Legislature(2015 - 2016)HOUSE FINANCE 519

04/05/2016 08:30 AM FINANCE

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08:32:22 AM Start
08:33:33 AM HB247
10:51:27 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Please Note Time --
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 247                                                                                                            
     "An  Act relating  to  confidential information  status                                                                    
     and  public   record  status  of  information   in  the                                                                    
     possession of  the Department  of Revenue;  relating to                                                                    
     interest  applicable  to  delinquent tax;  relating  to                                                                    
     disclosure  of  oil  and   gas  production  tax  credit                                                                    
     information; relating  to refunds  for the  gas storage                                                                    
     facility tax credit, the  liquefied natural gas storage                                                                    
     facility  tax credit,  and the  qualified in-state  oil                                                                    
     refinery   infrastructure   expenditures  tax   credit;                                                                    
     relating to  the minimum  tax for  certain oil  and gas                                                                    
     production;  relating to  the  minimum tax  calculation                                                                    
     for  monthly  installment  payments of  estimated  tax;                                                                    
     relating  to interest  on monthly  installment payments                                                                    
     of  estimated  tax;  relating to  limitations  for  the                                                                    
     application  of tax  credits; relating  to oil  and gas                                                                    
     production   tax  credits   for   certain  losses   and                                                                    
     expenditures;     relating    to     limitations    for                                                                    
     nontransferable  oil  and  gas production  tax  credits                                                                    
     based on oil production  and the alternative tax credit                                                                    
     for oil  and gas  exploration; relating to  purchase of                                                                    
     tax  credit  certificates  from the  oil  and  gas  tax                                                                    
     credit fund; relating  to a minimum for  gross value at                                                                    
     the   point   of    production;   relating   to   lease                                                                    
     expenditures  and tax  credits for  municipal entities;                                                                    
     adding    a   definition    for   "qualified    capital                                                                    
     expenditure";  adding  a  definition  for  "outstanding                                                                    
     liability  to   the  state";  repealing  oil   and  gas                                                                    
     exploration    incentive    credits;   repealing    the                                                                    
     limitation on  the application  of credits  against tax                                                                    
     liability  for   lease  expenditures   incurred  before                                                                    
     January 1,  2011; repealing  provisions related  to the                                                                    
     monthly installment payments for  estimated tax for oil                                                                    
     and gas produced before January  1, 2014; repealing the                                                                    
     oil  and  gas  production   tax  credit  for  qualified                                                                    
     capital  expenditures  and certain  well  expenditures;                                                                    
     repealing   the    calculation   for    certain   lease                                                                    
     expenditures applicable before  January 1, 2011; making                                                                    
     conforming amendments;  and providing for  an effective                                                                    
8:33:33 AM                                                                                                                    
RICHARD   ENNIS,  MANAGING   DIRECTOR,   ING  CAPITAL   (via                                                                    
teleconference), shared  that his company had  utilized that                                                                    
oil and gas tax credit program  in the state. He shared that                                                                    
the bill proposed a "phase-down"  of credits over a multiple                                                                    
years,  and  felt that  it  was  beneficial to  the  Alaskan                                                                    
companies.  He remarked  that  two of  his  clients were  in                                                                    
multi-year development programs in  the North Slope and Cook                                                                    
Inlet. He felt  that the provision was  beneficial for their                                                                    
decision making  processes. He noted  that the  current bill                                                                    
included an  ongoing assignment provision  to the  lender of                                                                    
the tax  credit, which was  an important part of  the credit                                                                    
division. He  felt that  ING was in  the position  of buying                                                                    
and  remitting the  credit upon  its maturity.  He expressed                                                                    
concern with  the bankruptcy in  the underlying  client, and                                                                    
the  ability of  other  creditor and/or  the  state to  come                                                                    
between his  company and the assignment  provision. He noted                                                                    
that  the legislation  did not  contain clarifying  language                                                                    
concerning  bankruptcy   intervention.  He  noted   the  new                                                                    
provision in the bill, which  allowed the right of offset by                                                                    
the state  against the  client or  oil company.  He remarked                                                                    
that  the  provision kept  his  company  from realizing  the                                                                    
value of the  assigned credit. He did not want  to return to                                                                    
the lender to  obtain representation or audit  review of any                                                                    
offsetting claims  that may impact the  already assigned tax                                                                    
credits. He  noted the  discussions regarding  a cap  on the                                                                    
amount  paid. He  shared  that the  cap  was originally  $25                                                                    
million,  and the  current discussion  was $200  million. He                                                                    
felt  that $200  million  would satisfy  almost everyone  to                                                                    
keep the reimbursement of the  credits at short-term. He was                                                                    
not concerned with a reduction  of the $200 million, and was                                                                    
comfortable  taking a  multi-year  repayment obligation.  He                                                                    
noted  that  the  appropriations issue  was  the  overriding                                                                    
issue, but  did not  know if that  was fixable.  He remarked                                                                    
that  appropriations  were   assigned  annually.  He  wanted                                                                    
clarification in the current  legislation regarding a multi-                                                                    
year commitment to the program.                                                                                                 
8:39:19 AM                                                                                                                    
Vice-Chair  Saddler requested  more  detail  related to  the                                                                    
right  of  offset.  Mr.  Ennis   replied  that  the  current                                                                    
legislation  had a  provision  that said,  should the  state                                                                    
have any  claim for  other taxes or  license fees;  or state                                                                    
excised tax on  gasoline or diesel fuel;  any claims against                                                                    
the oil company  that assigned the credit to  the bank could                                                                    
be offset  against the credits. Therefore,  it reduced value                                                                    
of the credit after it had been assigned to his company.                                                                        
Vice-Chair  Saddler  surmised  that  there  would  be  other                                                                    
obligations that the recipient of  the credit would pay back                                                                    
to  the state  before it  would  pay the  banker. Mr.  Ennis                                                                    
agreed, and furthered  that the state a right  to reduce the                                                                    
value of the credit.                                                                                                            
Vice-Chair   Saddler   wondered   how  an   exploration   or                                                                    
development  company would  use the  credits; and  where ING                                                                    
fit  into the  provision of  resources. Mr.  Ennis responded                                                                    
that the  credit program took  between 15 to 20  months from                                                                    
the time that  money was expended to the time  that it could                                                                    
be reimbursed by the state.  He stated that ING provided the                                                                    
working   capital  through   the   20-month  financing,   by                                                                    
advancing  immediate money  to the  company. He  stated that                                                                    
ING was "stepping into" the  oil company's rights to receive                                                                    
those credits when the credits were available.                                                                                  
Vice-Chair  Saddler asked  Mr. Ennis  about his  background.                                                                    
Mr. Ennis  provided his professional background  of which he                                                                    
had been a banker for over 30 years.                                                                                            
8:43:33 AM                                                                                                                    
Representative Gara  queried an  opinion on the  $25 million                                                                    
cap  per  tax credit  holder.  Mr.  Ennis replied  that  $25                                                                    
million was not a very large  credit amount for the types of                                                                    
expenditures  that ING  was funding.  He  remarked that  the                                                                    
credits were  currently designed  to expire after  10 years,                                                                    
which would limit  the total value to $250  million. He felt                                                                    
that  there  was  a significant  appropriations  risk  under                                                                    
those circumstances, should the  repayment be limited to ten                                                                    
years, as opposed to 10 months.                                                                                                 
Representative Gara wondered  if Mr. Ennis was  aware of the                                                                    
provision  of the  law which  was that  the state,  in lower                                                                    
revenue years,  was only required  to pay a lower  amount of                                                                    
money in total  tax credits. He shared that  the formula for                                                                    
the current  year resulted  in a total  of $72  million; the                                                                    
formula in  the previous year resulted  in approximately $96                                                                    
