Legislature(2017 - 2018)ADAMS ROOM 519

04/23/2018 01:30 PM FINANCE

Note: the audio and video recordings are distinct records and are obtained from different sources. As such there may be key differences between the two. The audio recordings are captured by our records offices as the official record of the meeting and will have more accurate timestamps. Use the icons to switch between them.

Download Mp3. <- Right click and save file as
Download Video part 1. <- Right click and save file as

Audio Topic
01:35:49 PM Start
01:36:29 PM HB331
04:15:27 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Recessed to a Call of the Chair --
+= HB 331 TAX CREDIT CERT. BOND CORP; ROYALTIES TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
HOUSE BILL NO. 331                                                                                                            
                                                                                                                                
     "An Act establishing the  Alaska Tax Credit Certificate                                                                    
     Bond Corporation;  relating to purchases of  tax credit                                                                    
     certificates; relating  to overriding  royalty interest                                                                    
     agreements; and providing for an effective date."                                                                          
                                                                                                                                
1:36:29 PM                                                                                                                    
                                                                                                                                
Co-Chair Foster  invited Commissioner Fisher to  come to the                                                                    
table.                                                                                                                          
                                                                                                                                
SHELDON   FISHER,  COMMISSIONER,   DEPARTMENT  OF   REVENUE,                                                                    
appreciated  the focus  and the  attention to  the bill.  He                                                                    
believed  the bill  was a  good and  prudent policy.  He was                                                                    
available to answer specific questions or concerns.                                                                             
                                                                                                                                
Representative Wilson mentioned  a previous discussion about                                                                    
evening  something up.  She asked  if the  legislature would                                                                    
change something  if a company  decided to wait  their turn.                                                                    
She asked for more information.                                                                                                 
                                                                                                                                
Commissioner Fisher  responded that the bill  was structured                                                                    
in a way  that companies would be able to  choose whether to                                                                    
participate.  The department  had worked  with companies  to                                                                    
convey the  intent of the bill.  He relayed that one  of the                                                                    
value blocks was the fact  that the legislature did not have                                                                    
to appropriate a  full $184 million; it  could appropriate a                                                                    
lesser  amount.   He  relayed   that  what   the  department                                                                    
presented  assumed that  everyone  participated. Under  that                                                                    
scenario,  interest would  need  to be  appropriated in  the                                                                    
amount  of  $27 million,  based  on  participation from  all                                                                    
parties. If someone chose not  to participate and would have                                                                    
been entitled  under the normal  course to get a  $5 million                                                                    
payment during the year, the  interest payment would decline                                                                    
slightly because  they would not  be a part of  the bonding.                                                                    
Additional  funding  might  be  necessary to  care  for  the                                                                    
company's interest. The department's  goal was to understand                                                                    
and inform the legislature  what it anticipated would happen                                                                    
as  it  rolled   out,  should  the  bill   be  enacted.  The                                                                    
department   had  had   multiple  communications   with  the                                                                    
companies over the  last several months. So far,  no one had                                                                    
informed  the  department  that   they  did  not  intend  to                                                                    
participate. They  either informed the department  that they                                                                    
wanted to participate, or they  were still thinking about it                                                                    
and would get back to the department.                                                                                           
                                                                                                                                
Representative Wilson was concerned  that if a company chose                                                                    
to wait to participate, they would be negatively penalized.                                                                     
                                                                                                                                
Commissioner   Fisher   indicated  that   the   department's                                                                    
intention was that companies would  neither be advantaged or                                                                    
penalized by choosing not to participate.                                                                                       
                                                                                                                                
1:41:00 PM                                                                                                                    
                                                                                                                                
Representative  Ortiz asked  if  the  bill could  negatively                                                                    
impact the ability  of the state to  bond for infrastructure                                                                    
projects  and  deferred  maintenance. Mr.  Barnhill  in  the                                                                    
prior meeting  had indicated that  the bill could  have that                                                                    
impact. He asked the commissioner to elaborate.                                                                                 
                                                                                                                                
Commissioner Fisher responded that,  as a general matter, it                                                                    
was  the  department's  view   and  understanding  that  the                                                                    
legislation  would  not have  a  substantial  impact on  the                                                                    
state's capacity  to bond.  There were  a couple  of reasons                                                                    
for his answer.  First, the debt was already  on the state's                                                                    
financial statement.  It could  be viewed as  refinancing by                                                                    
taking  an  existing  obligation   and  financing  it  in  a                                                                    
different way. Second,  there was a schedule  presented in a                                                                    
previous  meeting  that  showed  the  cumulative  amount  of                                                                    
general fund money used to  finance other debt including the                                                                    
pension  obligation payments.  It  also  showed the  current                                                                    
debt flattening out. The current  plan would stabilize to 25                                                                    
percent  for a  longer period  rather than  peaking over  30                                                                    
percent of  undesignated general funds (UGF).  He thought it                                                                    
would  open   up  capacity  because  there   would  be  more                                                                    
available UGF.  He remarked that the  credit agencies viewed                                                                    
it as  an interesting and  as a  helpful tool to  manage the                                                                    
obligation.  He   thought  the  negative  impact   would  be                                                                    
minimal. He  did not have a  dollar figure but would  see if                                                                    
he could quantify it.                                                                                                           
                                                                                                                                
1:44:00 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  provided a  hypothetical scenario                                                                    
in  which  a  company  took   money  from  the  state  at  a                                                                    
discounted rate to  pay off loans and  outstanding debt with                                                                    
a plan  in place  for reinvestment.  He wondered  what would                                                                    
happen if  the company  sold to another  entity in  terms of                                                                    
the obligation to fulfill that plan by the new owner.                                                                           
                                                                                                                                
Commissioner Fisher heard  2 questions. The first  had to do                                                                    
with  reinvestment  and  paying  off current  debt  and  the                                                                    
source of capital a company  would use to reinvest. He hoped                                                                    
some banks would be testifying  later in the meeting. One of                                                                    
the things  a number  of people from  financial institutions                                                                    
and credit  holders had  articulated to  the state  was that                                                                    
when they had  a debt in default, it was  very difficult and                                                                    
expensive  for  them  to  attract  additional  capital.  The                                                                    
default  had to  be disclosed  and their  balance sheet,  in                                                                    
essence, had a  cloud over it associated  with the defaulted                                                                    
instrument. By  virtue of  receiving the  money, much  of it                                                                    
would go to  paying off existing debt  holders. If companies                                                                    
were able  to clean up  their balance sheet  resolving their                                                                    
outstanding  liability, they  could attract  capital from  a                                                                    
number  of sources.  He  reported that  a  number of  credit                                                                    
holders  had  investors prepared  to  invest  if their  debt                                                                    
could get resolved.                                                                                                             
                                                                                                                                
Commissioner  Fisher  addressed Representative  Guttenberg's                                                                    
second question  about a company  setting forth a  plan. The                                                                    
Department of  Revenue (DOR) had the  statutory direction to                                                                    
review a  company's plan.  The department  would look  for a                                                                    
schedule of investments, how a  company would use the money,                                                                    
and  assurances   of  sources  for  capital   to  support  a                                                                    
company's plan.  He reported that  DOR was working  with the                                                                    
Department of  Law to determine  consequences for  a company                                                                    
that  did  not  fulfill   its  obligations.  Currently,  the                                                                    
departments  were  discussing   the  repayment  of  benefits                                                                    
should a company defaulted on  their commitment. He provided                                                                    
an example.  If the payment  was 90 percent under  the lower                                                                    
discount  rate  ($90  million  payment  versus  $85  million                                                                    
payment resulting  $5 million benefit),  they would  have to                                                                    
repay the  benefit plus some  additional amount in  the form                                                                    
of a  penalty that would  induce a company to  continue with                                                                    
their  commitment   to  reinvest.  Generally,   a  company's                                                                    
obligations would transfer with the sale of their business.                                                                     
                                                                                                                                
1:50:02 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg questioned  the  definition of  a                                                                    
qualified expenditure in the federal  tax code as it related                                                                    
to  the   state's  purpose   of  reaching   development  and                                                                    
production   as   quickly   as  possible.   He   asked   for                                                                    
clarification.                                                                                                                  
                                                                                                                                
Commissioner  Fisher   would  have  to  come   back  with  a                                                                    
response.  As a  general matter,  he was  assuming that  the                                                                    
companies had the  same goal in mind as the  state. He would                                                                    
need time to think about how to respond.                                                                                        
                                                                                                                                
Representative  Kawasaki asked  about the  structure of  the                                                                    
bill.  He  asked  how  a   bond  corporation  worked  as  an                                                                    
instrumentality of government.                                                                                                  
                                                                                                                                
Commissioner Fisher  thought the  answer would  be presented                                                                    
as part of  the sectional analysis later in  the meeting. He                                                                    
asked if he could defer the question until then.                                                                                
                                                                                                                                
Representative  Kawasaki  was  okay   with  waiting  for  an                                                                    
answer.                                                                                                                         
                                                                                                                                
Representative Grenn  asked the  commissioner to  talk about                                                                    
how all of the different  stake holders had come together on                                                                    
the issue.                                                                                                                      
                                                                                                                                
Commissioner Fisher explained  that the department developed                                                                    
the  solution after  the  governor had  requested  a way  of                                                                    
dealing  with the  tax credits.  The governor's  concern was                                                                    
putting Alaskans back to work.  The department developed the                                                                    
strategy  outline and  a structure  by going  through a  few                                                                    
different  scenarios.  The  department also  sat  down  with                                                                    
different  participants  with  different  perspectives.  The                                                                    
department  structured  the bill  as  a  balance, trying  to                                                                    
account  for  all  of  the  different  interests.  Not  many                                                                    
changes were  made in response  to the  meetings. Initially,                                                                    
many of the credit holders  were frustrated with the thought                                                                    
of taking  less for their  money. He thought that  over time                                                                    
people started to see that  the bill included a fair balance                                                                    
of  interest.  It was  not  necessarily  skewed one  way  or                                                                    
another. People started gravitating  to the legislation as a                                                                    
potential solution.                                                                                                             
                                                                                                                                
1:55:52 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton  was  concerned   with  2  scenarios  being                                                                    
offered; 10  percent or  5.1 percent.  He thought  the lower                                                                    
rates would be substantially  different for each producer or                                                                    
explorer.  It was  his first  time hearing  that DOR  rather                                                                    
than  Department   of  Natural  Resources  (DNR)   would  be                                                                    
handling  the  agreements  to overriding  royalty  interests                                                                    
(ORRI).  The amount  of value  for  an ORRI  might be  quite                                                                    
different among projects and there  might be time delays. He                                                                    
reported  hearing  that as  soon  as  the state  reached  10                                                                    
percent  the   royalty  interest  would  go   away.  He  was                                                                    
uncertain how the ORRI was  being written and whether it was                                                                    
fair to the state to reduce  the interest rate. He asked the                                                                    
Commissioner to address both items.                                                                                             
                                                                                                                                
Commissioner Fisher  explained that when he  stated a moment                                                                    
prior  that  the state  would  be  examining the  plans  for                                                                    
reinvestment,  he intended  it to  mean just  the plans  for                                                                    
reinvestment. He  clarified that the ORRI  was something DNR                                                                    
would  be negotiating,  not DOR.  The plan  for reinvestment                                                                    
would be  examined and  approved by DOR.  He noted  that the                                                                    
intent of  the bill with  respect to  the ORRI was  that the                                                                    
credit  holder would  have the  right to  present a  plan or                                                                    
proposal. The Department of  Natural Resources would examine                                                                    
that proposal  based on their  view of the  opportunity. The                                                                    
intent was  for the state  to be  taking some risk  with the                                                                    
field  developer  but also  sharing  in  the upside.  If  he                                                                    
implied that once  the 10 percent was paid  off, the royalty                                                                    
would  disappear, it  was not  the  intent of  the bill.  In                                                                    
other words, he imagined that  a company could offer to give                                                                    
the  state a  royalty  interest that  lasted  10 years,  for                                                                    
example. The Department of  Natural Resources would evaluate                                                                    
the proposal  based on  the time value  of money,  the risk,                                                                    
and the  return. There  would be  scenarios where  the state                                                                    
might  not make  as much  as expected  or make  considerably                                                                    
more. The department's expectation  was that if someone gave                                                                    
an ORRI, it would be for  the life of the field. There would                                                                    
be risk to  the state as well as upside  opportunity. It was                                                                    
not the  intent for the state  to bare all the  risk without                                                                    
any upside associated with the ORRI.                                                                                            
                                                                                                                                
Co-Chair Seaton noted that,  generally, plans of development                                                                    
got delayed rather than accelerated.  He was concerned about                                                                    
the time commitment.                                                                                                            
                                                                                                                                
2:00:53 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara thought the bill  had both pros and cons. He                                                                    
understood  the  policy.  It  would be  easier  for  him  to                                                                    
support  the bill  if the  legislature had  raised some  oil                                                                    
money. However,  it seemed like  money only flowed  one way.                                                                    
He  relayed that  the $600  million  that the  oil tax  bill                                                                    
passed by  the House, would  have easily paid for  this. One                                                                    
of the  pros was that  if the state  did not take  action, a                                                                    
provision was  included in  the law that  would let  the oil                                                                    
industry buy the  credits for a fraction of $1  but deduct a                                                                    
full $1 from  their taxes. He was concerned  about a massive                                                                    
liability  with  huge deductions  if  BP,  Conoco, or  Exxon                                                                    
started buying  up the  credits for $.60  on the  dollar. He                                                                    
asked if  the commissioner considered allowing  the state to                                                                    
purchase the  credits for  less than  what they  were worth,                                                                    
like the major oil companies were allowed.                                                                                      
                                                                                                                                
