State, local leaders discuss PILT split from AK LNG Project

Who should get what portion of $16.5 billion from the Alaska LNG Project?

That’s the question the Municipal Advisory Gas Project Review Board is beginning to try to answer.

The huge sum of money in question is what would go to local governments and the State of Alaska in the form of municipal impact payments and payments in-lieu of taxes, or PILT, if the Alaska LNG Project is realized. 

Of the $16.5 billion total, $800 million would be for municipal impact payments during construction — funds to offset strains on local services, such as police and fire, while the project is being built. The remaining $15.7 billion would cover PILT for the planned 25-year life of the Alaska LNG Project.

The PILT is a substitution for property tax payments to local governments and the state. 

Because the board is an advisory body made up primarily of municipal mayors along the project corridor and some statewide representatives, it will make recommendations, but the final allocations will be made by the Legislature.

The amounts were negotiated by the producers and the State of Alaska and were first made public at the Municipal Advisory Gas Project Review Board meeting in late September. At that time, little was known about the details behind the impressive $16.5 billion figure, or what the then-proposed buyout of TransCanada’s share of the project by the state might mean.

Settling on PILT and impact payment amounts early in the process was significant for BP, ConocoPhillips and ExxonMobil, the state’s producer partners in the $45 billion to $65 billion North Slope LNG export plan, because it helps provide the elusive fiscal certainty the companies are looking for from the state to help model the project’s finances, according to Revenue Commissioner Randy Hoffbeck, who chairs the board.

The $15.7 billion PILT amount is based on a 13.75-mill rate — an average of the state’s 20-mill rate for the North gas treatment plant and pipeline combined with a negotiated 7.5-mill rate for the LNG plant and terminals in Nikiski and a mid-range $55 billion project cost, or value.

“The $15.7 (billion) was not a target we were originally shooting for. It was the result of the formula,” Hoffbeck said.

Adding tax burden if the project goes forward with a capital cost greater than $55 billion could stress the economics of the Alaska LNG Project, which is expected to have relatively thin margins.

“This pipeline doesn’t have the economics that (the Trans-Alaska Pipeline) had,” Hoffbeck said.

Natural Resources Commissioner Mark Myers commented that the value of the pipeline, projected to cost $15 billion with eight gas compressor stations, is its ability to help get North Slope natural gas to market, and less its appraised value as far as the project goes.

Applying a mill rate, or a percent of value tax, is how property taxes are typically collected. A 15-mill rate, for example, is a 1.5 percent tax on property value.

Starting from a base amount to assure money is distributed in the early years, payments would follow a five-year rolling average for natural gas throughput, a “pennies per mcf” surcharge on the gas, as Hoffbeck described it. Mcf is an industry abbreviation for one thousand cubic feet of natural gas, which a base measurement of gas volume.

Thus, payment amounts would follow the projected ramp up over the first few years of the project and include a 1 percent escalator — factoring inflation and depreciation — each year.

The first PILT would be distributed in 2024 or 2025 based on the current project timeline and is estimated at $556 million, with a final payment of $706 million in year 25.

Since the state has now bought out TransCanada and owns a 25 percent share of the Alaska LNG Project — the producers collectively hold the other 75 percent — examining how the money could be split is slightly less complex and was what the board addressed at its Dec. 16 meeting in Anchorage.

Hoffbeck outlined a hypothetical scenario to detail how the $596 million PILT in year eight of operation, which is expected to be the first year at full capacity, would be divided up amongst local governments and the State of Alaska. The actual allocations will be decided by the Legislature.

PILT split

The PILT must be split three ways: between municipalities with project assets; between all areas of the state, recognizing the statewide impact of the project; and the State of Alaska.

In Hoffbeck’s hypothetical scenario, the state and the municipalities each receive 50 percent of the $596 million payment. However, because they are “4/4ths” payments, meaning paid by all four project partners, the state would take $149 million first, to cover its 25 percent of the $596 million, according to Natural Resources Commissioner Myers, also a board member. The state, as an owner in the Alaska LNG Project, would essentially tax itself with the PILT, Myers described.

That would make the actual PILT ratios — if first split evenly — 27 percent for municipalities and 73 percent for the state.

Regardless of how the PILT is allocated, it seems clear the state plans on recouping the tax it pays out as a partner in the project. Taking a quarter of the $15.7 billion off the top would leave about $11.8 billion to be split between the state and local governments.

Another chunk would be taken from the $596 million to spread project revenues statewide. If that amount were $100 per resident, as Hoffbeck hypothesized, and distributed to local governments based on population, the statewide payment would be another $75 million, if a population of 750,000 Alaskans is assumed.