million. He stressed that those  provisions were in place to                                                                    
protect the  public money, because most  the state's revenue                                                                    
was from  oil. Mr. Ennis  replied that  he was aware  of the                                                                    
Representative  Gara  stressed  that ING  was  a  risk-based                                                                    
company.  He remarked  that the  statute  that he  mentioned                                                                    
outlined a specific  risk. He wondered if that  was a factor                                                                    
in   the   investment    decision.   Mr.   Ennis   responded                                                                    
affirmatively. He  added that the  bank was willing  to take                                                                    
multi-year payment  risk, which was essentially  the meaning                                                                    
of the provision.                                                                                                               
Representative Gara  noted that the payment  requirement was                                                                    
much  lower  than  the  historic  average,  because  of  the                                                                    
drastic  downturn in  oil price.  Therefore, he  wondered if                                                                    
the  risk was  still acceptable.  Mr. Ennis  replied in  the                                                                    
Representative Wilson queried the  effect on interest rates.                                                                    
Mr. Ennis indicated interest rates would increase.                                                                              
Representative  Wilson  wondered  if a  determined  time  of                                                                    
credit  delivery  would  affect  the rate  less.  Mr.  Ennis                                                                    
responded  that it  would help  to  know the  tenner of  the                                                                    
8:48:48 AM                                                                                                                    
Representative  Guttenberg  queried  an explanation  of  the                                                                    
change   of   the   worldwide  climate   on   investing   in                                                                    
hydrocarbons  over the  two recent  years of  plummeting oil                                                                    
prices. Mr.  Ennis replied that  it was a  difficult market.                                                                    
He  shared that  there were  certain parts  of his  business                                                                    
that  were benefitting  from the  downturn.  He shared  that                                                                    
petro-chemicals   were  receiving   very  inexpensive   feed                                                                    
stocks.  He shared  that the  refining  and retail  entities                                                                    
were in a similar situation.  He shared that the truck stops                                                                    
and  gas stations  were  seeing a  higher  level of  demand,                                                                    
which improves  their provision. The upstream  and major oil                                                                    
companies  were  suffering  from  the  recent  downturn.  He                                                                    
shared that  he had a group  based in Houston that  only did                                                                    
upstream oil  and gas financing.  That group  was struggling                                                                    
with bankruptcies and distressed  clients. He shared that he                                                                    
had been through a few  downturned cycles, but felt that his                                                                    
company would get through it.                                                                                                   
Representative  Guttenberg  queried the  difference  between                                                                    
the  current  climate  and  no credits  at  all.  Mr.  Ennis                                                                    
responded  that the  provided credits  in  Alaska were  only                                                                    
against the  tax credit,  because of the  small size  of the                                                                    
companies that  were financed. He  shared that Fury  had one                                                                    
producing  well  in  Alaska,   and  Brooks  Range  had  zero                                                                    
operating  wells;  therefore,  ING   could  not  lend  money                                                                    
against  the  value  of their  reserves.  He  remarked  that                                                                    
continuing to drill wells,  would create diversification and                                                                    
producing reserves.  He stated  that the  ongoing commitment                                                                    
to provide  financing in  Alaska was  predicated on  how the                                                                    
state's  tax  credit  program   would  continue  to  provide                                                                    
support.  Currently, the  small clients  were too  small for                                                                    
conventional lending.                                                                                                           
Representative Guttenberg  clarified that the bank  was only                                                                    
lending to the  small developers because of  the state's tax                                                                    
credits.  Mr. Ennis  relayed that  the larger  companies did                                                                    
not go  through his entities.  Some of the  mid-market names                                                                    
had not come to ING Capital to finance them.                                                                                    
Representative  Guttenberg  asked  for  a  rough  amount  of                                                                    
loans. Mr. Ennis stated that the bank had $150 million.                                                                         
8:55:02 AM                                                                                                                    
Representative  Pruitt wondered  whether he  had clients  in                                                                    
other  regimes  who  had  experienced   a  tax  increase  or                                                                    
elimination of  incentives to produce or  explore. Mr. Ennis                                                                    
replied  that  the Norwegian  tax  credit  program was  very                                                                    
similar to Alaska's  tax credit program. He  shared that his                                                                    
counterparts  in   Europe  had  heard  from   the  Norwegian                                                                    
authorities who wanted  to reduce the amount  of credits for                                                                    
the same reason that Alaska was looking to reduce credits.                                                                      
Representative Pruitt  asked if there were  any regimes that                                                                    
were  looking  to  increase incentives  or  lower  taxes  to                                                                    
maintain investment. Mr. Ennis responded in the negative.                                                                       
Representative  Pruitt  believed  Mr. Ennis  had  been  very                                                                    
careful with his words. He  mentioned that the legislature's                                                                    
challenge  was   to  maintain  the  investing   climate.  He                                                                    
wondered how Mr. Ennis viewed  the governor's version of the                                                                    
bill versus the  current version. Mr. Ennis  stated that the                                                                    
natural  gas investors  in the  Cook Inlet  area had  been a                                                                    
good investment. On the North  Slope it was small baby steps                                                                    
that he was  seeing. The legacy production  was enormous. He                                                                    
would like to keep doing business in Alaska.                                                                                    
9:00:45 AM                                                                                                                    
Representative  Pruitt  wondered  how the  phasing  approach                                                                    
versus  immediately  eliminating  the credits  would  affect                                                                    
future  decisions to  invest in  Alaska.  Mr. Ennis  replied                                                                    
that it did not directly  affect his future investments, but                                                                    
it  caused  financial  uncertainty   for  the  oil  and  gas                                                                    
companies. He  did not want financial  uncertainty for those                                                                    
Representative  Pruitt  shared   that  the  legislature  was                                                                    
facing  two different  approaches:  a  measured approach  to                                                                    
manage  its way  out of  the credits;  or make  an immediate                                                                    
reaction.  He wondered  if that  risk was  worth investment.                                                                    
Mr.  Ennis replied  that the  approach was  a political  tax                                                                    
risk,  but  was routinely  analyzed.  He  stressed that  all                                                                    
taxes were  analyzed, in all  regimes. He remarked  that ING                                                                    
hoped that it  was a gradual, measured  approach; as opposed                                                                    
to a  sudden "shift of  gears." He  spoke in support  of the                                                                    
proposed "phase down" of the credits.                                                                                           
9:03:49 AM                                                                                                                    
Representative Edgmon  commented that  the Cook Inlet  was a                                                                    
high-risk and  high-cost area as related  to exploration. He                                                                    
noted  that the  development of  Cook Inlet  was a  separate                                                                    
part of its model. He  wondered if there was a consideration                                                                    
of the attractiveness  of the Cook Inlet Basin,  in terms of                                                                    
its potential and the smallness  of the companies. Mr. Ennis                                                                    
viewed the  Cook Inlet  Basin as a  local supply  of natural                                                                    
gas in an area with no  other supply available. He felt that                                                                    
it was a  non-competitive business, with a  willing buyer of                                                                    
the gas.  The price was  much higher than world  or Lower-48                                                                    
prices for  natural gas.  He felt that  it was  an excellent                                                                    
prospect to make  a loan. There was long-term  value to both                                                                    
the company and the state.                                                                                                      
Representative  Edgmon indicated  that what  he was  hearing                                                                    
that the  tax credits were  crucial to the lending,  but not                                                                    
the most  important element to a  lending determination. Mr.                                                                    
Ennis disagreed. He would not  be financing the small player                                                                    
without the tax credit program.                                                                                                 
9:08:24 AM                                                                                                                    
Vice-Chair Saddler queried the general  views on the tax and                                                                    
credit structure as  a tool for achieving  the state's goals                                                                    
of both production  and revenue. He wondered  if revenue and                                                                    
production could  be achieved with  the same  mechanism. Mr.                                                                    