Commissioner  Fisher had  been  asked  the question  before.                                                                    
There were two things the  department was trying to balance.                                                                    
There  was no  question  that there  were certain  companies                                                                    
that would sell their credits  for a deep discount. However,                                                                    
he did not believe it extended  to all of the companies. One                                                                    
of the department's  goals was to finally  address the issue                                                                    
for the  state and  the industry.  Another objective  of the                                                                    
department was  to provide a  balanced solution. He  was not                                                                    
suggesting  that  the  bill  reflected  the  best  financial                                                                    
decision  for  the  state.  He thought  it  was  neutral  to                                                                    
modestly  positive for  the state.  It  required the  credit                                                                    
holders to bare  the cost of the interest.  The solution was                                                                    
thoughtful  and  respected  by  the  oil  industry  and  the                                                                    
financial industry. He  thought it served the  state well in                                                                    
the long term. He felt  that balancing the various interests                                                                    
in the way  the bill did was appropriate and  better for the                                                                    
state in the long run.                                                                                                          
                                                                                                                                
Vice-Chair  Gara  asked  if the  department  had  considered                                                                    
giving the state  the same right as the  major oil companies                                                                    
to buy the credits at less than face value.                                                                                     
                                                                                                                                
Commissioner  Fisher responded  that  the  state was  buying                                                                    
them  at  less   than  face  value.  The   state  had  never                                                                    
considered  a  deep discount  when  the  department did  its                                                                    
modeling. The proposal brought forward  in the bill tried to                                                                    
balance some of the other factors he had mentioned.                                                                             
                                                                                                                                
2:05:09 PM                                                                                                                    
                                                                                                                                
Representative Pruitt was  uncertain whether the legislature                                                                    
had expressed  the importance of  where the money  would go.                                                                    
He  mentioned concerns  that had  been  expressed about  the                                                                    
money potentially being used to  pay off banks. He asked how                                                                    
important it  was for the  money to open up  opportunity for                                                                    
further investment.                                                                                                             
                                                                                                                                
Commissioner Fisher responded that, at  a high level, it was                                                                    
difficult for  a company in  default on a credit  to attract                                                                    
additional  debt or  equity investment.  Representations and                                                                    
warrantees  would be  required. The  existence of  debt gave                                                                    
the  debt  holder  the  ability  to  put  the  company  into                                                                    
bankruptcy. The threat  of bankruptcy, even if  the bank was                                                                    
in forbearance,  made future investors uncomfortable  with a                                                                    
credit.  Cleaning  up  a  company's  balance  sheet  offered                                                                    
tremendous  benefit. Companies  would  structure their  debt                                                                    
based on the cash flow they  expected. They would be able to                                                                    
create  a   capital  structure   more  sustainable   in  the                                                                    
long-term.                                                                                                                      
                                                                                                                                
Commissioner  Fisher continued  that one  of the  things the                                                                    
legislature would  hear from  ING was  that they  were over-                                                                    
collateralized. They  might have, for example,  $100 million                                                                    
of debts and  $140 million of credits. In  other words, when                                                                    
they  got paid  there  would  be some  money  that would  be                                                                    
returned to the  companies. There would be  money going back                                                                    
to the  companies and  would be  available to  the companies                                                                    
for their operations.                                                                                                           
                                                                                                                                
Co-Chair Foster acknowledged  Representative Chris Birch and                                                                    
Representative George Raucher in the audience.                                                                                  
                                                                                                                                
2:09:05 PM                                                                                                                    
                                                                                                                                
THOMAS RYAN, ING GROUP, NEW  YORK CITY (via teleconference),                                                                    
had  a couple  of  points he  wanted to  make.  He had  made                                                                    
similar points in the resource  committee hearings two weeks                                                                    
prior.  The  company  had been  working  with  two  specific                                                                    
borrowers  in  Alaska,  both  of   whom  were  nearing  full                                                                    
production. ING financed the tax  credits beginning in 2015.                                                                    
Those  loans  were  still  outstanding,  past  due,  and  in                                                                    
default.  ING  had  been  working   with  the  companies  to                                                                    
restructure their  loans for  the past  couple of  years. He                                                                    
thought one  of the  key hallmarks  of the  transactions was                                                                    
that ING provided short-term liquidity  to companies at very                                                                    
inexpensive  rates  against  their   tax  credits  with  the                                                                    
expectation  that  they  would  be  repaid  and  cashed  out                                                                    
quickly. Obviously,  that did not  happen, and the  terms of                                                                    
the loans  were extended even  though they were  in default.                                                                    
The  money was  already spent  by the  companies in  Alaska.                                                                    
Significant  amounts  of  money   including  debt  that  the                                                                    
companies  raised and  equity that  they raised  were spent.                                                                    
The equity  of the credit  money was taxed and  was expected                                                                    
to  come  back  from  the  state: The  equity  was  used  as                                                                    
collateral for ING's lending purposes.                                                                                          
                                                                                                                                
Mr. Ryan  continued that  clearly circumstances  had changed                                                                    
over the last number of years.  ING had been patient and had                                                                    
worked as  diligently as  possible with  the state  and with                                                                    
the companies to keep them  liquid and in operation. Both of                                                                    
the  companies  had  significant  capital  investment  plans                                                                    
going  forward. They  also had  further  capital to  finance                                                                    
those  plans.  The  fact that  they  had  defaulted  balance                                                                    
sheets prevented them from moving  forward with their plans.                                                                    
The companies had been trying  stay afloat over the past few                                                                    
years.                                                                                                                          
                                                                                                                                
Mr. Ryan  reported that  ING was  over-collateralized. There                                                                    
was  a concern  that somehow  the companies  would take  the                                                                    
money and  run. ING was a  committed lender to the  State of                                                                    
Alaska and  lent to several different  industries in Alaska.                                                                    
He  noted that  much  of  the money  that  the credits  were                                                                    
coming back against  had already been spent.  There would be                                                                    
excess that would  go back to the projects  to spend further                                                                    
as well  as raising  new capital.  From the  very beginning,                                                                    
ING  had been  asking for  a  restructuring of  debt on  the                                                                    
balance  sheet,  which meant  that  everyone  would have  to                                                                    
experience a bit  of pain in the  restructuring. The credits                                                                    
were  being  refinanced at  a  discount.  ING was  realistic                                                                    
about  things. He  suggested that  once  the balance  sheets                                                                    
were cleaned  up, it might  be possible for the  projects to                                                                    
be refinanced and operations furthered.                                                                                         
                                                                                                                                
2:12:45 PM                                                                                                                    
                                                                                                                                
PETER   CLINTON,    ING   GROUP,   NEW   YORK    CITY   (via                                                                    
teleconference),  commented on  the bill.  He reported  that                                                                    
things  had  not worked  out  as  intended for  anyone.  The                                                                    
situation  was similar  to  a  private credit  restructuring                                                                    
when a company  had to restructure because  of an unforeseen                                                                    
event impacting  its revenues  or earnings  to the  point of                                                                    
not being  able to  pay its  original debts.  The difference                                                                    
had  to do  with the  length of  time that  it took  for the                                                                    
state  to  address its  problems.  It  had to  address  them                                                                    
through  the  annual  legislative  process.  Typically,  the                                                                    
first thing private companies did  when restructuring was to                                                                    
stop making their  payments. Next, they had  to decide which                                                                    
payments were a  priority. In the state's case,  it had some                                                                    
tough  decisions to  make because  of  having several  other                                                                    
priorities.                                                                                                                     
                                                                                                                                
Mr. Clinton reported that the  size of the problem needed to                                                                    
be determined. The state did  so when it stopped issuing the                                                                    
tax credits  and ended up  where it  was today -  needing to                                                                    
solve the problem of how to  pay the credits. He thought the                                                                    
proposal  was  balanced  and fair.  The  proposal  was  also                                                                    
consistent with the  packet of proposals that  would be seen                                                                    
in private  industry when a  company took an  obligation and                                                                    
tried   to   identify   a   solution   in   which   everyone                                                                    
participated. He  thought the  bill asked  everyone involved                                                                    
to participate.  The bill asked  the parties that  were owed                                                                    
money  to  accept a  discount.  The  bill also  asked  those                                                                    
participants  who benefited  from the  program to  commit to                                                                    
reinvesting  in the  state. The  bill  would take  near-term                                                                    
appropriations  and spread  them out  over a  longer period.                                                                    
While  he  appreciated  there was  some  concern  about  not                                                                    
having  great visibility  over  a  10-year period  regarding                                                                    
repayment capacity, it was not  dissimilar to other types of                                                                    
organizations. Collectively, the proposal  on the table made                                                                    
good sense.  It was true to  a formula that was  used in the                                                                    
private sector.                                                                                                                 
                                                                                                                                
2:16:53 PM                                                                                                                    
                                                                                                                                
Representative Wilson  asked who made the  final decision on                                                                    
the discount. She asked who owned the credits presently.                                                                        
                                                                                                                                
Mr. Ryan responded that one  of the positive features of the                                                                    
program  was  that  when  ING   financed  the  credits  they                                                                    
essentially  purchased  them  from the  companies.  The  tax                                                                    
credits  were issued  in  ING's name  as  the recipient.  He                                                                    
reiterated  that  ING  was  overcollateralized  and  had  an                                                                    
obligation to give back to  the companies anything in excess                                                                    
of  what ING  was owed.  It would  be a  joint decision.  He                                                                    
furthered  that   ING  would  look  at   the  final  capital                                                                    
investment plans of the company  going forward and the right                                                                    
discount.  ING and  each company  would decide  collectively                                                                    
what the  right strategy was  for both parties. Much  of the                                                                    
decision  would  come  down  to   the  final  details  of  a                                                                    
company's plan. For  example, it might be  possible to split                                                                    
the credits into multiple buckets  with different rates. ING                                                                    
was still working on the details.                                                                                               
                                                                                                                                
Representative Wilson used a  hypothetical scenario in which                                                                    
a  credit was  worth $100  million,  and ING  was given  $90                                                                    
million. She asked if the company  would have to make up the                                                                    
difference of $10 million.                                                                                                      
                                                                                                                                
Mr. Ryan  responded, "If we're overcollateralized,  yes." He                                                                    
explained the bank  had two different deals.  The first deal                                                                    
was overcollateralized to  a large extent and  the other was                                                                    
not. Depending  on the exact  final details of the  plan and                                                                    
the plans of the company, ING  might take a loss on one deal                                                                    
and  the other  deal might  have some  excess that  would be                                                                    
returned to the company. He  furthered that depending on the                                                                    
size of  the discount, some of  it would be borne  by ING in                                                                    
one case and all of it would  be borne by the company in the                                                                    
other. Until  the final details  were available it  would be                                                                    
difficult to make a prediction.                                                                                                 
                                                                                                                                
Representative  Wilson  was  trying   to  get  something  on                                                                    
record. She  suggested that  if the  company owned  the note                                                                    
they could guarantee that they  would do a certain amount of                                                                    
work in the following couple of  years. She was not sure the                                                                    
bank  could make  the same  obligation. She  wanted to  make                                                                    
sure  the  legislature  was  not  putting  the  banks  at  a                                                                    
disadvantage. The banks could only  do a 10 percent discount                                                                    
rather than a  5 percent discount. She was  trying to figure                                                                    
out the difference  between the bank owning  the note versus                                                                    
the company owning the note.                                                                                                    
                                                                                                                                
2:20:23 PM                                                                                                                    
                                                                                                                                
Representative  Grenn noted  that  the  testifiers used  the                                                                    
term "fair  and balanced." He  wanted to  use the term  as a                                                                    
way of framing  a conversation he had  regarding the state's                                                                    
reputation the  last few years  and instilling or  hurting a                                                                    
confidence in the  state's oil and gas tax  policy. He asked                                                                    
how  the  proposal  would   impact  the  state's  reputation                                                                    
regarding investment in  the state's oil and  gas tax policy                                                                    
compared to the status quo of the past few years.                                                                               
                                                                                                                                
Mr.  Clinton offered  his perspective.  He thought  it would                                                                    
greatly  enhance   the  state's  reputation.   He  suggested                                                                    
rephrasing  the question  to reflect  how  much the  state's                                                                    
reputation would hurt  by not doing something  like what was                                                                    
being  proposed.  He  thought  the  state's  reputation  had                                                                    
already  been  damaged   significantly.  He  indicated  that                                                                    
private  lenders  were not  put  off  by similar  situations                                                                    
where  something   unexpected  happened   that  had   to  be                                                                    
addressed. Ultimately,  lenders looked for the  ability of a                                                                    
predictable payout.  His job was to  manage the expectations                                                                    
of  senior  management  regarding   a  payout  timeline.  He                                                                    
relayed that if he had a  report each year that a payout was                                                                    
subject  to  appropriation  and   that  the  amount  was  in                                                                    
dispute, it would not be  predictable. However, if the state                                                                    
were to  adopt a program,  such as  the bond, where  it paid                                                                    
something   off  at   a  discount   over   a  longer   term,                                                                    
institutions  would  be  more   than  happy  to  accept  the                                                                    
tradeoff -  the tradeoff of predictability.  He relayed that                                                                    
one of ING's  loans would not likely lead to  a loss because                                                                    
it had  overcollateralization. Another loan might  lead to a                                                                    
small loss.  In cases that lead  to a loss, for  ING, it led                                                                    
to a more desirable outcome  than the uncertainty that would                                                                    
continue to exist without a solution.                                                                                           
                                                                                                                                
2:23:29 PM                                                                                                                    
                                                                                                                                
Representative  Grenn  thanked   the  testifiers  for  their                                                                    
comments.                                                                                                                       
                                                                                                                                
Vice-Chair Gara  expressed confusion  about the  issue about                                                                    
the  state's reputation.  He mentioned  that for  many years                                                                    
the  state  paid  credits as  they  came  in.  Circumstances                                                                    
changed  with  the  oil  price crash  in  2015,  which  hurt                                                                    
everyone  including  the state.  Since  that  time when  the                                                                    
state stopped paying every single  dollar, the state shifted                                                                    
to what  the statute  stated. The  statute defined  that the                                                                    
state paid 10  percent of the production tax  revenue if oil                                                                    
was over $60 per barrel and  15 percent if oil was less than                                                                    
$60  per  barrel.  He  reported  that  the  legislature  had                                                                    
followed the statute. He was  confused as to why the state's                                                                    
reputation  would be  hurt.  He assumed  that  ING read  the                                                                    
statute before  lending money. He  was bothered by  the idea                                                                    
of the  state's reputation  being damaged because  the state                                                                    
had been  following the law.  He asked  if ING had  read the                                                                    
law.                                                                                                                            
                                                                                                                                
