but there would be millions more in state revenue from the sale of royalty gas, the portion of the resource owned by the state. Without Agrium, there might be no demand for companies to look for or develop that gas, they said.

"It is not a giveaway," Anchorage Republican Rep. Dan Saddler said Monday, as there is no benefit in the form of lower taxes unless the company actually buys gas and pays royalties to the state. "There's no credit unless there's production."

Rep. Tammie Wilson said in a hearing in early April that the income tax money the state would forgo if the subsidy is approved is money that the state is not collecting now, so the state would not really be giving anything up.

"Right now we're getting zero. And we're incentivizing is the purpose of it, that you will reopen -- that it will be more economical than some other projects that you may have out there. Is that correct?" Wilson asked an Agrium official.

Adam Diamond, the government relations manager, said that is "absolutely correct."

The study by the McDowell Group on the economics assumes that many of the companies that would sell gas to Agrium would qualify for an existing tax credit for small companies. "Most Cook Inlet producers qualify for this tax credit, which often reduces their tax liability to zero," the report said. The main revenue to the state then would be from the 12.5 percent share that the state owns, about $15 million a year.

Opponents of the bill said the royalty gas revenue would flow to the state no matter who buys it and that there was no evidence that the tax credit would make or break the project.

"Are you saying that you might open up even without this tax credit?" Gara asked Agrium officials during a hearing April 3. "That is definitely a possibility," responded Diamond.

"The easiest thing, which we're not going to get, is their financials, so we're guessing," said Gara. "That's probably very true," Rep. Steve Thompson said.

Diamond said the subsidy could make the project more profitable for the company.

"This credit will not guarantee that the plant will open. It will not prevent the plant from not opening. All we can do is put the most attractive position before Agrium, who has to then make an internal decision. This will absolutely be a factor in that decision, but I cannot say that it will make or break," he said.

David Izett, a senior lawyer for Agrium in Calgary, testified by phone that the company is looking at numerous alternative financing sources. "As part of that exercise, this credit is one of those things that we're investigating," he said.

The Agrium plant, built in 1968 and expanded in 1978, was at one time the second-largest producer of ammonia and urea in the United States, according to AIDEA.

A shortage of natural gas in Cook Inlet led the company to shut the plant in 2007, seven years after the Canadian fertilizer producer bought Unocal's agricultural products subsidiary. The company needs 80 million cubic feet a day of natural gas for at least five years at "reasonable prices," according to a 2014 AIDEA summary.

It's not clear what price is considered reasonable, but in 2003, the plant was paying a rate for gas that was 67 percent below the prevailing value, according to the McDowell Group study on the economic impact of the plant.

"With respect to Kenai, we continue to investigate our options around natural gas up there," Agrium vice president Ron Wilkinson said during a Feb. 24 earnings call. "We've made good progress, but we've not made enough progress to actually tie down enough gas to bring forward a proposal to restart the plant. We're still very optimistic, though, in terms of the reserves up in that area and do believe that they'll come to production."'

Agrium CEO Chuck Magro said in early 2014 that the plant was kept in good condition after its shutdown in 2007.

"It will require capital to restart and really the key question with Kenai is 'Is there enough gas to restart the plant?' " he said on Jan. 22, 2014, at the Whistler Institutional Investor Conference.

At that time, he said the company needed another year of drilling before saying whether gas could be purchased in quantity at the right price. The plant could produce about 1 million tons of ammonia and urea per day.

"We think it could take $200 million, maybe $250 million to restart. So if you look at those economics, they are phenomenal and they are worth a year's worth of investigation to see if it's even possible," Magro said.

In recent hearings, Agrium has said the cost could be about $275 million to resume operations.

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