Ennis remarked  that the credit program  allowed development                                                                    
to  occur,  which  would  not   have  occurred  without  the                                                                    
credits.  He   remarked  that  the  credit   program  showed                                                                    
significant benefit  in Cook Inlet,  but not  as significant                                                                    
in the North Slope. He felt  that an incentive program was a                                                                    
good way to  "kick start" new development. He  felt that, in                                                                    
the long  run, the state  would be the  ultimate beneficiary                                                                    
as the primary royalty holder and tax collector.                                                                                
Vice-Chair Saddler queried metrics  to capture the values of                                                                    
employment   stability,  future   prospects  for   continued                                                                    
production,  or   keeping  the  pipeline  open.   Mr.  Ennis                                                                    
understood  the  question  as  whether  there  was  tool  to                                                                    
determine which credits to extend.  He stated that the state                                                                    
must  make  a  decision  to  provide  credits  to  different                                                                    
companies based on the plan.  He recalled that the state had                                                                    
programs  to   make  those  determinations,  but   were  not                                                                    
successful, because  it became  like a "beauty  contest" for                                                                    
the  companies that  were making  the  proposals. He  stated                                                                    
that there  should be  a "blind"  system, without  trying to                                                                    
determine the "winners and losers."                                                                                             
9:12:41 AM                                                                                                                    
Vice-Chair  Saddler  queried a  repeat  of  the thoughts  on                                                                    
bankruptcy  protection, and  the importance  of that  issue.                                                                    
Mr.  Ennis  replied  that  at   the  moment  of  the  credit                                                                    
assignment by the  company, the credit did  not mature until                                                                    
the filing of  the tax return. He explained that  a loan did                                                                    
not become a true security  interest until the company filed                                                                    
its tax  return. The  company could  file bankruptcy  in the                                                                    
interim, so  the bank  could return  to an  unsecured place.                                                                    
The state could provide clarity  on the topic, but felt that                                                                    
Mr. John  Iverson could provide  some suggested  language to                                                                    
create clarity  regarding the  intervention of  a bankruptcy                                                                    
while the credits fully mature.                                                                                                 
Vice-Chair Saddler  wondered if  the bank wanted  a stronger                                                                    
position  in  the  chain  of   interest  holders  to  ensure                                                                    
repayment of the loan. Mr. Ennis responded affirmatively.                                                                       
Vice-Chair  Saddler queried  the tax  credit protection  for                                                                    
the  lender  in  Norway's  tax credit  proposal.  Mr.  Ennis                                                                    
replied in the affirmative. He  stated that, in Norway, once                                                                    
the assignment was executed the  credit was good, regardless                                                                    
of   the  underlying   company's  financial   standing.  The                                                                    
bankruptcy  filing did  not matter,  because the  bank could                                                                    
collect against the stat program  without invention from any                                                                    
other creditor.                                                                                                                 
Vice-Chair Saddler queried the  importance of the bankruptcy                                                                    
protection  provision.  Mr.  Ennis  replied  that  he  would                                                                    
appreciate the provision, but furthered  that the bank would                                                                    
continue  to make  loans. He  stressed that  there would  be                                                                    
more scrutiny with the companies.                                                                                               
Vice-Chair   Saddler   asked   about   the   importance   of                                                                    
confidentiality agreements.  Mr. Ennis stated that  the bank                                                                    
had a waiver.                                                                                                                   
9:18:00 AM                                                                                                                    
Vice-Chair  Saddler asked  if the  confidentiality provision                                                                    
made   a  big   difference.  Mr.   Ennis  stated   that  the                                                                    
legislation  was public,  the  company  information was  not                                                                    
public. The bank was happy with the flow of information.                                                                        
Representative   Guttenberg   commented  that   the   rating                                                                    
agencies have notified  the state that it needed  to get its                                                                    
"Fiscal House"  in order. He  wondered how the  stated would                                                                    
be perceived by the rating  agencies. Mr. Ennis did not wish                                                                    
to comment.                                                                                                                     
Co-Chair Thompson thanked Mr.  Ennis for being available for                                                                    
9:21:17 AM                                                                                                                    
JARED   GREEN,   PRESIDENT,    ENSTAR   NATURAL   GAS   (via                                                                    
teleconference), read from a prepared statement:                                                                                
     Good   morning  Co-Chair   Thompson,  members   of  the                                                                    
     Committee, I  am Jared Green,  President of  ENSTAR and                                                                    
     with  me is  Moira  Smith, Vice  President and  general                                                                    
     Counsel  of ENSTAR.  We thank  you for  allowing us  an                                                                    
     opportunity  to speak  today. ENSTAR  is here  today as                                                                    
     the  largest  purchaser  of natural  gas  in  the  Cook                                                                    
     Inlet. Ultimately,  our customers are a  beneficiary of                                                                    
     the tax  credit program  that has  been in  place since                                                                    
     2012. Our customers depend on  the natural gas from the                                                                    
     Cook Inlet  to heat their homes,  their businesses, our                                                                    
     schools,    our   hospitals    and   our    industries.                                                                    
     Fundamentally,  our  interest  is the  fostering  of  a                                                                    
     stable  and appealing  natural gas  environment in  the                                                                    
     Cook Inlet. This environment needs to exist in the                                                                         
     short term, the medium term and the long term.                                                                             
Mr. Green turned to slide 1: "Natural Gas Supply Needs." He                                                                     
continued to read from a prepared statement:                                                                                    
        · ENSTAR's  number  1  priority  is  safe,  reliable                                                                    
          natural gas service to our customers.                                                                                 
       · Founded in 1959, the same year as statehood                                                                            
        · Average  year is  33  Bcf [Warm  =  30Bcf, Cold  =                                                                    
       · Enalytica said total in state use was 80Bcf                                                                            
        · ENSTAR  has a  very  high seasonality  to its  gas                                                                    
          needs.  Moira  will  explain  this  further  in  a                                                                    
          moment, but  from a high level,  we generally vary                                                                    
          by a  roughly 12:1 ratio  of winter to  summer gas                                                                    
        · The  final  aspect of  setting  the  stage is  the                                                                    
          daily variability. We live  in an environment that                                                                    
          can  have substantial  variability in  gas demands                                                                    
          due to  weather. With  our current  customer base,                                                                    
          we have  a potential  daily demand of  287 mmcf/d.                                                                    
          This level  of demand is  most likely to  occur in                                                                    
          January of any  given year. Now, we  also have the                                                                    
          potential of  needing less than  100 mmcf/d  if we                                                                    
          have a warm spell like we had this January.                                                                           
        · When ENSTAR  plans its  natural gas  portfolio, we                                                                    
          look many  years in advance. Operating  in a small                                                                    
          closed  supply  network  such as  the  Cook  Inlet                                                                    
          requires  very long  lead times.  We need  to know                                                                    
          that  we   have  firm  gas  supply   set  for  our                                                                    
          customers at  least 2  years in  advance. Anything                                                                    
          less  puts  the  marketplace  at  risk  of  supply                                                                    
        · In ENSTAR's  business we  must have  gas available                                                                    
          for our  customers on the coldest  days, no matter                                                                    
          what.  When  it is  20  below  on a  dark  January                                                                    
          evening,   every  single   one   of  our   140,935                                                                    
         customers must have their gas needs met.                                                                               
        · So,  what  does  it  mean  to  be  a  natural  gas                                                                    
          supplier to ENSTAR?                                                                                                   
        · There  is no  doubt, it  is challenging  to supply                                                                    
          natural  gas in  the Cook  Inlet today.  ENSTAR is                                                                    
          the largest  purchaser of natural gas  and we have                                                                    
          very demanding needs as I just noted.                                                                                 
        · Between the CINGSA storage facility and our                                                                           
          producer  contracts,  we  need  to  have  the  287                                                                    