Mr.  Ryan indicated  that the  bank  had been  aware of  the                                                                    
terms  and  the  state's  historical  performance.  ING  was                                                                    
mindful that future legislative  budgets could not be bound.                                                                    
ING  based its  lending decisions  on speaking  with several                                                                    
entities including DOR, DNR, and  the governor's office. ING                                                                    
was aware  of what  happened and that  a future  event could                                                                    
potentially  slow down  payments  to the  formula. The  bank                                                                    
stress-tested  the  payments  and scenarios.  Based  on  the                                                                    
representations   it  had   from   stakeholders  and   ING's                                                                    
modeling,  the  lender  felt comfortable  with  event  risk.                                                                    
There  was  no  question  that  the  event  happened  taking                                                                    
everyone by  surprise. He  did not  think anyone  was saying                                                                    
that  the state  was not  honoring  the letter  of the  law.                                                                    
However, there  were some  reasonable expectations  made and                                                                    
discussions  had  amongst  serious  stakeholders  in  Alaska                                                                    
prior to  ING making its  decision. He indicated  that based                                                                    
on a willingness to pay and  the state's ability to pay, the                                                                    
bank  was asking  for some  predictability. As  a bank,  ING                                                                    
would like to lend more and  with its projects it would like                                                                    
some certainty. He furthered that  when the projects and the                                                                    
equity  was  put into  the  projects  in Alaska  there  were                                                                    
promises made of  prompt payment of credits  in exchange for                                                                    
cash. He  agreed that  the relationship of  the state  was a                                                                    
good one. However, they thought  the bill, by adding clarity                                                                    
and certainty  at a  discount, would  help show  the state's                                                                    
goodwill  and  compliance  with  the  legislation.  ING  had                                                                    
experienced  positive dealings  with the  state in  the past                                                                    
and  he  hoped, with  the  passage  of  the bill,  it  would                                                                    
continue to do business in Alaska.                                                                                              
                                                                                                                                
2:28:00 PM                                                                                                                    
                                                                                                                                
Representative Pruitt noted that  earlier in ING's testimony                                                                    
Mr. Ryan had referenced the  genesis of working with some of                                                                    
the  oil companies  and offering  liquidity  at cheap  rates                                                                    
because  of the  state's precedent  of paying  the companies                                                                    
off  over a  short term.  He assumed  there were  terms that                                                                    
would  allow for  lower interest  rates  or certain  payment                                                                    
schedules that  took into  account the  state would  pay the                                                                    
credits within  a reasonable  amount of  time. Mr.  Ryan had                                                                    
also expressed that ING had  been working with the companies                                                                    
in renegotiating  the terms.  He wondered  how the  bank was                                                                    
adjusting and  reorganizing the debt.  He asked if  a higher                                                                    
interest rate would be imposed.                                                                                                 
                                                                                                                                
Mr.  Clinton  replied  that  the   imposition  of  a  higher                                                                    
interest rate would be typical  in any credit restructuring.                                                                    
A  general  loan agreement  would  include  a default  rate,                                                                    
which  was generally  2 percent  above the  contracted rate.                                                                    
ING's default  rate kicked  in when a  loan was  not repaid.                                                                    
There  were  other rights  and  remedies  available to  ING,                                                                    
which it did not exercise  in these cases. For instance, ING                                                                    
could have foreclosed  on the company or  caused the company                                                                    
to file  for bankruptcy by taking  certain actions. However,                                                                    
forcing the company into bankruptcy  would not result in ING                                                                    
getting  paid any  sooner or  solve the  company's problems.                                                                    
There were  other creditors involved with  the companies who                                                                    
were  standing aside  waiting  for  certain developments  to                                                                    
happen  to lead  companies back  to financial  health. Since                                                                    
ING's only  source of payment  was through the  tax credits,                                                                    
it  stood  by  and  let  the  other  creditors  control  the                                                                    
outcome. He reported  ING staying in close  contact with the                                                                    
other creditors.                                                                                                                
                                                                                                                                
Representative  Pruitt  asked  if  interest  could  be  used                                                                    
against a tax  liability - therefore, less  tax available to                                                                    
the federal government  or the state entity.  He wondered if                                                                    
interest was the cost of doing business.                                                                                        
                                                                                                                                
Mr. Clinton  answered there  was a  cost of  doing business.                                                                    
ING had  implied costs  that were  not balance  sheet costs.                                                                    
They were  calculated the way  ING thought it  did business,                                                                    
with a cost of capital.  ING had things called risk weighted                                                                    
assets - capital the bank set  aside based on the quality of                                                                    
assets it  had. He conveyed that  when a bank had  a loan of                                                                    
$100  million  that  was  past  due  without  any  immediate                                                                    
repayment in sight,  then the bank had  a significant amount                                                                    
of capital  set aside against  that loan which could  not be                                                                    
used for new loans.                                                                                                             
                                                                                                                                
Mr. Ryan  asked if Representative Pruitt  was speaking about                                                                    
the interest expense for the  bank's customers. If so, their                                                                    
interest   was  typically   deductible  against   their  tax                                                                    
liability.                                                                                                                      
                                                                                                                                
2:33:18 PM                                                                                                                    
                                                                                                                                
Representative Pruitt was asking  about the interest expense                                                                    
of  the customer.  He  noted that  it  effected the  state's                                                                    
ability to  get additional tax  for Alaska. He asked  if ING                                                                    
had been unable to extend capital  to the Alaska oil and gas                                                                    
sector because of the current circumstance.                                                                                     
                                                                                                                                
Mr.  Clinton responded  in  the  affirmative. He  elaborated                                                                    
that ING ran  a significant oil and gas business  out of one                                                                    
of its  Houston offices. The  company had a  portfolio equal                                                                    
to $2.5  billion with  40 to  50 different  followers. Since                                                                    
the  beginning  of the  energy  crisis,  about 10  of  those                                                                    
borrowers filed  for bankruptcy.  ING was fortunate  in most                                                                    
of  those  instances that  the  level  it  lent at  was  not                                                                    
empiric.  However, there  were  significant  loses to  other                                                                    
investors. ING  continued to lend  to those  companies after                                                                    
they  came out  of  bankruptcy. ING  continued  to make  new                                                                    
loans in  the production  industry in  Houston as  well. ING                                                                    
looked and  the process  and the predictability  of outcomes                                                                    
before conducting  the financial analysis to  assess whether                                                                    
the next  opportunity to lend  to a company made  sense. The                                                                    
fact that  a company  had incurred some  problems previously                                                                    
did not exclude ING lending to them again.                                                                                      
                                                                                                                                
Vice-Chair Gara thanked Mr. Clinton and Mr. Ryan for the                                                                        
tone of their testimony.                                                                                                        
                                                                                                                                
2:37:08 PM                                                                                                                    
AT EASE                                                                                                                         
                                                                                                                                
2:37:48 PM                                                                                                                    
RECONVENED                                                                                                                      
                                                                                                                                
Co-Chair Foster commented that it was good for members to                                                                       
thank testifiers but cautioned members to be mindful of                                                                         
what others might infer from legislators' statements.                                                                           
                                                                                                                                
KARA MORIARTY, CEO, ALASKA OIL AND GAS ASSOCIATION,                                                                             
ANCHORAGE (via teleconference), introduced herself and read                                                                     
from a prepared statement:                                                                                                      
                                                                                                                                
     For the record,  my name is Kara Moriarty and  I am the                                                                    
     President/CEO  of the  Alaska  Oil  & Gas  Association,                                                                    
     commonly  referred  to as  "AOGA."  AOGA  is a  private                                                                    
     trade association  that represents the majority  of oil                                                                    
     and   gas    producers,   explorers,    refiners,   and                                                                    
     transporters  of Alaska's  oil and  gas. The  following                                                                    
     testimony reflects the opinion of our membership.                                                                          
                                                                                                                                
     AOGA  supports an  expedited  resolution  this year  to                                                                    
     refund  the  earned  credits.  Companies  earned  these                                                                    
     credits by  investing hundreds  of millions  of dollars                                                                    
     to hire Alaskans for the  exploration and production of                                                                    
     oil. The delay  in the rebates has  damaged the state's                                                                    
     reputation  and   chilled  future   investment;  caused                                                                    
     projects to be shelved,  resulting in negative economic                                                                    
     impacts to  the state  and local communities;  and many                                                                    
     Alaskans  are now  out of  work, especially  within the                                                                    
     oil and gas industry.                                                                                                      
                                                                                                                                
     AOGA believes  the state  should honor  all outstanding                                                                    
     earned  tax  credits  in  full,  and  in  as  expedited                                                                    
     process  as   possible.  The  Governor's  bill   is  an                                                                    
     innovative approach  that seeks to refund  a portion of                                                                    
     the  earned credits  via bonding  to  raise the  money,                                                                    
     then  refunding  the credits  at  a  reduced rate.  The                                                                    
     Governor proposes to lower the  refunding rate to cover                                                                    
     the  state's  bond  finance costs.  AOGA  has  concerns                                                                    
     about the steep discount  rates and other provisions of                                                                    
     the bill.  But AOGA  is committed  to working  with the                                                                    
     administration and legislature  to finding an equitable                                                                    
     solution     it's  simply   too  important.  AOGA  does                                                                    
     applaud  the  administration   for  acknowledging  that                                                                    
     refunding these payments is a critical step this year.                                                                     
                                                                                                                                
     AOGA supports  an equitable plan  that will  refund the                                                                    
     entirety of the earned credits  this year: Let's send a                                                                    
     strong  signal to  investors that  Alaska  is open  for                                                                    
     business  and attract  much  needed  new investment  to                                                                    
     employ Alaskans,  produce more oil, and  drive Alaska's                                                                    
     economy forward. Thank you.                                                                                                
                                                                                                                                
Ms. Moriarty made herself available for questions.                                                                              
                                                                                                                                
2:42:50 PM                                                                                                                    
                                                                                                                                
Representative Grenn  asked if she had  unanimous consent to                                                                    
testify.                                                                                                                        
                                                                                                                                
Ms.  Moriarty  confirmed  that she  had  to  have  unanimous                                                                    
consent on matters of tax, which  tax credits were a part of                                                                    
tax policy.                                                                                                                     
                                                                                                                                
Representative Grenn asked  if some of the  members were not                                                                    
owed tax credits.                                                                                                               
                                                                                                                                
Ms.  Moriarty   responded  that  Representative   Grenn  was                                                                    
correct.  However, the  companies that  did not  have earned                                                                    
tax  credit  certificates  were supportive  of  getting  the                                                                    
credits  paid  sooner rather  than  later  because having  a                                                                    
healthy oil business,  large or small, was  important to the                                                                    
entire industry.  It was important to  have strong companies                                                                    
across the board. She represented  companies like Caelus and                                                                    
Petro Star  that were holding  tax credit  certificates that                                                                    
had  not  received  their  payments in  full.  The  lack  of                                                                    
payments  hampered  these  companies  in  their  ability  to                                                                    
continue to  do business  and attract investment  in Alaska.                                                                    
She also represented companies that  were never eligible for                                                                    
cash  payments   such  as  BP,   Exxon,  and   Hilcorp.  The                                                                    
organization looked at the issue  holistically and, having a                                                                    
healthy  business   climate  for  all  companies   was  very                                                                    
important to all of her membership.                                                                                             
                                                                                                                                
Representative   Wilson  asked   if  AOGGA's   members  were                                                                    
concerned about  the additional requirement of  investing in                                                                    
Alaska within the following 2 years.                                                                                            
                                                                                                                                
Ms. Moriarty responded that AOGA  member companies were very                                                                    
committed  to  the  State  of Alaska.  Alaska  Oil  and  Gas                                                                    
Association would prefer that the  credits were paid in full                                                                    
because  the  companies spent  the  money  and believed  the                                                                    
credits were owed. Her members  also recognized the position                                                                    
the  state was  in and  were  trying to  find an  innovative                                                                    
approach when  prices were in a  lower-for-longer range. She                                                                    
thought all of  the companies she represented  planned to be                                                                    
in  Alaska.  She  had  not heard  any  objections  from  her                                                                    
membership about  putting together future  development plans                                                                    
to  make the  discount  contingent on  future spending.  She                                                                    
reiterated that, in  a perfect world, members  would like to                                                                    
be paid in full without  any type of discount. The companies                                                                    
that  she represented  were very  committed to  investing in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
Representative  Wilson asked  if the  intent of  DOR was  to                                                                    
utilize a  development plan as an  indicator of reinvestment                                                                    
for a company  that already had a development  plan in place                                                                    
- with or without the credits.                                                                                                  
                                                                                                                                
Ms. Moriarty  thought the issue  was something  that members                                                                    
had  to work  through  with the  state.  She needed  further                                                                    
clarification whether  the state  was expecting a  brand new                                                                    
development plan or something  already in place. She thought                                                                    
the  companies  that would  take  advantage  of the  program                                                                    
would work  closely with the  state. If they had  to provide                                                                    
something  additional, hopefully  it would  not be  any more                                                                    
onerous than what  they have had to provide  for their lease                                                                    
in the first place.                                                                                                             
                                                                                                                                
Representative  Wilson  asked  if in-state  refineries  were                                                                    
under  the same  obligation for  2  years as  the other  oil                                                                    
companies  with  tax  credits.  The  tax  credits  were  not                                                                    
written  exactly  the  same.  She  asked  about  the  2-year                                                                    
stipulation.                                                                                                                    
                                                                                                                                
Co-Chair Foster mentioned that there  were folks calling in,                                                                    
but  the  committee  was  only  hearing  invited  testimony.                                                                    
However, public  testimony would be heard  the following day                                                                    
at 1:30 P.M.                                                                                                                    
                                                                                                                                
2:47:57 PM                                                                                                                    
                                                                                                                                
Representative  Thompson   noted  that  in   Ms.  Moriarty's                                                                    
testimony she reported that hundreds  of millions of dollars                                                                    
had been  invested by  the oil  companies. In  actuality, he                                                                    
thought  the   total  investment  dollars  were   well  over                                                                    
billions. He  wanted to clarify that  companies had invested                                                                    
billions of dollars in Alaska  because of the tax incentives                                                                    
and  only received  a percentage  back  in the  form of  tax                                                                    
credits.                                                                                                                        
                                                                                                                                