The state currently has about 735,000 residents. 

Because the pipeline would run through significant unincorporated areas, particularly north of Fairbanks, the State of Alaska would receive a 20-mill rate tax on 304 miles of pipeline.

The State of Alaska’s initial take would leave about $220 million for the seven municipalities along the project corridor. How that chunk is divided will undoubtedly be the center of much debate as well. 

The Fairbanks North Star Borough, for example, would get just 0.2 percent of the PILT for the pipeline, because only two miles of the proposed route is in the borough. 

However, the Fairbanks area would certainly feel a much larger share of project impacts than its ratio-based PILT allocation as a staging area for construction and then operation for much of the project.

Kenai Peninsula Borough Mayor Mike Navarre, a board member, predicted the annual PILT would be viewed by the Legislature as additional funds available for allocation, adding political pressure and power plays between regional delegations of legislators to the mix.

Fairbanks North Star Borough Mayor Karl Kassel called it “disingenuous” to say his jurisdiction will see impacts equal to the tax on two miles of pipeline corridor.

Local governments on either end of the project are likely to fair much better. The North Slope Borough would receive the entire municipal share — whatever the Legislature decides that would be — on the $15 billion gas treatment plant and all feeder lines to the project.

Hoffbeck eased concerns of North Slope Mayor Charlotte Brower, an advisory board member, by confirming that current Point Thomson infrastructure would not fall under the negotiated PILT amount; it could still be taxed by the borough despite Point Thomson’s major role as a gas source for the Alaska LNG Project. 

The PILT would apply only to new pipeline connections from Point Thomson to the gas treatment plant.

ExxonMobil’s $4 billion Point Thomson gas development is a lynchpin to the larger project. It is connected to TAPS with a pipeline meant to carry natural gas liquids, an operation planned to commence in 2016.

The Kenai Peninsula Borough would get the entirety of local government take on the $25 billion Nikiski LNG plant and marine terminals. The Alaska LNG Project infrastructure would quadruple the borough’s taxable property value, Navarre estimated.

Under Hoffbeck’s hypothetical 50-50 split, that would be nearly $80 million per year — roughly equal to the Kenai Borough’s annual general fund budget.

Under current oil and gas property tax statute, the Kenai Borough would get closer to $220 million per year, Navarre said.

Navarre said taxing the LNG plant at the statutory maximum 20-mill rate is not feasible. He indicated the borough simply couldn’t spend $220 million more per year.

“The state, regardless of where the infrastructure is sited, should be the biggest beneficiary (of AK LNG),” Navarre said.

Not a grant impact payment program

Legislators will also have to decide how to pay $800 million to local governments impacted by construction of the Alaska LNG Project — before PILT funds and gas start flowing.

The Municipal Advisory Gas Project Review Board is recommending a grant-style program be established through the state Commerce Department to distribute the municipal impact payment funds.

The board chose Commerce because it has significant experience administering state and pass-through grant programs.

Revenue Commissioner Hoffbeck urged against referring to the proposal as grant program at the Dec. 16 meeting because the $800 million would not be available to everyone and it would not be new money for those that do get a portion of it. Rather, the disbursements would be made only to offset the added burden on public services from construction activity and an influx of construction workers.

An outline of the program, drafted first by the Kenai Peninsula Borough as an idea to work from, lists fund-eligible impacts as increased public safety and emergency medical services costs along with added waste disposal and water distribution systems and health facilities.

Several thousand construction workers are expected to descend on the Kenai Peninsula to build the LNG plant and marine terminals near Nikiski.

Roads and bridges would not be covered by the impact payments. The Kenai Spur Highway will most likely be rerouted between Kenai and Nikiski if the Alaska LNG Project materializes.

Hoffbeck said the goal is to keep the application process simple and not force local governments to spend time and money drafting complex grant-like impact payment applications.

An arm of the Commerce Department would then go through a review or audit process to make sure the money is used appropriately.

North Slope Mayor Brower likened the idea somewhat to a federal program in place for villages affected by oil development in the National Petroleum Reserve-Alaska. 

The board is also recommending anticipatory payments.

“We don’t want it to be reimbursable. We don’t want you to have to front the money first,” Hoffbeck said when describing the proposal to the board of municipal leaders.

Correctly anticipating direct project impacts to areas of construction or indirect impacts to other areas of the state could be done by using socioeconomic impact data collected for other reasons, such as the project’s environmental impact statement, which will be led by the Federal Regulatory Energy Commission.

Updated: 
12/22/2015 - 4:04pm

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