          mmcf/d of  gas available. However, we  do not need                                                                    
          it each  and every day. This  means producers need                                                                    
          to  have significant  capacity beyond  the average                                                                    
          production rates. It means  producers need to have                                                                    
          the operational  capability to ramp  up production                                                                    
          and also throttle it back.                                                                                            
        · This is a very different world than the lower 48.                                                                     
          With  the  integrated   transmission  and  storage                                                                    
          network, producers  can simply drill a  well, open                                                                    
          up  the  taps 100  percent  and  the large  market                                                                    
          simply absorbs  it. From the  utility perspective,                                                                    
          it  is   also  a  nice  easy   world  down  there.                                                                    
          Utilities  have a  lineup of  marketers trying  to                                                                    
          sell  them  gas.  However,  if  a  contract  isn't                                                                    
          fulfilled for  any reason, they simply  go back to                                                                    
          the trading screen and source  the gas from one of                                                                    
          the thousand other suppliers lined up.                                                                                
9:27:04 AM                                                                                                                    
Mr. Green continued to read from a prepared statement:                                                                          
        · We do not have that luxury here. We have a very                                                                       
          small,  and  illiquid  market with  a  handful  of                                                                    
          buyers and  an even  smaller number  of suppliers.                                                                    
          Layer on to  that the fact that  Conoco is selling                                                                    
          its assets  which will  take another  supplier out                                                                    
          of the  market and  also shrink the  buying market                                                                    
         with ML&P becoming largely self-supplied.                                                                              
        · This leaves us in an extremely delicate                                                                               
        · Now, I am not saying that the sky is falling. We                                                                      
          are in a  much better place than we  were in 2012.                                                                    
          We  have transitioned  from a  time where  we were                                                                    
          looking  at shortages,  from both  a total  supply                                                                    
          and a  deliverability perspective. Today  Moira is                                                                    
          going  to  talk to  you  about  the contract  that                                                                    
          ENSTAR   has  signed   with  Hilcorp   as  a   key                                                                    
          foundation in our  supply portfolio. This contract                                                                    
          takes  us out  to 2023,  which from  ENSTAR's view                                                                    
          takes us just beyond the short term window.                                                                           
        · We are in a position where I have good visibility                                                                     
          for our  supply into 2021. With  a continuation of                                                                    
          activity  by Hilcorp,  by  Furie,  by the  revived                                                                    
          Cook Inlet Energy and  hopefully other new players                                                                    
          like Blue  Crest or others,  I am  optimistic that                                                                    
          we  can see  our  supply horizon  moving into  the                                                                    
          2025's,  however,  that  statement hinges  on  the                                                                    
          continued activity by these  and new producers. We                                                                    
          need to encourage and  foster an environment which                                                                    
          keeps producers engaged.                                                                                              
        · I strongly feel that the utilities in the inlet                                                                       
          have a  responsibility for this. We  have designed                                                                    
          our  supply  portfolio  to balance  our  number  1                                                                    
          priority  of safe,  reliable natural  gas service,                                                                    
          with the  need to  foster the long  term viability                                                                    
          of  the  inlet. We  have  put  our support  behind                                                                    
          Furie's development of Kitchen  Lights and we have                                                                    
          also left open 10  percent of our supply portfolio                                                                    
          for other producers.                                                                                                  
        · Since 2012 the State has also provided a huge                                                                         
          support to the viability  of the gas supply market                                                                    
          in the Cook Inlet.                                                                                                    
        · ENSTAR is cognizant of the short term budget                                                                          
          challenges facing the state.  ENSTAR would love to                                                                    
          see the  State continue to help  the encouragement                                                                    
          of this  marketplace in whatever form  keeps it as                                                                    
          an attractive investment for producers.                                                                               
     Before I  pass the presentation  over to Moira,  I have                                                                    
     one final note.  I have mentioned, as  have others over                                                                    
     the past  few days that we  are in a good  place in the                                                                    
     Cook Inlet right now. And  we are. However, weather has                                                                    
     been  a  very advantageous  tailwind  over  the past  2                                                                    
     years. We  are through  2 full warm  years and  2016 is                                                                    
     tracking very  balmy as well.  If we had  experienced 3                                                                    
     cold  winters, the  current  facilities  may have  been                                                                    
     stretched. As  a reminder,  today we  only have  1 well                                                                    
     into Kitchen  Lights. There are no  production wells in                                                                    
     Cosmo. We  have 4 large  fields in the inlet  which are                                                                    
     old and are  aging more every year.  With cold weather,                                                                    
     or even if one of  the existing platforms or fields had                                                                    
     an issue, we do not  have a large contingency of backup                                                                    
     alternatives.  As  this  committee knows,  we  have  no                                                                    
     inter-ties into the  lower 48 or Canada and  we are 100                                                                    
     percent  dependent on  this small,  illiquid market  to                                                                    
     keep half of the State's population warm.                                                                                  
9:31:06 AM                                                                                                                    
MOIRA SMITH, VICE PRESIDENT, ENSTAR NATURAL GAS (via                                                                            
teleconference), began with slide 3 "Supply and Demand."                                                                        
She read from a prepared statement:                                                                                             
   This graph illustrates why, as Jared mentioned, ENSTAR is                                                                    
   a complicated customer.  Producers prefer to  produce gas                                                                    
   from wells  at consistent  rates. The  graph depicts  the                                                                    
   variability in our  customers' daily  demand, as  well as                                                                    
   ENSTAR's daily supply, in  2014 and 2015. This  is actual                                                                    
   data as to which companies supplied gas each day of those                                                                    
   years, represented in the different colors  on the chart;                                                                    
   and how much gas  was consumed on  each day of  those two                                                                    
   years, which is represented  in the black line  that tops                                                                    
   off the chart. A couple things are worth noting:                                                                             
     · First, the day to day variability is marked - our                                                                        
        customers' demand changes as the weather changes.                                                                       
     · Second is the seasonal variability. In some years,                                                                       
        our customers'  demand  has a  12  to  1 swing  from                                                                    
        winter to summer.  This means that  in a day  in the                                                                    
        winter, our customers  consume twelve times  as much                                                                    
        gas as on a day in the summer.                                                                                          
     · Finally, have a look at the blue lines at the bottom                                                                     
        of the slide. These represent  CINGSA injections and                                                                    
        withdrawals. As you  can see,  on cold  days, ENSTAR                                                                    
        withdrew significant volumes  of gas from  CINGSA to                                                                    
        meet its customers' demand. Look for  example at the                                                                    
        middle of November 2015.  For those of you  who live                                                                    
        in and around Cook Inlet, you'll  remember that cold                                                                    
        spell. It  is  reflected  on the  chart.  Similarly,                                                                    
        while last winter was overall very warm, we did have                                                                    
        some  cold  weather  in  February.   That,  too,  is                                                                    
        reflected here.  On warm  days,  ENSTAR injects  gas                                                                    
        into CINGSA.  ENSTAR's  withdrawal  capability  from                                                                    
        CINGSA is 91 million  a day; a little  less than 1/3                                                                    
        of ENSTAR's daily demand. Having CINGSA available is                                                                    
        critical in light of the declining production, which                                                                    
        Enalytica detailed in their presentation.                                                                               
Ms. Smith continued to slide 4: "Seasonal Average                                                                               
Deliverability." She continued to read from a prepared                                                                          