Ms. Moriarty  agreed with Representative Thompson  that that                                                                    
companies had  invested billions.  They did  not get  all of                                                                    
their money  back except  the portion that  was part  of the                                                                    
credit as stated in law.                                                                                                        
                                                                                                                                
2:49:27 PM                                                                                                                    
                                                                                                                                
PAT  FOLEY, CAELUS  ALASKA, ANCHORAGE  (via teleconference),                                                                    
suggested the bill  represented the end of an  era. He noted                                                                    
that Pioneer  started its business  in Alaska in  2002 under                                                                    
profit-based  production  tax  (PPT).  Between  Pioneer  and                                                                    
Caelus,  they had  invested over  $2 billion  in the  state.                                                                    
They  participated  in  about  a  dozen  exploration  wells,                                                                    
developed  Oooguruk,   commenced  operations  on   its  Nuna                                                                    
development, and made a substantial  discovery in Smith Bay.                                                                    
All of  the work  he mentioned had  been done  under various                                                                    
tax  credit  programs  that   helped  assist  the  company's                                                                    
financing. All of the credits  had ended with the passage of                                                                    
HB 111  [Legislation passed in  2017 - Short Title:  Oil and                                                                    
Gas Production Tax; Payments: Credits].                                                                                         
                                                                                                                                
Mr. Foley thought  HB 331 would bring an end  to the state's                                                                    
obligation  to repay  the tax  credits. He  articulated that                                                                    
the state had  been the beneficiary of a number  of items as                                                                    
a result  of the investments  made by the oil  companies. He                                                                    
also asserted  that the large  number of investments  in the                                                                    
state  was  beneficial  as  was   a  diverse  population  of                                                                    
explores  and  developers. He  asserted  that  Alaska was  a                                                                    
high-cost  environment with  substantial barriers  to entry.                                                                    
The tax  credit program  that began more  than a  decade ago                                                                    
helped  to  level  the  playing   field  between  the  large                                                                    
existing legacy  producers and the  new companies  trying to                                                                    
grow and incubate their businesses  in Alaska. The state had                                                                    
seen benefits  from all of  the tax credit  programs through                                                                    
jobs,  production  down  tax  taps,  and  increased  royalty                                                                    
payments.  He  indicated that  it  was  not the  big  legacy                                                                    
producers that had been the  beneficiaries of the recent tax                                                                    
credit  programs.  It  was companies  like  Caelus,  Repsol,                                                                    
Brooks  Range,   Great  Bear,  Doyon,  CIRI,   Arctic  Slope                                                                    
Regional Corporation (ASRC), Blue  Crest, Fury, and SAE that                                                                    
have made the investments and  were entitled to the payments                                                                    
that would hopefully result under the bonding program.                                                                          
                                                                                                                                
Mr. Foley asserted  that if the bill was able  to become law                                                                    
and the credits  were paid to the bonding  program, it would                                                                    
demonstrate  the  state  taking  great  steps  to  help  its                                                                    
reputation  and making  good on  its  obligations. It  would                                                                    
also  help to  put money  back into  the hand  of developers                                                                    
allowing new investments to be made in Alaska.                                                                                  
                                                                                                                                
Mr. Foley believed  that HB 331 represented good  policy - a                                                                    
win  for the  state, and  a  win for  investors. The  credit                                                                    
holders would  be paid out  earlier than what  the statutory                                                                    
minimum  formula  provided.  Companies would  take  a  small                                                                    
haircut, a discount they were  willing to accept. The amount                                                                    
of the  discount (the  interest cost  of the  repayment) was                                                                    
similar to the  company's cost to capital at  10 percent. If                                                                    
his company  was able  to enjoy the  lower discount  rate it                                                                    
would be economical money and a  fair deal for the state and                                                                    
the investor. The state helped  clear all of its obligations                                                                    
to repay  the taxes  and, from a  cash flow  standpoint, the                                                                    
state  minimized  its  2018  cash  obligations.  Absent  the                                                                    
program,  he  believed  the statutory  minimum  obligated  a                                                                    
payment  of  about  $184 million.  He  thought  Commissioner                                                                    
Fischer had  testified that the  interest payment  the state                                                                    
would incur in 2018 was about $27 million.                                                                                      
                                                                                                                                
Mr. Foley  offered that he  thought it was good  policy that                                                                    
the bill  provided two different discount  rates. It created                                                                    
an  incentive   for  more  activities   in  the   state.  It                                                                    
encouraged investors  to put money  back into the  state. He                                                                    
thanked  Representative Wilson  who  reminded the  committee                                                                    
that the tax  credit holders had made  literally billions of                                                                    
dollars in  investments in the state.  Those investments had                                                                    
resulted in jobs, production,  royalties, and other tangible                                                                    
benefits to  the state. The  investments had earned  the tax                                                                    
credit certificates.  The bonding program would  resolve the                                                                    
repayment of  those tax credit certificates.  He thanked the                                                                    
administration for  making it  a priority  to repay  the tax                                                                    
credit obligation  that existed.  He asked the  committee to                                                                    
pass HB 331  and for the legislature to write  the bill into                                                                    
law.  He thanked  the committee  and offered  to answer  any                                                                    
questions.                                                                                                                      
                                                                                                                                
2:55:05 PM                                                                                                                    
                                                                                                                                
Representative Grenn asked  Mr. Foley if he  could share the                                                                    
amount Caelus was owed in tax credits.                                                                                          
                                                                                                                                
Mr.  Foley  responded that  the  amount  was close  to  $190                                                                    
million in tax credit certificates.                                                                                             
                                                                                                                                
Representative  Grenn  asked  what  would  be  happening  at                                                                    
Caelus the day after the passage of the bill.                                                                                   
                                                                                                                                
Mr. Foley  responded that  the company  would be  happy. The                                                                    
company had  loans against  the $190  million in  tax credit                                                                    
certificates. The  company would  be poised  to pay  off the                                                                    
loans and  to attract  additional investment  through equity                                                                    
or debt  or a  combination to allow  Caelus to  move forward                                                                    
with the Nuna  project and to drill  an additional appraisal                                                                    
well  in  Smith  Bay.  It  should  set  the  environment  to                                                                    
facilitate other investment in the state.                                                                                       
                                                                                                                                
Representative  Wilson thanked  Caelus  for its  investment.                                                                    
She  asked  him  if  he   was  comfortable  with  the  added                                                                    
requirements to receive the higher discount.                                                                                    
                                                                                                                                
Mr. Foley  responded in the affirmative.  He believed Caelus                                                                    
would  be in  a position  to make  investments in  the state                                                                    
that exceeded  the $190 million tax  credit certificates. He                                                                    
was confident  his company  would be  entitled to  the lower                                                                    
discount rate.  Having said  that, even  if his  company was                                                                    
discounted  at 10  percent, he  would  have to  go into  the                                                                    
market to borrow  more money. He thought the  cost to borrow                                                                    
that money would be in the neighborhood of 10 percent.                                                                          
                                                                                                                                
Representative Wilson  asked if Caelus had  put any projects                                                                    
on hold as a result of the credits not being paid.                                                                              
                                                                                                                                
Mr. Foley  responded, "Yes  and no." Although  it was  not a                                                                    
direct  connection, the  fact that  credits  were not  being                                                                    
paid  and discussions  continued  at  the legislature  about                                                                    
reshuffling production  taxes made  it difficult  for Caelus                                                                    
to  attract investment  dollars. He  elaborated that  Caelus                                                                    
had  been out  in  the market  place for  more  than a  year                                                                    
trying  to obtain  financing for  the  Nuna development  and                                                                    
additional  work at  Smith Bay.  It had  been difficult  for                                                                    
Caelus  to  obtain financing.  The  company  had yet  to  be                                                                    
successful. He hoped  the legislation would be  a first step                                                                    
in facilitating the company's ability to attract capital.                                                                       
                                                                                                                                
Representative  Wilson  thanked  Mr.  Foley  again  for  his                                                                    
investment.                                                                                                                     
                                                                                                                                
Representative  Pruitt asked  Mr.  Foley what  the value  of                                                                    
$190 million would  translate to in future  Alaskan jobs and                                                                    
potential production.                                                                                                           
                                                                                                                                
Mr.  Foley responded  that Pioneer  and Caelus  have had  as                                                                    
many  as  900 employees  and  contractors  working for  them                                                                    
simultaneously on  the slope.  Today they  had less  than 50                                                                    
working  on  the  North  Slope and  about  50  employees  in                                                                    
Anchorage.  He  indicated  that Oooguruk  had  totally  been                                                                    
developed  within some  kind of  a tax  credit program.  The                                                                    
company  had made  about $30  million barrels  of production                                                                    
thus far. The  company's daily production was  a little more                                                                    
than 13,000 barrels  per day. He relayed  that the company's                                                                    
Nuna development  project was  the next  development project                                                                    
it hoped  to begin work  on soon.  He claimed that  the Nuna                                                                    
project  would  be  about  15  million  barrels  plus,  peak                                                                    
production  was about  25,000 per  day. Peak  jobs would  be                                                                    
over 200  or 300  during the  construction phase.  The total                                                                    
investment for Nuna would be more than $1 billion.                                                                              
                                                                                                                                
3:01:01 PM                                                                                                                    
                                                                                                                                
JEFF   HASTINGS,   CEO,    SAEXPLORATION,   ANCHORAGE   (via                                                                    
teleconference), read a prepared statement:                                                                                     
                                                                                                                                
     Good Afternoon;                                                                                                            
                                                                                                                                
     I would like  to start by extending  my appreciation to                                                                    
     Chairman Foster and Chairman Seaton  and members of the                                                                    
     House Finance committee for  allowing us to participate                                                                    
     in today's testimony.                                                                                                      
                                                                                                                                
     For  the record  my name  is  Jeff Hastings.  I am  the                                                                    
     Chairman    and    Chief    Executive    Officer    for                                                                    
     SAExploration, and the  managing member of Kuukpik/SAE,                                                                    
     our Joint Venture with the  north slope, native village                                                                    
     of Nuiqsut. My family has lived in Alaska since 1987.                                                                      
                                                                                                                                
     Our core business is  offering seismic data acquisition                                                                    
     services to  the oil  and gas industry.  We are  not an                                                                    
     oil company    we  simply provide  the seismic  data to                                                                    
     help  the State  and companies  know where  to look  in                                                                    
    order to find oil more effectively and efficiently.                                                                         
                                                                                                                                
     Our  company has  employed an  average of  400 Alaskans                                                                    
     annually.   We  are   the   holders  of   approximately                                                                    
     $50,000,000.00 of assigned tax  credits and continue to                                                                    
     wait  for  an  additional  $21,000,000.00  in  assigned                                                                    
     credits,  which  are  still in  the  process  of  being                                                                    
     verified and audited for more  than two years. Since we                                                                    
     are not an  oil company, we do  not have any long- term                                                                  
     production prospects  for making  up the money  that is                                                                    
     owed  our  company  for  all  the  work  we  performed.                                                                    
     Instead,  we  have  been   forced  to  restructure  and                                                                    
     downsize  our company  as we  await  payments from  the                                                                    
     State of Alaska.                                                                                                           
                                                                                                                                
     Today I would  like talk in support of  HB331, which if                                                                    
     passed  would  provide  a  mechanism  to  pay  off  the                                                                    
     existing  oil and  gas tax  credits owed  by the  State                                                                    
     through the issuance of bonds.                                                                                             
                                                                                                                                
     Over  the  past  couple  years, we  have  felt  adverse                                                                    
     effects as a  result of prolonging the  period in which                                                                    
     the oil and  gas tax credits are  verified, issued, and                                                                    
     ultimately  paid.   As  an   Alaskan  company   and  as                                                                    
     Alaskans, we understand the  state's fiscal dilemma and                                                                    
     appreciate the Legislature's efforts  to find long term                                                                    
     fiscal solutions.  But circumstances  are such  that we                                                                    
    need to work together today to find a solution, and                                                                         
     HB331 offers a pathway.                                                                                                    
                                                                                                                                
     In   our  sector   of   the   industry,  seismic   data                                                                    
     collection, we  have experienced a  continuing downward                                                                    
     trend   in   activity   since  the   governor's   first                                                                    
     appropriation veto  in Q2  of 2015.  Year over  year, a                                                                    
     50% decrease  in the dollars  being spent on  new data,                                                                    
     data  needed to  identify new  reserves that  the state                                                                    
     needs   for   its   economic   well-being.   In   2015,                                                                    
     $200,000,000.00 was spent  on new high-resolution data.                                                                  
     In 2018  there will  be less than  $20,000,000.00 spent                                                                    
     on   new   seismic   data  collection.   Perhaps   more                                                                    
     importantly  are  the  jobs that  have  been  lost  and                                                                    
     continue to  be reduced year  after year. As  a company                                                                    
     we   have  gone   from  employing   400  Alaskans   and                                                                    
     multitudes of Alaskan subcontractors  for 8 to 9 months                                                                    
     a year, to a company  that employees 150 Alaskans and a                                                                    
     few  select Alaskan  contractors for  45 days  in 2018.                                                                    
     This is not  a result of a loss in  our market share to                                                                    
     competition or  a continued  downturn in  the commodity                                                                    
     price. It is simply due  to a lack of capital spending,                                                                    
     be  it our  clientele waiting  on tax  credits owed  to                                                                    
     them  individually  or  a lack  of  confidence  in  the                                                                    
     State's oil  and gas tax policy.  Their capital budgets                                                                    
     are being  directed to  other basins  and opportunities                                                                    
     where there is a higher level of confidence.                                                                               
                                                                                                                                
     The  governor's tax  credit  appropriation vetoes,  the                                                                    
     debate  about annual  minimum  appropriations, and  the                                                                    
     two DOR  advisory bulletins  2016-01 and 2017-01, which                                                                
     effectively shut  down the  secondary market,  have all                                                                    
     combined  to  create  a  business  environment  without                                                                    
     meaningful  consistency. Please  know  that this  isn't                                                                    
     trying to  cast blame or fault  anyone   all of  us are                                                                    
     doing  our  best  to  cope   with  the  State's  fiscal                                                                    
     situation. But  I point  these things  out to  you with                                                                    
     the  hope that  we can  move  forward with  HB331 as  a                                                                    
     solution.                                                                                                                  
                                                                                                                                