     This chart is a further illustration of the                                                                                
     seasonality of our demand. This illustrates ENSTAR's                                                                       
     average daily deliverability in each month in 2019-                                                                        
     again, our goal is to have 287 MMcf/day under contract                                                                     
     or available from storage in  the coldest months of the                                                                    
     year. Here,  you can see  in blue the  Hilcorp contract                                                                    
     Jared  referenced,  which I'll  talk  more  about in  a                                                                    
     moment. The  dark blue represents firm  deliveries; the                                                                    
     light blue represents optional  volumes ENSTAR can call                                                                    
     on if  the weather is  cold. The dark  green represents                                                                    
     firm deliveries under our new  contract with Furie, and                                                                    
     the light green represents  optional volumes ENSTAR can                                                                    
     purchase  in  cold  weather.  So  it  is  important  to                                                                    
     understand   that  our   suppliers  not   only  provide                                                                    
     critical  volumes   throughout  the  year,   they  also                                                                    
     provide significant  additional deliverability  on each                                                                    
     day in winter months.                                                                                                      
Ms. Smith moved on to slide 5: "Supply Contract 2016-23."                                                                       
She continued to read from a prepared statement:                                                                                
     This  slide projects  ENSTAR's gas  supply from  now to                                                                    
     2023.  Focusing  on 2016  and  2017,  you see  ENSTAR's                                                                    
     portfolio  of relatively  small  contracts. Because  we                                                                    
     knew that  these contracts were  all expiring  in 2018,                                                                    
     ENSTAR issued  an RFP  in late 2014  to solicit  gas to                                                                    
     meet its customers' needs in 2018 and beyond.                                                                              
     ENSTAR   then   engaged    in   intensive,   protracted                                                                    
     negotiations  with  multiple  producers  and  potential                                                                    
     producers  throughout 2015  and  into  2016. Our  first                                                                    
     priority  was   to  secure   an  anchor   contract,  at                                                                    
     reasonable prices, which could  form the foundation for                                                                    
     gas supply  in the post-2018 world.  These negotiations                                                                    
     took  a year  and resulted  in APL-14,  a new  contract                                                                    
     with Hilcorp  that was just  filed with  the Regulatory                                                                    
     Commission of Alaska on Monday.                                                                                            
9:35:44 AM                                                                                                                    
Ms. Smith advanced to slide 6: "(TA 280-4) APL-14 GSA." She                                                                     
continued to read from a prepared statement:                                                                                    
     APL-14 is a five year  contract that begins on April 1,                                                                    
     2018. It  will supply  approximately 70 percent  of our                                                                    
     customers' needs  from 2018-2023.  It has both  firm as                                                                    
     well as  optional volumes  - it  will supply  around 22                                                                    
     billion cubic  feet per  year of firm  gas. And  if you                                                                    
     remember the  light blue from  two slides ago,  it also                                                                    
     offers  optional  volumes  to help  ENSTAR  manage  its                                                                    
     weather  related variability.  This  means that  ENSTAR                                                                    
     can  ramp  deliveries  up  or  down  depending  on  its                                                                    
     customers'  needs,  a  key  feature  in  light  of  our                                                                    
     variable annual demand.                                                                                                    
     Another key  element of the contract  is its reasonable                                                                    
     price. You  will remember that,  in 2013, the  State of                                                                    
     Alaska entered  into a  Consent Decree,  which resolved                                                                    
     an  antitrust investigation  and  set  price caps.  The                                                                    
     price caps  escalated 4 percent annually.  The weighted                                                                    
     average  annual  price  under APL-12  during  its  last                                                                    
     contract  year  will  be $8.33  per  Mcf,  whereas  the                                                                    
     weighted  average  annual  price  for  firm  deliveries                                                                    
     during  the first  contract year  under APL-14  will be                                                                    
     $7.56 per Mcf. This is  almost a 10 percent decrease in                                                                    
     Perhaps the most important feature  of this contract is                                                                    
     what it  doesn't do. It  does not meet all  of ENSTAR's                                                                    
     gas supply requirements. What this  means is that fully                                                                    
     30 percent  of our  portfolio was  left open  for other                                                                    
     producers  to  fill.  As a  public  utility,  we  value                                                                    
     safety  and   reliability  above   all  else.   And  we                                                                    
     understand  the  need  to  have  a  diversified  supply                                                                    
     portfolio.  This not  only  diversifies supplier  risk,                                                                    
     but it  also helps  to foster investment  and drilling,                                                                    
     which  is  good for  the  long-term  stability of  Cook                                                                    
     Inlet  supply.   Between  APL-14  and  the   new  Furie                                                                    
     contract,  ENSTAR  has  90 percent  of  its  needs  met                                                                    
     through  2021.  To  ensure the  entire  market  has  an                                                                    
     opportunity  to participate,  we sent  a second  RFP to                                                                    
     producers on  Friday to try  to acquire supply  for the                                                                    
     remaining 10 percent of our portfolio.                                                                                     
     We believe  this contract represents a  huge measure of                                                                    
     stability  in the  Cook Inlet  gas  market. Indeed,  if                                                                    
     approved, it will be the  most significant gas contract                                                                    
     ENSTAR  has   had  approved   in  15   years.  Assuming                                                                    
     Commission approval,  we will have laid  the foundation                                                                    
     of  ENSTAR's  gas supply  well  into  the next  decade.                                                                    
     Given where we were just  three years ago, this is very                                                                    
     good news.                                                                                                                 
9:38:31 AM                                                                                                                    
Mr. Green concluded the ENSTAR presentation by reading from                                                                     
a prepared statement:                                                                                                           
     As I noted before, we  are working with a very delicate                                                                    
     market with a  small number of buyers and  a very small                                                                    
     number of producers. ENSTAR  has contracts meeting most                                                                    
     of our needs out to 2021  and 2023, but we will need to                                                                    
     negotiate extensions  in the  next couple of  years. It                                                                    
     is very important  to all of south  central Alaska that                                                                    
     we  have a  capable  producer marketplace  who will  be                                                                    
     there   to   provide   the  gas   molecules   and   the                                                                    
     deliverability that Southcentral Alaska needs.                                                                             
9:39:17 AM                                                                                                                    
Representative Wilson queried  ENSTAR's current credits. Mr.                                                                    
Green responded that ENSTAR was  a purchaser of natural gas,                                                                    
and was then flowed  through to customers. Therefore, ENSTAR                                                                    
did  not  directly  receive  credits.  He  stated  that  the                                                                    
company bought the  gas from the producers  who had received                                                                    
the credits.                                                                                                                    
Representative  Edgmon  noted  that  he  did  not  hear  any                                                                    
comments regarding  Blue Crest. He queried  more information                                                                    
about  Blue Crest.  Mr. Green  replied that  the Blue  Crest                                                                    
project was the  development of the oil  reserves. He shared                                                                    
that there  was a  deep portion of  the reservoir  where the                                                                    
oil  resided, and  the shallower  portion  of the  reservoir                                                                    
held the  gas reserves. He  stated that Blue Crest  was able                                                                    
to access  the oil  from the  onshore pad,  but in  order to                                                                    
access  the  natural gas  the  reservoir  must be  developed                                                                    
offshore.  He stated  that, currently,  that portion  of the                                                                    
development was not in Blue  Crest's plan. He hoped that the                                                                    
gas would  be developed in  the future. He stressed  that it                                                                    
required   the  installation   of   an  offshore   platform,                                                                    
development wells, and a pipeline to attach the platform.                                                                       
Representative   Edgmon   thanked    Mr.   Green   for   the                                                                    
Vice-Chair Saddler queried the impact  of the credits on the                                                                    
improvement  of the  security of  ENSTAR's  gas supply.  Mr.                                                                    
Green replied  that the entities had  already shared whether                                                                    
or not  they invested  in Cook Inlet  because of  the credit                                                                    
program. He  stated that Hilcorp entered  the market because                                                                    
of the  credit program.  Hilcorp was a  key operator  in the                                                                    
Cook  Inlet, because  they had  taken over  some significant                                                                    
fields  that supplied  the majority  of the  natural gas  to                                                                    
south-central  Alaska.  Hilcorp   spent  approximately  $600                                                                    
million  to   date  on  the  erection   of  their  off-shore                                                                    
platform,  and  the  development   of  their  one  well.  He                                                                    
remarked  that the  Furie reservoir  had abundant  reserves,                                                                    
and was hopeful that it would be further developed.                                                                             
9:45:13 AM                                                                                                                    
Mr. Green  shared that  with the  removal of  each molecule,                                                                    
the reservoir declined. He felt  that Furie must continue to                                                                    
develop. He  remarked that Hilcorp  must continue  to invest                                                                    
in  its asset,  even to  satisfy the  current contracts.  He                                                                    
remarked  that originally  Buccaneer had  drilled a  well in                                                                    
the Cook  Inlet, because  of the  credit program.  He stated                                                                    
that Buccaneer  had experienced a financial  bankruptcy, and                                                                    
AIX  Inc.  had  received  assets after  the  bankruptcy.  He                                                                    
stated  that there  were  debtors who  took  issue with  the                                                                    
bankruptcy,  but the  molecules continued  to flow  into the                                                                    
system.  He  stated  that, from  ENSTAR's  perspective,  the                                                                    
bankruptcy presented a risk, but  the molecules continued to                                                                    
bring  value to  customers. He  reiterated that  the credits                                                                    
were helpful to encourage  the current producers to complete                                                                    
their work. He noted that  a slight pause in development and                                                                    
drilling activities  could cause a shortfall  in the reserve                                                                    
development.  He   stressed  that  the  molecules   must  be                                                                    
available to stay warm.                                                                                                         
Vice-Chair  Saddler  asked  about  the  stepdown  provisions                                                                    
versus  completely   eliminating  the  credits.   Mr.  Green                                                                    
commented that if  the credits had to be  reduced a stepdown                                                                    
would be a  much more stable action. An  abrupt action would                                                                    
be more harmful. He advocated predictability and stability.                                                                     
9:49:57 AM                                                                                                                    
Representative Gara  remarked that  the Henry Hub  price for                                                                    
natural gas was  close to $2 and MCF, but  the Alaskan price                                                                    
was more than triple that  amount. He remarked that, without                                                                    
cash  subsidies from  the  state, the  price  could go  even                                                                    
higher. He  wondered why  the high cost  of the  natural gas                                                                    
was not a  factor in attracting companies to  explore when a                                                                    
new  contract became  available.  Mr.  Green responded  that                                                                    
companies  know   of  the  high  cost   of  development  and                                                                    
drilling.  The prices  reflect the  cost of  the development                                                                    
activities.  He stated  that new  producers will  invest, if                                                                    
there  was a  stable marketplace.  He agreed  that the  Cook                                                                    
Inlet was  currently appealing, but  producers did  not make                                                                    
decisions simply  on the cash  flow over a  12-month period.                                                                    
He  stressed  that the  greater  stability  in the  forecast                                                                    
periods   resulted   in   producers   continued   investment                                                                    
interest.  He  looked  at  slide  3,  which  identified  the                                                                    
challenge  of  being  a  producer  in  the  Cook  Inlet.  He                                                                    
encouraged the committee  to relate the slide  to a producer                                                                    
in the Lower-48.  He stated that a producer  in the Lower-48                                                                    
would open  a level to  its most efficient  producing level,                                                                    
and was left  running full tap. That well  would be produced                                                                    
at  a flat-line  basis, which  was how  producers wanted  to                                                                    
produce  that  gas.  He  stressed   that  when  his  company                                                                    
negotiates with producers, the producers  want to produce at                                                                    
a  flat-line basis.  Those producers  wanted  to sell  "flat                                                                    
gas" for the entire year to  ENSTAR. He pointed out that, as                                                                    
reflected in  slide 3, ENSTAR  could not buy "flat  gas" for                                                                    
the entire  year. He looked at  the top red line,  which was                                                                    
the maximum  needs for  deliverability. A  Lower-48 producer                                                                    
would be able  to "color everything below" the  top red line                                                                    
and call  it "cash  flow." He stressed  that because  of the                                                                    
deliverability needs  in the Cook Inlet,  the producers must                                                                    
build their assets  to very robust levels in  order to reach                                                                    
the peak winter needs-but they did  not get to sell it year-                                                                    
round. The summer  months did not provide much  cash flow to                                                                    
the  producers.  The  deliverability  required  overproduced                                                                    
assets, which resulted in higher costs.                                                                                         
9:55:14 AM                                                                                                                    
Representative  Gara wondered  if the  buyers were  dropping                                                                    
out because  of the  higher cost of  gas. Mr.  Green replied                                                                    
that  the price  change followed  the actions,  from a  Cook                                                                    
Inlet perspective.  He remarked  that he  saw the  world LNG                                                                    
price  drop from  nine dollars  to five  dollars. He  stated                                                                    
that it was a good and  challenging market. He looked at the                                                                    
larger  projects, which  was looking  at a  market that  was                                                                    
much  different  than  it  was   at  the  point  of  initial                                                                    
investment. He  stated that the ConocoPhillips  LNG facility                                                                    
was  looking at  world LNG  prices,  and did  not feel  that                                                                    
there  would be  much  LNG produced  in  that facility.  The                                                                    
Agrium facility was  shut down because of  the market prices                                                                    
and overall supply cost to  produce throughout the world. He                                                                    
stated that the price was  more driven by the customer need,                                                                    
rather than  the producer need, once  more producers dropped                                                                    
Representative Gara remarked that  the state did not receive                                                                    
any production  tax revenue from  Cook Inlet,  however there                                                                    
were many tax credits granted  to Cook Inlet. He shared that                                                                    
many  industry people  had admitted  that the  tax structure                                                                    
was  unsustainable. The  governor had  hoped to  finance the                                                                    
producers  at  a  better  interest  rate  than  the  private                                                                    
market.  He  wondered why  financing  was  not considered  a                                                                    
decent way  to move  forward. Mr.  Green replied  that there                                                                    
were  many ways  to address  the problem.  He felt  that the                                                                    
best solution was to maintain predictability.                                                                                   
10:00:40 AM                                                                                                                   
Vice-Chair  Saddler   had  heard  that  loans   from  Alaska                                                                    
Industrial  Development and  Export Authority  (AIDEA) would                                                                    
not  bring  much  value  and   would  only  be  replacing  a                                                                    
traditional lender.  He stated that the  credits allowed the                                                                    
producers to receive  8 percent of financing  in addition to                                                                    
the valuable  credit, as opposed  to 20 percent.  He queried                                                                    
the impact of  reopening Agrium on the gas  supply in south-                                                                    
central   Alaska.  Mr.   Green  replied   that  ENSTAR   was                                                                    
originally opposed to the  ConocoPhillips LNG facility being                                                                    
approved  to  export  natural gas,  seven  years  prior.  He                                                                    
stated  that,  at that  time,  the  molecules would  not  be                                                                    
available  for  local markets.  He  stated  that ENSTAR  had                                                                    
changed  its  views,  and  had  supported  the  most  recent                                                                    
applications from  ConocoPhillips. He explained  that ENSTAR                                                                    
was   currently  supporting   those  applications,   because                                                                    
encouraging a  stronger demand  market increased  the supply                                                                    
attraction. He  felt that reopening Agrium,  with the supply                                                                    
to  run   the  facility,  would  result   in  fairly  active                                                                    
producers in the Cook Inlet  to supply the needs. The active                                                                    
producers in  the Cook Inlet would  benefit ENSTAR's overall                                                                    
needs. He stated that a  large industrial load would provide                                                                    
a greater security  to the freezing weather,  because of the                                                                    
greater supply of gas. Therefore,  the large industrial load                                                                    