     Working  together and  passing  this  bill will  create                                                                    
     opportunities  to bring  online the  reserves that  the                                                                    
     state  desperately  needs  to  solve  our  fiscal  gap,                                                                    
     opportunities which  are now effectively  sidelined due                                                                    
     to the  current situation.  Except for  one exploration                                                                    
     effort in  2018, the capital  needed to get us  back to                                                                    
     work  is not  being  allocated.  Project after  project                                                                    
     suspended because of a lack  visibility, resulting in a                                                                    
     lack  of  capital  available,  both  the  institutional                                                                    
     capital  and   the  private  capital  needed   to  move                                                                    
     projects forward  because of  the continued  erosion of                                                                    
     confidence in  the consistency of  our oil and  gas tax                                                                    
     policy  and   plan  to   pay  the   outstanding  credit                                                                    
     liability.                                                                                                                 
                                                                                                                                
     Recent data from  DOR would indicate that  the 2016 and                                                                    
     2017 credits,  depending on the annual  allocation will                                                                    
     not see  payments begin until  fiscal 2021 and  may not                                                                    
     see the full amounts  paid until sometime beyond fiscal                                                                    
     2024 or  2025. This  data would  indicate an  even more                                                                    
     protracted period of low activity.                                                                                         
                                                                                                                                
     The  DOR projections  for  commodity  pricing over  the                                                                    
     near-term show that we cannot depend  on an increase in                                                                  
     price of  oil to solve this  issue. And yet as  a state                                                                    
     we need  more production and more  revenue generated by                                                                    
     that  production  to  bridge  our fiscal  gap  and  the                                                                    
     future  needs  as a  State.  To  do  that we  need  the                                                                    
     industry off the sidelines and  working to increase our                                                                    
     throughput.                                                                                                                
                                                                                                                                
     We  believe HB331  provides a  path  to restarting  the                                                                    
     industries engine.  Is it ideal - - no. On one  side of                                                                
     the equation no one wants to  have to take a haircut on                                                                    
     monies owed.  On the  other you  can argue  why, should                                                                    
     the  State take  on the  debt and  service of  the debt                                                                    
     even if the, discount provides for an offset.                                                                              
                                                                                                                                
     The level of the discount  will be a company by company                                                                    
     choice. Dependent  on the current projected  payment by                                                                    
     DOR,  their cost  of  capital and  their  need for  new                                                                    
     project capital.                                                                                                           
                                                                                                                                
     What  HB331  does  do  is  create  confidence  in  when                                                                    
     companies will be paid, how  much they will be paid and                                                                    
     normalizes  the  amount that  the  state  will need  to                                                                    
     appropriate each year against the tax credit liability                                                                     
     More   importantly  it   gives  us   the  ability   and                                                                    
     confidence as an  industry to find the  capital we need                                                                    
     for new or suspended projects.  And it puts our Alaskan                                                                    
     families back to work.                                                                                                     
                                                                                                                                
     Thank you  for your time  today and the  opportunity to                                                                    
     share our view point.                                                                                                      
                                                                                                                                
3:08:26 PM                                                                                                                    
                                                                                                                                
Representative Thompson asked for a copy of Mr. Hastings'                                                                       
prepared statement.                                                                                                             
                                                                                                                                
                                                                                                                                
Mr. Hastings confirmed that he had submitted it.                                                                                
                                                                                                                                
Co-Chair Foster indicated that Mr. Alper would be providing                                                                     
the sectional analysis.                                                                                                         
                                                                                                                                
3:09:15 PM                                                                                                                    
                                                                                                                                
KEN ALPER,  DIRECTOR, TAX  DIVISION, DEPARTMENT  OF REVENUE,                                                                    
offered  to  review  the  bill  in as  much  detail  as  the                                                                    
committee  required.   He  also   conveyed  that   he  could                                                                    
potentially  answer  some  of the  questions  that  came  up                                                                    
during testimony earlier in the meeting.                                                                                        
                                                                                                                                
Mr. Alper  specified that there  had been a question  on the                                                                    
prior  Saturday posed  by  Representative  Kawasaki. He  had                                                                    
given a preview  to the section and indicated  that the bill                                                                    
did  4  things.  He  would  keep  the  structure  of  the  4                                                                    
subtopics  as he  reviewed the  bill in  greater detail.  He                                                                    
reviewed the sectional analysis.                                                                                                
                                                                                                                                
     Section 1:                                                                                                                 
                                                                                                                                
     Exempts  the bond  corporation created  in Sec.  2, and                                                                    
     any overriding royalty  interests negotiated under Sec.                                                                    
     11, from the procurement code.                                                                                             
                                                                                                                                
     Section 2:                                                                                                                 
                                                                                                                                
     Establishes  the  Alaska  Tax Credit  Certificate  Bond                                                                    
     Corporation  within   DOR.  [Largely   patterned  after                                                                    
     Alaska Pension Obligation Bond Corporation, AS 37.16]                                                                      
                                                                                                                                
     37.18.010 Creates the corporation.                                                                                         
                                                                                                                                
     37.18.020 Establishes  the board  of directors,  all of                                                                    
     whom are state department commissioners.                                                                                   
                                                                                                                                
     37.18.030 Authorizes the corporation  to issue bonds up                                                                    
    to $1 billion and contract for associated services.                                                                         
                                                                                                                                
     37.18.040 Authorizes the corporation  to have a reserve                                                                    
     fund which will  hold funds to be  used for repurchase,                                                                    
     as  well  as  funds  appropriated for  the  purpose  of                                                                    
     interest and principal payments to bond holders.                                                                           
                                                                                                                                
     37.18.050 Authorizes  the corporation to set  the terms                                                                    
     of bonds to be issued.                                                                                                     
                                                                                                                                
     37.18.060  Corporation  must   adopt  a  resolution  to                                                                    
     approve the issuance of bonds.                                                                                             
                                                                                                                                
     37.18.070 Gives  certain enforcement rights  to certain                                                                    
     bond holders.                                                                                                              
                                                                                                                                
     37.18.080 Bonds  may not be issued  unless the discount                                                                    
     rate by  which tax  credits are  purchased is  at least                                                                    
     1.5  percent greater  than the  total interest  cost of                                                                    
     the bonds.                                                                                                                 
                                                                                                                                
     37.18.090  Corporation may  refund bonds  prior to  the                                                                    
     maturity date.                                                                                                             
                                                                                                                                
     37.18.100 Bonds are legal instruments.                                                                                     
                                                                                                                                
     37.18.800 This chapter shall  be liberally construed to                                                                    
     carry out its purposes.                                                                                                    
                                                                                                                                
     37.18.810 Corporation  may adopt  regulations necessary                                                                    
     to implement this chapter.                                                                                                 
                                                                                                                                
     37.18.900 Definitions.                                                                                                     
                                                                                                                                
     Section 3:                                                                                                                 
                                                                                                                                
     Amends the  Gas Storage Credit to  enable repurchase of                                                                    
     any credits via the bond program.                                                                                          
                                                                                                                                
     Section 4:                                                                                                                 
                                                                                                                                
     Amends the  LNG Storage Credit to  enable repurchase of                                                                    
     any credits via the bond program.                                                                                          
                                                                                                                                
     Section 5:                                                                                                                 
                                                                                                                                
     Amends  the Refinery  Infrastructure  Credit to  enable                                                                    
     repurchase of any credits via the bond program.                                                                            
                                                                                                                                
     Section 6:                                                                                                                 
                                                                                                                                
     Amends  various provisions  of  AS  43.55.028, the  tax                                                                    
     credit repurchase fund.                                                                                                    
                                                                                                                                
     .028(e) The  department may either  use the  tax credit                                                                    
     fund money,  or money disbursed from  the bond program,                                                                    
     to   purchase   tax   credits.  Written   to   maximize                                                                    
     flexibility  and   retain  the  existing   program  and                                                                    
     procedures.                                                                                                                
                                                                                                                                
     Section 7:                                                                                                                 
                                                                                                                                
     .028(g)  Clarifies that  the  current  $70 million  per                                                                    
     company per  year cap,  with the  associated "haircut",                                                                    
    does not apply to repurchases via the bond program.                                                                         
                                                                                                                                
     Section 8:                                                                                                                 
                                                                                                                                
     .028(i) Adds  definitions for  "money disbursed  to the                                                                    
     commissioner," and "total interest cost."                                                                                  
     Section 9:                                                                                                                 
     .028(j) Clarifies that if a  company has an outstanding                                                                    
     liability to  the state, this  can be offset  against a                                                                    
     payment   via  the   bond  program   as  well   as  via                                                                    
     traditional repurchase.                                                                                                    
                                                                                                                                
     Section 10:                                                                                                                
                                                                                                                                
     .028(k)  New  section  authorizing  the  department  to                                                                    
     negotiate  a  repurchase  of  all  credits  held  by  a                                                                    
     company  and  describing  how  the  holder  of  credits                                                                    
     indicates their  desire to participate in  the program.                                                                    
     This section contemplates that if a holder of credits                                                                      
     existing at  the time  of a  bond issuance  declines to                                                                    
     participate in  the program,  such holder  is precluded                                                                    
     from submitting such existing credits for purchase in                                                                      
     connection with  future bond issuances.  This provision                                                                    
     does not  preclude such holder from  submitting credits                                                                    
     claimed  after   a  bond   issuance  for   purchase  in                                                                    
     connection with a future bond issuance.                                                                                    
                                                                                                                                
     .028(l) New  section describes  the mechanism  by which                                                                    
     the department  estimates the expected  cash flow  to a                                                                    
     company   via  the   current  repurchase   process  and                                                                    
     expected  schedule.  From  this  estimate,  a  purchase                                                                    
     offer  can be  calculated  based on  the discount  rate                                                                    
     determined in (m).                                                                                                         
                                                                                                                                
     .028(m) New  section establishing a base  discount rate                                                                    
     of 10  percent, with four  methods to reduce this  to a                                                                    
    number equal to total interest cost + 1.5 percent.                                                                          
                                                                                                                                
          1. For  a seismic  credit, the company  has waived                                                                    
          the  10-year confidentiality  period for  the data                                                                    
          and allowed it to become public;                                                                                      
          2.  The  company  has   agreed  to  an  overriding                                                                    
          royalty   interest   (ORRI)    accepted   by   the                                                                    
          Department of Natural Resources;                                                                                      
          3. The  company has committed reinvest  the entire                                                                    
          amount  received  within  an Alaska  oil  and  gas                                                                    
          project within 24 months; or                                                                                          
          4.  The credit  is  against  the corporate  income                                                                    
          tax,  primarily impacting  refinery infrastructure                                                                    
          credits.                                                                                                              
                                                                                                                                
     .028(n)  New section  clarifying that  the amount  of a                                                                    
     credit  in excess  of the  discounted amount  purchased                                                                    
     retains no  value and cannot  be used against  taxes or                                                                    
     sold.                                                                                                                      
                                                                                                                                
     Section 11:                                                                                                                
                                                                                                                                
     Authorizes  the  Department  of  Natural  Resources  to                                                                    
     negotiate  Overriding Royalty  Interests (ORRI).  These                                                                    
     are then  valued, and a  determination is  made whether                                                                    
     the incremental  value received  by the  state warrants                                                                    
     the approval  of the lower  discount rate  for purposes                                                                    
     of credit repurchase.                                                                                                      
                                                                                                                                
     Section 12:                                                                                                                
                                                                                                                                
     Authorizes  DNR   and  DOR  to  adopt   regulations  to                                                                    
     implement this act                                                                                                         
                                                                                                                                
     Section 13:                                                                                                                
                                                                                                                                
    Authorizes retroactive application of regulations.                                                                          
                                                                                                                                
     Section 14:                                                                                                                
                                                                                                                                
     Immediate effective date.                                                                                                  
                                                                                                                                
Mr.  Alper  summarized  Section  1 having  to  do  with  the                                                                    
procurement code. There  were two new pieces of  the bill in                                                                    
which  certain  new  state  activity  would  not  explicitly                                                                    
require going  through the details of  the state procurement                                                                    
process. First was  the bond corporation and  the second was                                                                    
the  acquisition  of   those  overriding  royalty  interests                                                                    
through DNR in Section 11.                                                                                                      
                                                                                                                                
Mr. Alper reported  that Section 2 wrote a  new chapter into                                                                    
statute,  AS   37.18,  which  creating  a   new  state  bond                                                                    
corporation  for  the  purpose  of  the  Alaska  tax  credit                                                                    
certificate  bond corporation  within DOR.  The section  was                                                                    
modeled after very similar language  specific to the pension                                                                    
obligation  bond corporation  law  that  passed through  the                                                                    
body  about  10 years  prior.  There  were many  subsections                                                                    
within Section  2 and took up  about half the length  of the                                                                    
bill.                                                                                                                           
                                                                                                                                
Mr.  Alper   referenced  AS  37.18.010  which   created  the                                                                    
corporation.  He conveyed  that AS  37.18.020 established  a                                                                    
board of  directors which included three  commissioners: one                                                                    
from  DOR, one  from the  Department of  Commerce, Community                                                                    
and  Economic   Development  (DCCED),   and  one   from  the                                                                    
Department  of Administration  (DOA).  He  reported that  AS                                                                    
37.18.030 authorized the  board could sell up  to $1 billion                                                                    
in  bonds.   He  was  expecting  multiple   bond  issuances,                                                                    
although, the  first one  would be the  "big" one  - roughly                                                                    
$700 million  presuming most  companies participated  in the                                                                    
program.                                                                                                                        
                                                                                                                                