would benefit  ENSTAR. He  stated that,  over the  long run,                                                                    
the producers will follow the gas demand.                                                                                       
Vice-Chair  Saddler  understood  that most  export  licenses                                                                    
included provisions  that forced the  export of gas  to halt                                                                    
in order to  fund domestic needs. He looked at  slides 4 and                                                                    
5,  and queried  the  role  of the  Cook  Inlet natural  gas                                                                    
facility, CINGSA, had in tax  situation. He noted that there                                                                    
was  no supply  forecasted  up until  2018.  He wondered  if                                                                    
CINGSA ceased to  exist moving forward, or was  it too small                                                                    
to register. He  queried CINGSA's role in  the long-term gas                                                                    
supply  forecast. Ms.  Smith replied  that  slide 4's  graph                                                                    
represented average  daily deliverability on any  day in the                                                                    
depicted months.  She explained  that, as  ENSTAR forecasted                                                                    
its supply for the months  from 2019 to 2021, the injections                                                                    
were  forecasted. The  withdrawals  would  occur, but  would                                                                    
occur  on colder  than average  days. Therefore,  they would                                                                    
not be  depicted in the graph.  She noted that the  total in                                                                    
January was  the total  deliverability of  approximately 148                                                                    
million cubic feet per day.  She explained that the peak day                                                                    
was 287  million cubic feet  per day,  and any day  could be                                                                    
between 100 million and 287  million in the winter time. She                                                                    
stated that  CINGSA provide 91  million cubic feet  per day,                                                                    
would be important in the  winter supply withdrawal strategy                                                                    
well into the  future. She looked at slide  5, and explained                                                                    
that ENSTAR  had a 20-year  contract with CINGSA  that ended                                                                    
in 2032.  She explained  that the  slide forecasted  the gas                                                                    
that would  be purchased  to put  into CINGSA.  She stressed                                                                    
that  storage supply  was part  of the  forecast. The  slide                                                                    
only reflected what was purchased  from the marketplace. She                                                                    
furthered that slide 3 clearly  depicted the actual way that                                                                    
ENSTAR used CINGSA.                                                                                                             
10:08:10 AM                                                                                                                   
Vice-Chair  Saddler surmised  that  he  should not  consider                                                                    
that  CINGSA was  included in  the undesignated  supply. Ms.                                                                    
Smith answered in the affirmative.                                                                                              
Representative Pruitt wanted to  understand at what point in                                                                    
time the  ramifications were understood.  He stated  that it                                                                    
took  until  2010   until  there  was  a   decision  by  the                                                                    
legislature to address what had  reached a critical mass. He                                                                    
discussed that between  2010 and 2012 the  state had started                                                                    
to see the  brownout drills. He was concerned  about the lag                                                                    
time. Mr. Green stated that the  point would be in 2023, but                                                                    
it could  occur in  a terrifying  emergency. He  shared that                                                                    
ENSTAR examined its gas supply  portfolio in the short-term,                                                                    
medium-term,  and  long-term   scenario.  He  stressed  that                                                                    
ENSTAR was  expecting to be  the natural gas  distributor in                                                                    
south-central  Alaska for  many  decades in  the future.  He                                                                    
stated that  ENSTAR wanted a  stable supply  environment, so                                                                    
the "ups and  downs were scary." He stated that  there was a                                                                    
fortunate  scenario in  Hilcorp's entering  the marketplace.                                                                    
He reiterated  that the credits  were a factor  in Hilcorp's                                                                    
entering the marketplace.                                                                                                       
10:14:31 AM                                                                                                                   
Representative Pruitt  assumed that the price  point allowed                                                                    
a recovery at a reasonable  profit, and reinvest to ensure a                                                                    
supply   through  2023.   He  wondered   if  there   was  an                                                                    
opportunity to invest beyond 2023.  He asked if the customer                                                                    
would be  charged for the  initial costs to continue  to add                                                                    
to  the reserves,  to go  beyond 2023.  Mr. Green  responded                                                                    
that ENSTAR  contracted with the  producers to provide  at a                                                                    
high  winter  rate. The  peak  rate  delivery was  the  most                                                                    
challenging aspect of the producer's  ability to build their                                                                    
assets.  He  shared that,  if  the  producers chose  to  not                                                                    
continue to invest after 2023,  the reserves would not cease                                                                    
to exist,  but there  may not be  a daily  deliverability at                                                                    
the needs of the Cook Inlet.                                                                                                    
10:18:32 AM                                                                                                                   
Co-Chair  Thompson  invited  Mr.  Alper to  comment  on  the                                                                    
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
asked for guidance of where to begin.                                                                                           
Co-Chair   Thompson  requests   comments   on  the   current                                                                    
investment climate.                                                                                                             
Mr.  Alper  stated that  ING,  Bank  of America,  and  other                                                                    
larger operators joined the Alaska  market three years prior                                                                    
in response to legislation  that enabled the credit payments                                                                    
to be directly assigned to the  bank. He stated that DOR was                                                                    
directly writing  the check for  the credit to the  bank. He                                                                    
stated  that   it  had  developed  a   "greater  than  first                                                                    
priority" in  the terms of  a secured loan. He  commented on                                                                    
the assertion  that the  security did  not mature  until the                                                                    
underlying net  operating loss  was patented  at the  end of                                                                    
the  year; therefore,  the entity  was  in a  position of  a                                                                    
secured lender.  He stated that  money was lent  against the                                                                    
tax credits, but  the companies were not  lending the entire                                                                    
company lend.  He explained that,  with an expectation  of a                                                                    
percentage  of money  through the  tax  credit program,  the                                                                    
entity would only lend what  was expected to be available in                                                                    
the form of  the credit. The companies still  needed to seek                                                                    
other financing  for the remaining project  costs. He stated                                                                    
that, by changing  the credit program, there was  a shift of                                                                    
balance to  need more money  at the high interest  and could                                                                    
not access the money at lower interest.                                                                                         
Co-Chair  Thompson felt  that the  legislation would  have a                                                                    
negative  effect on  the number  of  jobs; exploration;  and                                                                    
development.  Mr. Alper  replied  that it  was difficult  to                                                                    
determine the  impact of the  tax structure  change, because                                                                    
of  the decline  in  the  oil price.  He  stressed that  the                                                                    
industry was "retrenching" in  response to the legislature's                                                                    
actions. He  stressed that production  had slowed down  as a                                                                    
result  of  the  low  oil   price.  He  remarked  that  many                                                                    
companies  had  halted work,  but  were  holding onto  their                                                                    
leases while  waiting for  the market  to return.  He shared                                                                    
that Black and Veatch had  a methodology called "The Tornado                                                                    
Diagram."  The diagram  had wide  swaths  of variables,  and                                                                    
looked like a  tornado. He stated that  the largest variable                                                                    
for any  of the projects was  the price of the  resource. He                                                                    
furthered  that interest  rate,  risk,  and other  variables                                                                    
were of  secondary or tertiary importance.  He stressed that                                                                    
the  program  would  not  "make or  break"  the  market.  He                                                                    
remarked  that that  the  program was  not  a jobs  program,                                                                    
rather it  was in place  to encourage investment in  the oil                                                                    
and  gas  industry. He  remarked  that  there should  be  an                                                                    
expectation   of  a   reasonable  return   on  the   state's                                                                    
10:24:59 AM                                                                                                                   
Representative   Wilson   queried   the  modeling   on   the                                                                    
assertions. She felt that the  Cook Inlet, Middle Earth, and                                                                    
North  Slope  must  be  divided,   because  they  were  very                                                                    
different   from   each   other.   She   wondered   if   the                                                                    
administration  had  analyzed  the impact  on  removing  all                                                                    
credits in Cook Inlet. Mr.  Alper replied that there had not                                                                    
been  specific analysis  of the  elasticity of  changing one                                                                    
Representative  Wilson   remarked  that   micromanaging  and                                                                    
drastic  decisions were  each  poor  decisions. She  queried                                                                    
proof  that the  proposal would  not crash  the market.  Mr.                                                                    
Alper replied  that, under current  law, the  state provided                                                                    
50 to 60  percent of an ongoing development  project in Cook                                                                    
Inlet.  He  stressed  that  it  was  a  larger  number  than                                                                    
anything in history. He stated  that the credit was intended                                                                    
to be large,  because of the potential  crisis in utilities.                                                                    
He stressed  that the state  wanted all pilot  lights going.                                                                    
He  remarked   that  the  credit  had   resulted  in  better                                                                    
emergency  preparedness. The  intention  of the  legislation                                                                    
was to  provide a level of  support that was keeping  with a                                                                    
mature basin.                                                                                                                   
10:32:21 AM                                                                                                                   
Representative Wilson  wondered why  the Cook Inlet  was not                                                                    
taxed  in the  same manner  as  the North  Slope. Mr.  Alper                                                                    
suggested that  a legislator would  have to initiate  a Cook                                                                    
Inlet tax in the following  5 years. He stated that, without                                                                    
a legislative change  before 2022, there was  an awkward and                                                                    
unstable tax regime  in Cook Inlet. It had a  35 percent net                                                                    
tax, but  a 25 percent  NOL, with  no per barrel  credit. He                                                                    
stressed that there should be a Cook Inlet tax.                                                                                 
Representative Wilson  felt that the  state did not  need to                                                                    
reinvent the tax  regime. She opined that  Cook Inlet should                                                                    
not  be  considered  greater than  other  locations  in  the                                                                    
state. She  stressed that  the tax  credits were  already in                                                                    
place, and  felt that  the same tax  structure on  the North                                                                    
Slope could be used in Cook  Inlet. Mr. Alper agreed that an                                                                    
immediate  change the  tax regime  would be  to apply  SB 21                                                                    
statewide. He  felt that there  would need to  be discussion                                                                    
about the  definitions about  new GVR  oil, and  whether the                                                                    
criteria  in SB  21 was  appropriate for  the entire  state.                                                                    
There needed  to be a per  barrel credit for gas,  which did                                                                    
not currently exist in SB 21.                                                                                                   
10:36:30 AM                                                                                                                   
Representative  Gara  surmised  that, under  the  governor's                                                                    
proposal,  a  25  percent  credit   would  be  retained.  He                                                                    
wondered if the  small producer credit would  be retained in                                                                    
the proposal.  Mr. Alper replied  that the governor  was not                                                                    
looking to  modify the  small producer  credit in  the bill,                                                                    
with the  exception of  the floor-hardening  provisions. The                                                                    
small  producer credit  was sun-setting  over  the next  few                                                                    
years.  He explained  that  the credit  said  that you  must                                                                    
apply  and receive  the small  producer  credit, with  first                                                                    
production before May 1, 2016.  He stated that receiving the                                                                    
credit by  that deadline, allowed for  a claim of up  to $12                                                                    
million per year for the  first nine years of production. He                                                                    
explained that  someone could keep the  credit through 2024.                                                                    
Furthermore, the  producers who  had received the  credit at                                                                    
its initiation would be required  to pay the tax without the                                                                    
credit beginning the current or following year.                                                                                 
Representative  Gara wondered  why the  administration found                                                                    
the  limitations of  Cook Inlet  to be  in the  state's best                                                                    
interest in the state loan  program. Mr. Alper replied that,                                                                    
currently AIDEA  was already in  the business of  lending to                                                                    
entities across the  state. He remarked that  AIDEA had made                                                                    
several high-profile loans  in the oil and  gas industry. He                                                                    
remarked  that  AIDEA  was required  to  have  balanced  and                                                                    
diversified  multi-sector  portfolio,  but  oil  loans  were                                                                    
fairly  large   causing  an  unbalance  in   the  portfolio.                                                                    
Therefore, AIDEA felt that there  should be a dedicated fund                                                                    
for  oil and  gas. He  remarked that  within that  dedicated                                                                    
fund,  AIDEA  was  able to  negotiate  competitive  interest                                                                    
rates.  He remarked  that  there was  also  a provision  for                                                                    
AIDEA that  allowed AIDEA to  defer payments, or  lend money                                                                    
to an  oil project  without requiring payments  of principle                                                                    
or interest for  four or five years until  the company began                                                                    
production. He  stressed that traditional financing  did not                                                                    
often  offer   payment  deferment.  He  remarked   that  the                                                                    
combination of deferred payment  and the continuation of the                                                                    
25 percent operating loss credit,  seemed to ensure that the                                                                    
companies could continue with the development projects.                                                                         
10:40:33 AM                                                                                                                   
Representative Gara surmised that  there was an intention to                                                                    
repay  the existing  tax credit  system  with a  cap of  $25                                                                    
million  per  year.  Mr.  Alper   replied  that  there  were                                                                    
currently  $675 million  in credit  applications. He  shared                                                                    
that  the FY  18 payments  was mostly  related to  operating                                                                    
losses and expenditures for calendar  year 2016. He stressed                                                                    
that  calendar  year  2015 was  recently  ended,  which  was                                                                    
mostly FY  17 credit expenditures.  He remarked that  it was                                                                    
related  to the  tax-filing deadline,  with a  120 statutory                                                                    
turnaround that  required certificate issuance.  He remarked                                                                    
that the  bulk of the  NOL certificates were issued  in July                                                                    
and  August, and  the companies  immediately asked  for more                                                                    
Representative   Gara  thought   the  $1   billion  was   to                                                                    
capitalize AIDEA. He wondered if  $1 billion was intended to                                                                    
pay all  the past-due tax  credits.  Mr. Alper  replied that                                                                    
the  $1  billion  was  intended  to  pay  the  past-due  and                                                                    
anticipated  future  tax  credits.   It  also  was  for  the                                                                    
additional  $200 million  fund capitalization  in the  AIDEA                                                                    
10:44:19 AM                                                                                                                   
Vice-Chair  Saddler   queried  the  guiding   principles  in                                                                    
proposing HB 247.  He wondered if the tax  credit system was                                                                    
achieving the goals  of the program; and was  the tax credit                                                                    
program providing  enough revenue to the  state. He wondered                                                                    
if  the  legislation  was  a "money  maker"  or  tax  credit                                                                    
reform.  Mr.   Alper  replied   that  the   legislation  was                                                                    
primarily  tax credit  reform. He  commented  that that  the                                                                    
legislation would  be considered a "money  maker" as related                                                                    
to AIDEA.                                                                                                                       
Vice-Chair Saddler wondered if  the legislation deprived the                                                                    
oil producers the ability to  recover losses from individual                                                                    
fields. Mr. Alper responded that  the provision was intended                                                                    
to be at  a field-by-field level. He  explained that, should                                                                    
a  field  have  a  gross  value  below  zero,  it  would  be                                                                    
incorporated into  the calculation as a  zero. Therefore, it                                                                    
would not be used to offset positive value elsewhere.                                                                           
Vice-Chair  Saddler restated  his question.  He wondered  if                                                                    
the  prohibition  against  gross   value  at  the  point  of                                                                    
production against  going below  zero deprived  the industry                                                                    
of the ability  to deduct that loss in  the calculation. Mr.                                                                    
Alper replied in  the affirmative as related  to the portion                                                                    
that brought the  gross value below zero.  He explained that                                                                    
the company  would still enjoy  the full value of  its lease                                                                    
expenditures,  which was  the difference  between the  gross                                                                    
value and net value.                                                                                                            
HB  247  was  HEARD  and   HELD  in  committee  for  further                                                                    
Co-Chair Thompson reviewed the agenda for the afternoon.                                                                        

Document Name Date/Time Subjects
HB 247 Alaska State House Finance Committee 04.05.16.pdf HFIN 4/5/2016 8:30:00 AM
HB 247
HB 247 NEW FN DNR OG 040116.pdf HFIN 4/5/2016 8:30:00 AM
HB 247
HB 247 BP Letter to House Fin Comm 04_06_2016.pdf HFIN 4/5/2016 8:30:00 AM
HB 247