Mr. Alper indicated that AS  37.18.040 was the reserve fund.                                                                    
It provided  much of the  meat of how the  legislature would                                                                    
appropriate money to  pay the principle and  interest of the                                                                    
bonds. The language was spelled  out in AS 37.18.040 and had                                                                    
a  number of  subsections. He  moved to  AS 37.18.050  which                                                                    
authorized the  corporation to  set the  terms of  the bond.                                                                    
The last  bonds would be issued  by the end of  2021. It fit                                                                    
in with the  state's expectation that the  last cashable tax                                                                    
credits,  the last  refinery  credits,  and potentially  the                                                                    
credit the  interior gas utility  would request,  would come                                                                    
into the state sometime in 2020.                                                                                                
                                                                                                                                
Mr.  Alper  returned  to  Representative  Wilson's  question                                                                    
about  refinery  credits.  The refinery  automatically  came                                                                    
into  the  system at  the  lower  discount  rate. It  was  a                                                                    
specific care-out in  a later section of the  bill. In terms                                                                    
of talking about  getting the lower discount  rate through a                                                                    
reinvestment  commitment, it  was external  to the  refinery                                                                    
credits.   It  applied   to  companies   holding  the   more                                                                    
traditional operating  loss or exploration spending  type of                                                                    
credits. He  would talk about  it in greater detail  when he                                                                    
reached the applicable section.                                                                                                 
                                                                                                                                
Mr.  Alper  continued to  AS  37.18.060  which required  the                                                                    
corporation to  issue a resolution to  authorize the selling                                                                    
of the  bonds. Alaska  Statute 37.18.070  housed enforcement                                                                    
rights.  Alaska  Statute  37.18.080 inserted  a  restriction                                                                    
which only  allowed the  state to issue  bonds if  the state                                                                    
received a discount  the equivalent of at  least 1.5 percent                                                                    
above the total  interest cost. The total  interest cost was                                                                    
a  standard financial  term which  referred to  the interest                                                                    
and associated fees.                                                                                                            
                                                                                                                                
Mr. Alper explained that 37.18.090  was a repurchase ability                                                                    
that allowed  a corporation  to buy them  back prior  to the                                                                    
maturity  dates.  Alaska  Statute 37.18.100  indicated  they                                                                    
were an official legal instrument  of the state. He reviewed                                                                    
AS 37.18.800, AS 37.18.810, and AS 37.18.900.                                                                                   
                                                                                                                                
Representative  Wilson asked  why  a  corporation was  being                                                                    
created.                                                                                                                        
                                                                                                                                
Mr.  Alper  was   aware  that  the  method   had  been  used                                                                    
previously.  He  cited the  pension  obligation  bonds as  a                                                                    
comparable  example.   As  far   as  any  legal   reason  or                                                                    
requirement, he deferred to Mr. Barnhill.                                                                                       
                                                                                                                                
3:16:03 PM                                                                                                                    
                                                                                                                                
MIKE BARNHILL,  DEPUTY COMMISSIONER, DEPARTMENT  OF REVENUE,                                                                    
reported that at  the outside of the  design and envisioning                                                                    
how  to construct  the bill,  the department  had considered                                                                    
having the  state bond committee  issue the debt. It  was on                                                                    
the  advice of  tax council  that, specifically  because the                                                                    
use  of a  corporation was  approved by  the Alaska  Supreme                                                                    
Court  in the  Carr-Gottstein case,  they thought  it was  a                                                                    
useful thing  to include. The  department had  recently used                                                                    
the  same   structure  10  years   prior  for   the  pension                                                                    
obligation bond.  The department  thought it was  a familiar                                                                    
structure  for the  legislature and  did not  anticipate any                                                                    
controversy.                                                                                                                    
                                                                                                                                
Representative  Wilson asked  if  the  corporation would  be                                                                    
dissolved once the final payment was made.                                                                                      
                                                                                                                                
Mr. Barnhill replied there was  no sunset clause in the bill                                                                    
and would remain on the  books until the legislature decided                                                                    
to repeal it.                                                                                                                   
                                                                                                                                
                                                                                                                                
Co-Chair  Seaton  asked if  there  was  any reason  why  the                                                                    
legislature would  not want to  include a sunset  date after                                                                    
the fees were paid off.                                                                                                         
                                                                                                                                
Mr.  Barnhill commented  that  there was  no  reason not  to                                                                    
include a  sunset. He was  hesitant about defining  a sunset                                                                    
date  in the  event there  was some  sort of  refunding that                                                                    
extended  the  term.  They  would  want  to  make  sure  the                                                                    
corporation  existed  all  the  way  through  the  term.  He                                                                    
thought  the better  practice  might be  to  wait until  the                                                                    
program  was complete,  at which  time the  department could                                                                    
come back to the legislature to repeal it.                                                                                      
                                                                                                                                
Mr. Alper mentioned that the  ability to issue the bonds was                                                                    
fixed  in the  bill and  expired at  the end  of 2021.  If a                                                                    
delayed repeal was going to be  inserted it would need to be                                                                    
about 10 years after that time.  There was a precedent in HB                                                                    
111 that  had a delayed  repeal for the tax  credit sections                                                                    
themselves in AS 37.18.028 1  year after the last credit was                                                                    
paid off.  It was not  a fixed date.  Rather, it was  when a                                                                    
condition  was met.  It was  in a  transitional section  - a                                                                    
noncodified section at the end of the bill.                                                                                     
                                                                                                                                
3:19:09 PM                                                                                                                    
                                                                                                                                
DEVEN  MITCHELL, EXECUTIVE  DIRECTOR, ALASKA  MUNICIPAL BOND                                                                    
BANK  AUTHORITY, DEPARTMENT  OF REVENUE,  thought Mr.  Alper                                                                    
provided  great  answers. If  there  was  language that  was                                                                    
conditional   upon   the   maturity   of   all   outstanding                                                                    
obligations, the  entity would  cease to exist,  which would                                                                    
have to be after 2021.                                                                                                          
                                                                                                                                
Co-Chair Seaton commented that it  would be nice not to have                                                                    
to come back with another bill to repeal the corporation.                                                                       
                                                                                                                                
Representative Pruitt  asked if  the corporation  would have                                                                    
to  remain   in  existence  as   long  as  the   bonds  were                                                                    
outstanding.  The current  model  had the  state paying  out                                                                    
until 2031.  He thought  there was  interest in  inserting a                                                                    
sunset date for the corporation.                                                                                                
                                                                                                                                
Mr.  Mitchell clarified  that it  would be  after the  final                                                                    
payments  were made  rather  than a  specific  date. He  was                                                                    
unclear  what  the  future  held   and  did  not  think  the                                                                    
legislature  would  want  to   limit  flexibility  into  the                                                                    
future. He suggested  that a hard sunset date  of 2035 would                                                                    
be  sufficient.  He did  not  believe  it would  impair  the                                                                    
state's ability to market and issue the bonds.                                                                                  
                                                                                                                                
Representative Pruitt  clarified. Mr. Mitchell  responded in                                                                    
the affirmative.                                                                                                                
                                                                                                                                
Mr.  Alper continued  to review  the sectional  analysis. He                                                                    
indicated the  next sections addressed  Title 43,  tax laws.                                                                    
Sections 3, 4, and 5 were  connected. They were in AS 43.20,                                                                    
the corporate  income tax statute. They  reflected the three                                                                    
credits  outside  the  traditional  system  that  were  also                                                                    
eligible for  cash repurchase. Alaska Statute  43.20.046 was                                                                    
the gas  storage credit  used for the  Kenai facility  a few                                                                    
years   prior.  Alaska   Statue   43.20.047  reflected   the                                                                    
liquified  natural gas  (LNG) storage  credit that  would be                                                                    
used  for the  interior gas  utility. AS  43.20.053 was  the                                                                    
refinery  credit. All  of these  sections  had a  subsection                                                                    
that  specified the  credits  were  eligible for  repurchase                                                                    
through the state's tax  credit repurchase program. Sections                                                                    
3,  4, and  5 were  being amended  to create  an alternative                                                                    
repayment so  that they would  also be eligible  to purchase                                                                    
through the new  mechanism of the bonding fund.  The term in                                                                    
the bill was  "funds dispersed to the  commissioner from the                                                                    
tax  credit bond  corporation" which  meant  the bond  sales                                                                    
proceeds  could  be  used  to  repurchase  the  credits.  It                                                                    
created a parallel, alternative payment.                                                                                        
                                                                                                                                
3:23:15 PM                                                                                                                    
                                                                                                                                
Mr. Alper  spoke to Sections 6-9  amending existing sections                                                                    
of AS  43.55.028, the tax  credit fund and the  rules around                                                                    
which  the state  used  that fund  to  repurchase state  tax                                                                    
credits. Alaska  Statute 44.55.028(e)  in Section  6 created                                                                    
the same  alternative flexibility.  It allowed the  state to                                                                    
purchase credits  with money in  the fund or the  fund could                                                                    
be used as  a conduit to do the bond  repurchase through the                                                                    
bond sales and the money  dispersed to the commissioner from                                                                    
the bond corporation.                                                                                                           
                                                                                                                                
Mr.  Alper continued  to  Section 7,  a  newer section  that                                                                    
amended  AS 43.55.028(g).  The amendment  was  done 2  years                                                                    
previously  through HB  247 [Legislation  passed  in 2016  -                                                                    
Short Title:  Tax; Credits;  Refunds; O  and G].  House Bill                                                                    
247 eliminated  the Cook  Inlet credits  and inserted  a cap                                                                    
that prevented a company from  getting more than $70 million                                                                    
per  year  in cash  repurchases.  The  department needed  to                                                                    
create a  statutory waiver,  which was in  Section 7  of the                                                                    
bill.                                                                                                                           
                                                                                                                                
Mr.  Alper reported  that Section  8 contained  definitions.                                                                    
One  of the  definitions  was "money  dispersed through  the                                                                    
commissioner"  which included  the bond  proceeds and  total                                                                    
interest costs.                                                                                                                 
                                                                                                                                
Mr.  Alper  relayed that  Section  9,  another new  section,                                                                    
amended  AS 43.55.028(j)  which  was  added by  HB  247.  It                                                                    
ensured that  if a company  owed money to the  state through                                                                    
another tax, royalty, fine, or a  fee related to the oil and                                                                    
gas  business, the  state  could offset  them  with the  tax                                                                    
credit  payments.   The  department   could  back   out  the                                                                    
obligations  without  a   company's  permission  paying  the                                                                    
company  the  net amount.  Section  9  was amended  to  also                                                                    
include the  measure within the tax  credit bonding program.                                                                    
In the  case of a  company that  might stand to  receive $90                                                                    
million,  if  they owed  $5  million  to the  state  through                                                                    
something they were  delinquent on, the state  would pay its                                                                    
own liability and give the company the remaining $85.                                                                           
                                                                                                                                
3:26:04 PM                                                                                                                    
                                                                                                                                
Mr. Alper  continued to the  bulk of the changes  which were                                                                    
in  Section 10.  Section 10  added four  new subsections  to                                                                    
AS 43.55.028  that   talked  about   how  a   company  would                                                                    
participate   in   the   program.  The   first   subsection,                                                                    
AS 43.55.028(k)  was  the  mechanism   by  which  a  company                                                                    
offered its tax  credits to the program.  The companies were                                                                    
solicited  and indicated  whether  they wanted  to sell.  If                                                                    
they wanted  to sell,  companies could  not pick  and choose                                                                    
their credits because  all the old credits  would get bumped                                                                    
up  to  be  first  in  line to  get  better  access  to  the                                                                    
remaining cash.  Alternatively, companies  would be  able to                                                                    
participate in a better rate  in a second round. The statute                                                                    
clarified that a  company had to commit all  of its credits.                                                                    
If a  company did not  participate with the credits  it had,                                                                    
those credits  would not be  available for  purchase through                                                                    
the  bonding  program  in subsequent  years.  If  a  company                                                                    
earned new  credits between  now and  the second  round, the                                                                    
new  credits  would  be  eligible in  the  second  round  of                                                                    
financing.                                                                                                                      
                                                                                                                                
Mr.  Alper  continued  to  explain  AS  43.55.028(k),  which                                                                    
included  the  idea of  timing.  Companies  had to  make  an                                                                    
irrevocable  commitment by  time  certain, the  commissioner                                                                    
came up  with amount the  state would give the  company, and                                                                    
the company would either accept  or reject the state's offer                                                                    
in writing.  If a company  rejected the states'  offer, they                                                                    
waived their  right to participate in  future rounds through                                                                    
the program.                                                                                                                    
                                                                                                                                
Mr.  Alper explained  AS 43.55.028(l)  was the  mechanism to                                                                    
calculate  how much  the state  was going  to pay  a company                                                                    
based on the  idea of an anticipated  prorated amount. There                                                                    
were  three  new  definitions   embedded  in  subsection  l;                                                                    
assumed payment  amount, assumed appropriation,  and assumed                                                                    
proration  methodology. It  clarified that  the state  would                                                                    
first pay all of the 2016  credits pro rata among all of the                                                                    
companies that held them, then  the state would pay the 2017                                                                    
credits.  He suggested  that assuming  the state  would make                                                                    
annual  calculations based  on  the  statutory formula,  the                                                                    
statutory formula  was reference  in subsection  l in  a way                                                                    
that  clarified any  ambiguity.  It stated  taxes levied  by                                                                    
O-11  before the  application of  any tax  credits. For  the                                                                    
purpose of  this calculation only  the state was  locking in                                                                    
184  in 2019  and  168  in 2020  and  beyond. Presuming  the                                                                    
stream  of appropriations  appended,  it  defined any  given                                                                    
company's share.                                                                                                                
                                                                                                                                
Mr.  Alper  continued  that   AS  43.55.028(m)  defined  the                                                                    
discount rate was 10 percent  per year, unless a company met                                                                    
one of the four criteria  (see above). He elaborated that in                                                                    
subsection (3) the  reinvestment requirement was deliberated                                                                    
extensively  and the  24 month  commitment for  reinvestment                                                                    
was  decided  on.  He   mentioned  potential  amendments  to                                                                    
strengthen authority.                                                                                                           
                                                                                                                                
Mr. Alper discussed  AS 43.55.028(n) noting that  he did not                                                                    
expect to see it in  the bill. He admitted not understanding                                                                    
it to  start. It  indicated that  if a  company was  to sell                                                                    
something  at less  than  face value,  they  could not  turn                                                                    
around and  keep the amount  that was discounted  to collect                                                                    
on  later. By  selling something  at a  discounted rate,  it                                                                    
overtly retired the discounted amount.                                                                                          
                                                                                                                                
3:31:21 PM                                                                                                                    
                                                                                                                                
Mr. Alper moved to Section 11,  which had to do with DNR. It                                                                    
addressed the process by  which overriding royalty interests                                                                    
were negotiated and accepted. There  had to be an offer that                                                                    
had to be  valued, risked, discounted, and  turned into cash                                                                    
flow.  The offer  had  to  be valued  at  a  minimum of  the                                                                    
difference between  the higher  discount rate and  the lower                                                                    
discount rate.  For example, a  company would  receive about                                                                    
$85 million at the 10 percent  rate and about $92 million at                                                                    
the 5.1  percent discount  rate -  a $7  million difference.                                                                    
The overriding royalty interest had  to be worth at least $7                                                                    
million to the state for the  Commissioner of DNR to be able                                                                    
to sign off on the transaction.                                                                                                 
                                                                                                                                
Mr. Alper reported that the  remainder of the bill contained                                                                    
housekeeping sections that  always appeared at the  end of a                                                                    
complex bill. Section 12  authorized regulations. Section 13                                                                    
authorized   retroactivity   of  regulations.   Section   14                                                                    
outlined the  bill would have  an immediate  effective date.                                                                    
If the  bill passed without  an effective date, it  would go                                                                    
into effect 90 days after  the governor signed the bill into                                                                    
law.                                                                                                                            
                                                                                                                                
Co-Chair  Seaton referred  to Section  6  on page  2 of  the                                                                    
sectional. He  asked for more information  regarding 028 for                                                                    
the  payment  or disbursement  of  bonds.  He asked  if  the                                                                    
section would impact constitutional or state debt.                                                                              
                                                                                                                                
Mr. Alper  explained that the 028  fund was a fund  in which                                                                    
the  traditional  appropriation  passed  through  the  fund.                                                                    
Without  further  appropriation,  the  DNR  staff  had  been                                                                    
making the purchases of tax  credits for the prior 10 years.                                                                    
The language  in Section 6  stated that the money  that came                                                                    
through the  bonds could  also be used  to purchase  the tax                                                                    
credits. It did  not actually pass through the  028 fund. In                                                                    
fact, the conforming language on  page 9 of the bill stated,                                                                    
"The Department  may not  purchase with  money from  the oil                                                                    
and gas tax credit fund more  than $70 million in tax credit                                                                    
certificates."  The  real  purpose   of  Section  6  was  to                                                                    
establish that the  old system still existed  but that there                                                                    
were certain rules  to the old system that did  not apply to                                                                    
the bond system.  In terms of debt capacity,  he deferred to                                                                    
Mr. Mitchell.                                                                                                                   
                                                                                                                                
3:35:37 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton  asked  specifically about  the  department                                                                    
because  the department  spent from  the 028  funds. He  was                                                                    
concerned  with  state debt  and  the  department doing  the                                                                    
purchasing.                                                                                                                     
                                                                                                                                
Mr. Barnhill responded  that in DOR's and  the Department of                                                                    
Law's view, debt  as it was used in  the Alaska Constitution                                                                    
(Article 9, Section 8) had  a very specific meaning of "Term                                                                    
of Art." It meant that it was  the kind of debt in which the                                                                    
state had  pledged its full  faith and credit of  the state.                                                                    
If debt  was issued that  did not do  that, then it  was not                                                                    
debt governed by the Alaska  Constitution. There was nothing                                                                    
in the  bill that pledged the  full faith and credit  of the                                                                    
State of Alaska, therefore, it  was not debt governed by the                                                                    
Alaska Constitution. The issue of  revenue or other items in                                                                    
the   bill   that   triggered  the   Alaska   Constitution's                                                                    
definition of debt  was not part of the  bill. He reiterated                                                                    
that the  bill did not  pledge the  full faith in  credit of                                                                    
the State  of Alaska. Instead,  it disclaimed that  the full                                                                    
faith  in credit  as not  pledged and  therefore, not  state                                                                    
constitutional debt.  The perspective  was held  strongly by                                                                    
the Department of  Law and the bond  council. Many issuances                                                                    
using   a    variety   of   structures   relied    on   that                                                                    
interpretation. He  indicated that the anxiety  discussed on                                                                    
the previous  Saturday had never been  contemplated but, the                                                                    
department  remained  comfortable  that  the  constitutional                                                                    
issues were not triggered by the bill.                                                                                          
                                                                                                                                
Mr. Mitchell  mentioned that the  statutes were  modeled off                                                                    
the Pension Obligation Bond  Corporation. The department had                                                                    
gone  a  significant way  down  the  path of  issuing  those                                                                    
obligations  and contemplating  how that  commitment to  pay                                                                    
would be  created. It was  determined that there would  be a                                                                    
funding    agreement   in    place.   The    Department   of                                                                    
Administration  would enter  into a  funding agreement  with                                                                    
the corporation. There would be  a one-time deposit into the                                                                    
pension  trust  from the  corporation's  sale  of bonds.  In                                                                    
exchange for  that there would  be a commitment to  pay from                                                                    
the state through DOA for  purposes of satisfying the annual                                                                    
debt service of the  corporation. The appropriation would be                                                                    
subject to the appropriation  of the legislature every year.                                                                    
It was the  model that the department  anticipated using for                                                                    
the  corporation, if  the  legislation  was approved.  There                                                                    
would  be a  funding  agreement that  the corporation  would                                                                    
enter  into with  DOR.  Having a  public  corporation at  an                                                                    
arms-length legal  existence from DOR helped  in the effort.                                                                    
The  Department of  Revenue would  enter into  a contractual                                                                    
commitment with  the corporation which would  provide a one-                                                                    
time  funding   each  time  there  was   a  transaction.  In                                                                    
exchange, it would receive a  commitment from the department                                                                    
to seek  an annual  appropriation for the  funding agreement                                                                    
payment  amounts.  They would  consist  of  the annual  debt                                                                    
service related to the bond  issuance and perhaps the annual                                                                    
$2,500  for paying  agent services,  an ongoing  contractual                                                                    
fee with every bond issuance.                                                                                                   
                                                                                                                                
3:40:54 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton   wanted  to   make  sure  there   were  no                                                                    
complications when transferring the  funds into the existing                                                                    
028  fund.  He asked  if  there  was  an amount  that  would                                                                    
provide a better rate. He asked Mr. Mitchell to comment.                                                                        
                                                                                                                                
Mr. Mitchell  thought his  question was  interesting because                                                                    
there were  different buyers that participated  in different                                                                    
size transactions. Specific  to taxable transactions, bigger                                                                    
was definitely better. There were  investors that looked for                                                                    
a  $50 million  block size.  In other  words, it  meant that                                                                    
they  wanted $50  million for  themselves  and wanted  other                                                                    
people to have  $50 million blocks so that there  was a high                                                                    
probability for  secondary market  liquidity. It  meant that                                                                    
they would be able to trade  the paper later on in the event                                                                    
of  their  needing  to  get   out  of  their  position.  The                                                                    
municipal market  was a  little different.  It did  not have                                                                    
some of the same thresholds  that the taxable market had. In                                                                    
order  to get  the  market's attention,  it  helped to  have                                                                    
size. He suggested that a  transaction of $100 million would                                                                    
attract the market's attention.  A transaction of $5 million                                                                    
would  attract a  different class  of buyers.  Institutional                                                                    
investors  would  look  at   the  larger  transactions.  The                                                                    
department  did not  know  what  it would  be  selling on  a                                                                    
taxable tax exempt basis because  it required additional tax                                                                    
work.  If the  department  had an  $800 million  transaction                                                                    
that  went  50/50  or  60/40   it  would  be  a  highlighted                                                                    
municipal  market issuance.  Due to  tax law  changes people                                                                    
could not  do "advance for  funds" anymore in  the municipal                                                                    
market, and  the ability to  refinance bonds  had diminished                                                                    
supply. Therefore,  a $400 million or  $500 million issuance                                                                    
coming out of an issuer  would glean a significant amount of                                                                    
attention  currently. On  the taxable  side, while  it might                                                                    
not be billions, he thought it  was a sufficient size to get                                                                    
good market interest in the transaction.                                                                                        
                                                                                                                                
Co-Chair Seaton  wanted DOR to  look at Section 7  where the                                                                    
bill removed the  $70 million cap. He suggested  that if DOR                                                                    
anticipated  it would  be  able  to sell  all  of the  bonds                                                                    
without  any  interest  difference  he  was  okay  with  it.                                                                    
Otherwise, he  thought the legislature should  consider some                                                                    
pro-rata amounts  if the bond  issuance was lower  than what                                                                    
people  were willing  to pay.  He  wanted to  be asking  the                                                                    
appropriate questions on the sections in the bill.                                                                              
                                                                                                                                
Mr. Barnhill added  that in terms of how it  would work with                                                                    
deposits  into   the  fund,   with  many   transactions  the                                                                    
department often  funded money  in an escrow  account. There                                                                    
would be  a requisition process  for obtaining money  out of                                                                    
the fund  for qualified expenditures. He  used the structure                                                                    
used  at Goose  Creek for  an  example. As  the project  was                                                                    
conducted and built by  the Matanuska-Susitna Borough, there                                                                    
would be a requisition from  the borough to the construction                                                                    
fund with  sign-off from  the state  bond committee  for the                                                                    
purpose of paying  contractors. If there was going  to be an                                                                    
issue  with money  being deposited  directly into  the fund,                                                                    
the structure could be considered as well.                                                                                      
                                                                                                                                
3:45:38 PM                                                                                                                    
                                                                                                                                
Representative Wilson  asked if a  specific plan was  in the                                                                    
bill.                                                                                                                           
                                                                                                                                
Mr. Alper responded that the  concept of 2 years of interest                                                                    
only and the  rising principle was not defined  in the bill.                                                                    
However, the  notion that the corporation  had the authority                                                                    
to establish the terms was  included in the bill. The market                                                                    
would help to establish the  terms, as the people buying the                                                                    
bonds might have  certain preferences. It was  the intent of                                                                    
the administration to  move forward with the  way it modeled                                                                    
and presented it the prior Saturday.                                                                                            
                                                                                                                                
Representative Wilson  asked about  the effects of  it being                                                                    
higher.                                                                                                                         
                                                                                                                                
Mr. Alper replied that if  the interest rate was higher than                                                                    
the administration  was showing,  then the discount  rate at                                                                    
which the  state would be  buying the credits would  also be                                                                    
higher. In other  words, the state would be  buying them for                                                                    
a little less money to cover  the fact that the interest was                                                                    
larger.   The  lower   discount  rate   for  the   companies                                                                    
participating  would not  be set  until the  last minute  at                                                                    
which time  the state would  likely know the  interest rate.                                                                    
If Representative Wilson's  question was about restructuring                                                                    
the timing  of the  payment, it would  change the  timing of                                                                    
the payments  and increase the  amount the state  would have                                                                    
to pay  in the  first couple  of years.  The net  effect was                                                                    
still advantageous to the state  - the numbers were slightly                                                                    
different.  Currently there  was a  $27 million  fiscal note                                                                    
attached  to the  bill with  the assumption  of the  state's                                                                    
interest  obligation  for 2019.  He  suggested  that if  the                                                                    
bonds were sold under different  terms, the state would have                                                                    
to  come  back  to   the  legislature  with  a  supplemental                                                                    
request.                                                                                                                        
                                                                                                                                
Representative  Wilson was  concerned about  different terms                                                                    
for different companies. She was  also concerned with adding                                                                    
another   bonding  obligation   to  the   Public  Employees'                                                                    
Retirement  System (PERS)  and  Teacher's Retirement  System                                                                    
(TRS)  bonding  obligation.  She  had  a  question  for  the                                                                    
commissioner.   She  referred   to   a   company  that   had                                                                    
development plans  currently. She wondered if  they would be                                                                    
required  to  make  new  development  plans  to  meet  their                                                                    
obligation for 2 years of  showing their intent to invest in                                                                    
Alaska, or  whether they  could use what  they had  in place                                                                    
with DNR.                                                                                                                       
                                                                                                                                
Commissioner  Fisher  commented that  Representative  Wilson                                                                    
had a great question. He would  return with an answer at the                                                                    
next hearing.                                                                                                                   
                                                                                                                                
3:49:40 PM                                                                                                                    
                                                                                                                                
Representative  Wilson  did not  want  to  make things  more                                                                    
difficult for the  companies, as it was  a stipulation being                                                                    
added.                                                                                                                          
                                                                                                                                
Commissioner  Fisher  responded to  Representative  Wilson's                                                                    
question about  PERS and  TRS. He  explained that  when PERS                                                                    
and  TRS  was  added  to  the new  schedule  the  state  was                                                                    
flattening  out  the  total  amount  of  the  payment  as  a                                                                    
percentage of state UGF. He  thought there was a benefit. He                                                                    
remarked that  PERS and TRS  were rising and the  tax credit                                                                    
bonds would  be rising  in the  outyears. However,  it would                                                                    
not peak  at the same high  level it would if  the state did                                                                    
not do the proposed program.                                                                                                    
                                                                                                                                
Representative Wilson remembered that  it also depended upon                                                                    
oil going up  more than what it was  presently. She recalled                                                                    
contemplating the  price of oil  going up. However,  she did                                                                    
not want to bet the state's budget on the price of oil.                                                                         
                                                                                                                                
Commissioner   Fisher  conveyed   that  the   administration                                                                    
believed that  pushing the payments  out was  an appropriate                                                                    
strategy  because  of  anticipating an  improvement  in  the                                                                    
state budget.  Under the  status quo, if  the state  did not                                                                    
enact  the legislation,  the combination  of debt,  PERS and                                                                    
the TRS, and the credits would  cap out at about 31 percent.                                                                    
He continued  that with the  program it capped out  about 24                                                                    
percent.  His point  was  that the  program  would supply  a                                                                    
smoother  and   flatter  overall   expense  to   the  state,                                                                    
regardless of what happened with oil.                                                                                           
                                                                                                                                
Representative Ortiz asked why the  state might or might not                                                                    
want to  pass HB  331. He recalled  asking Mr.  Mitchell if,                                                                    
with  the passage  of HB  331,  there might  be a  potential                                                                    
impact  on  the  state's  ability to  bond  to  protect  the                                                                    
state's  infrastructure. He  asked Mr.  Mitchell to  further                                                                    
comment  on what  the state's  ability to  engage in  a bond                                                                    
program  for infrastructure  might be  if the  bill were  to                                                                    
pass.                                                                                                                           
                                                                                                                                
Mr.  Mitchell noted  that,  from  a management  perspective,                                                                    
there were  pros and  cons to the  state having  a liability                                                                    
that was being refinanced. It was  not as impactful as a new                                                                    
obligation but  would take  a soft liability  and make  it a                                                                    
hard  liability. There  would be  no optionality  in payment                                                                    
and would have an impact  on rating agencies. Also, it would                                                                    
be included in  net tax supported debt  when considering the                                                                    
state's debt capacity. He thought  it would have not quite a                                                                    
full $800  million worth of  impact on the  state's capacity                                                                    
but  an   impact  of  about   $200  million.  In   the  debt                                                                    
affordability  analysis release  earlier  in  the year,  the                                                                    
state opined  that the current  debt capacity of  the state,                                                                    
given the  metrics that the  state followed and  the current                                                                    
unrestricted general  fund revenue  forecast from  the fall,                                                                    
was  in the  range of  about $300  million to  $400 million.                                                                    
There  were   several  other  variables  in   play.  Without                                                                    
considering  the other  matters,  it had  an  impact on  the                                                                    
state's current ability to borrow.                                                                                              
                                                                                                                                
3:55:08 PM                                                                                                                    
                                                                                                                                
Representative Ortiz  asked if  it was safe  to say  that 10                                                                    
years prior the  state was more apt to be  all things to all                                                                    
people. He asked if, by going  down this road, the state was                                                                    
limiting  its  options  for future  legislatures  and  their                                                                    
ability to address certain issues.                                                                                              
                                                                                                                                
Mr. Mitchell  replied that there  was a  budgetary smoothing                                                                    
as a result  of the proposal in the bill  which allowed some                                                                    
flexibility.  In an  ideal  world, the  state  would have  a                                                                    
capital  project   plan  that  was  embedded   with  a  debt                                                                    
management component.  There were highly  essential projects                                                                    
funded on  a routine and  regular basis using a  policy that                                                                    
flowed  from one  group of  elected officials  to the  next.                                                                    
However, circumstances had been much more ad hoc.                                                                               
                                                                                                                                
Representative  Guttenberg   mentioned  the   legal  opinion                                                                    
letter  provided  by  Legislative   Legal  Services  on  the                                                                    
constitutionality  of the  bill.  The  legislature had  also                                                                    
received a  press release from  the attorney general  on the                                                                    
issue.  He mentioned  a document  from  the commissioner  as                                                                    
well.  He  was  looking  for  a  broader  basis  to  have  a                                                                    
conversation.                                                                                                                   
                                                                                                                                
3:58:07 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara  asked about the  impact of the bill  on the                                                                    
state's  bonding capacity.  He wondered  about an  amount or                                                                    
specific numbers.                                                                                                               
                                                                                                                                
Commissioner Fisher  asked if the  assumption would  be that                                                                    
the Percent of Market Value (POMV) legislation passed.                                                                          
                                                                                                                                
Vice-Chair Gara responded both ways.                                                                                            
                                                                                                                                
Commissioner Fisher replied that  it might be fair. However,                                                                    
his assumption  was that  the notion  of the  capital budget                                                                    
was premised  on the assumption  there would be a  POMV that                                                                    
would fund it. He could  talk about it both ways. Obviously,                                                                    
if the  POMV bill  passed, the  answer to  Vice-Chair Gara's                                                                    
question would be much easier to answer.                                                                                        
                                                                                                                                
Co-Chair Seaton explained that if  a POMV passed there would                                                                    
be  an  expectation  that  the  earnings  reserve  would  be                                                                    
available for state spending  and supporting state services.                                                                    
The  difference was  whether  an asset  was  counted or  not                                                                    
counted regarding a bondable amount.                                                                                            
                                                                                                                                
Commissioner Fisher answered  that with a POMV  in place the                                                                    
state  would  experience  a  much  larger  bonding  capacity                                                                    
amount.                                                                                                                         
                                                                                                                                
Mr. Mitchell  answered that the debt  affordability analysis                                                                    
that  the  division  released  in   January  used  the  fall                                                                    
forecast.  The state's  historical metrics  for purposes  of                                                                    
determining  capacity was  to have  general obligation  debt                                                                    
and state  supported debt be no  more than 5 percent  of UGF                                                                    
revenue. The division did not want  the debt to be more than                                                                    
8 percent  if the school  reimbursement debt was  added. The                                                                    
division  had not  been incorporating  the obligations  that                                                                    
the  state had  placed upon  itself through  the payment  on                                                                    
behalf  of  the  employer  situation   with  PERS  and  TRS.                                                                    
Employees  were  held  harmless  at  percentage  of  payroll                                                                    
levels  - not  making  them pay  the actuarially  determined                                                                    
payroll  levels. He  continued  that with  the analysis  the                                                                    
department's projected  UGF revenue was about  $2.3 billion.                                                                    
The state's existing debt was  declining because the program                                                                    
was  mature and  had  step-down obligations.  The state  had                                                                    
some new obligations that had  to be issued but were already                                                                    
authorized.  He   commented  that  a   10-year  look-forward                                                                    
resulted in a debt capacity  of between $300 million to $400                                                                    
million. In  other words,  over the  following 10  years the                                                                    
state  could be  highly  confident in  maintaining a  credit                                                                    
rating  with a  debt issuance  program of  that amount.  The                                                                    
bill would have a significant  impact on a percentage basis.                                                                    
He suggested that  a guesstimate of $200  million impact was                                                                    
accurate, about half of the limited capacity.                                                                                   
                                                                                                                                
Mr. Mitchell indicated  that if a POMV  passed, $1.7 billion                                                                    
would be available  for UGF spending on  an annualized basis                                                                    
and  growing  with inflation  at  2.25  percent. The  ratios                                                                    
looked much better. He did not  believe it could be the same                                                                    
analysis  that had  been used  in the  past. The  department                                                                    
needed to have  a holistic review of  the debt affordability                                                                    
analysis. He  had been hesitant  to go  the high end  of the                                                                    
historical  analysis. It  would  increase  the state's  debt                                                                    
capacity by about $1.7 billion.                                                                                                 
                                                                                                                                
4:04:42 PM                                                                                                                    
                                                                                                                                
Vice-Chair Gara asked  if it would be $1.7  billion with the                                                                    
passage of the bill.                                                                                                            
                                                                                                                                
Mr. Mitchell  replied that  if the bill  had a  $200 million                                                                    
theoretical  impact,  the  state   would  have  a  remaining                                                                    
capacity of $1.5 billion. He  was projecting on the low end.                                                                    
He  was  reluctant to  use  the  historical metrics  without                                                                    
considering some of  the shifts that had  occurred since the                                                                    
department   started  conducting   the  debt   affordability                                                                    
analysis with  the payments on  behalf of the  employers. It                                                                    
would  result in  a harder  liability from  a credit  rating                                                                    
perspective   and  would   be   included   in  the   state's                                                                    
Comprehensive  Annual  Financial   Report  (CAFR)  with  the                                                                    
potential to have impacts.                                                                                                      
                                                                                                                                
Co-Chair Seaton had a question  regarding Section 10 on page                                                                    
3 of the bill. He  referenced AS 43.55.028(m) and pointed to                                                                    
the  first  item  regarding  seismic   credits.  He  used  a                                                                    
scenario  with two  companies that  were willing  to release                                                                    
their seismic data immediately. One  of the companies was in                                                                    
the  early  stage of  development  and  the other  conducted                                                                    
seismic  testing several  years prior.  He wondered  how the                                                                    
department would value the release of their seismic data.                                                                       
                                                                                                                                
Mr. Alper replied  it was an important  question which might                                                                    
help clarify  the issue the department  was discussing about                                                                    
seismic credits and what data  would be provided. There were                                                                    
certain credits that were earned  for seismic work that were                                                                    
still outstanding  and unpaid.  Those credits were  for work                                                                    
done  in the  past couple  of  years. If  there was  seismic                                                                    
shooting  done 5  or 6  years prior  and there  were credits                                                                    
associated  with  them, they  were  long  paid and  not  the                                                                    
seismic  data  being  considered   for  early  release.  The                                                                    
department  was  looking  for the  seismic  data  that  were                                                                    
specific to the credit shoots  that had the open tax credits                                                                    
against them - a more recent  vintage of tax credits. If the                                                                    
state had  a case where  a company had some  seismic credits                                                                    
as well  as other  credits, it was  only the  seismic credit                                                                    
that would be bought down  to the better discount rate. They                                                                    
would not  be able to  get all of their  non-seismic credits                                                                    
at the  better discount  rates simply to  give the  data for                                                                    
their seismic  credits. Mr. Alper  asked if  his explanation                                                                    
helped.                                                                                                                         
                                                                                                                                
4:08:20 PM                                                                                                                    
                                                                                                                                
Co-Chair  Seaton responded  in  the  affirmative. He  opined                                                                    
that he had  not been given a good explanation  about how to                                                                    
get  two  rates. He  provided  a  hypothetical scenario.  He                                                                    
asked  if it  was  an  on-off lever  of  10  percent or  5.1                                                                    
percent.                                                                                                                        
                                                                                                                                
Mr. Alper  answered that the seismic  credits were discrete.                                                                    
There  was  a  finite  amount  of  them  within  a  set.  He                                                                    
suggested  that  10  percent  to 15  percent  of  the  total                                                                    
outstanding  credits were  seismic  related.  He imagined  a                                                                    
split   application  where   a  company   might  have   some                                                                    
outstanding  seismic credits  and not  be able  to obtain  a                                                                    
better discount rate on a  non-seismic credit. As far as the                                                                    
reinvestment requirement,  the way the  division interpreted                                                                    
it, the  credit would  not be  able to  be split.  A company                                                                    
would need to make a commitment  in the full amount of their                                                                    
cash out, whether  $10 million or $200  million. The company                                                                    
would  need  to commit  the  full  amount of  their  payment                                                                    
within the  24 month period.  It did not  anticipate someone                                                                    
splitting the particular provision.                                                                                             
                                                                                                                                
Co-Chair  Seaton asked  about the  overriding royalty.  If a                                                                    
company  had credits  on  several  different operations,  he                                                                    
wondered if the  overriding royalty was on each  part of the                                                                    
company's  production.  He   provided  another  hypothetical                                                                    
scenario. He  asked if the  overriding royalty was  based on                                                                    
the   company's  entire   production  or   on  the   credits                                                                    
generated. He asked if it was proportional or company-wide.                                                                     
                                                                                                                                
Mr. Alper  answered that the overriding  royalty section was                                                                    
not  explicit to  the  leases where  there  might have  been                                                                    
credits earned.  The only requirement  was that  the company                                                                    
had   tax  credits   eligible   for   repurchase  and   then                                                                    
negotiating   an   overriding   royalty.   They   would   be                                                                    
negotiating with DNR  for royalty on an  associated lease or                                                                    
on  another lease  under  production. If  they  had a  lease                                                                    
under  current production,  it might  be  perceived as  more                                                                    
valuable  to  DNR because  there  might  be much  less  risk                                                                    
associated with it. There was  not a requirement that all of                                                                    
a company's leases  be included. They needed  to be offering                                                                    
something of  value to  the state.  The commissioner  of DNR                                                                    
would  have to  value the  offering in  such a  way that  it                                                                    
would be worth the incremental money.                                                                                           
                                                                                                                                
4:12:06 PM                                                                                                                    
                                                                                                                                
Co-Chair Seaton asked if Mr.  Alper was referring to the net                                                                    
present value  of the incremental  amount based on  the plan                                                                    
of development.                                                                                                                 
                                                                                                                                
Mr. Alper  answered there  would be  the expectation  of the                                                                    
plan of  development (when the company  indicated they would                                                                    
come online).  There would be  a certain risking  that would                                                                    
occur  which  was  not  unlike   what  DOR  and  DNR  do  in                                                                    
generating  the production  forecast. There  was a  level of                                                                    
uncertainty  baked  into  the   calculation,  more  or  less                                                                    
reducing  the value  of what  the  company's projected  cash                                                                    
flow  would  be. A  present  value  would be  assigned.  The                                                                    
result  of  the  calculation, the  discounted  risk  present                                                                    
value, would have  to be greater than  the increment between                                                                    
the higher  and lower discount  rates. He referenced  the $7                                                                    
million difference - the difference  between $85 million and                                                                    
$92  million.  The  calculation would  result  in  something                                                                    
perceived to be at least $7 million to the state.                                                                               
                                                                                                                                
Co-Chair  Seaton  thought  it  was  good  to  get  out  more                                                                    
explanation on developing the cost  benefit to the state. He                                                                    
thanked the presenters.                                                                                                         
                                                                                                                                
Mr. Alper took some notes and  offered to speak now or write                                                                    
a letter to the committee.                                                                                                      
                                                                                                                                
Co-Chair  Seaton   asked  the   department  to   submit  the                                                                    
information  in writing.  He reviewed  the schedule  for the                                                                    
following day.                                                                                                                  
                                                                                                                                
Representative  Wilson asked  if an  amendment deadline  for                                                                    
the bill had been set.                                                                                                          
                                                                                                                                
Co-Chair Seaton answered that amendments were due on                                                                            
Wednesday at 5:00 p.m. He recessed the meeting [note: the                                                                       
meeting did not reconvene].                                                                                                     
                                                                                                                                

Document Name Date/Time Subjects
HB 331 - Support from ASRC.pdf HFIN 4/23/2018 1:30:00 PM
HB 331
HB 331 SAExploration House Finance Testimony 4-23-2018.pdf HFIN 4/23/2018 1:30:00 PM
HB 331