Legislature(2015 - 2016)BARNES 124

03/09/2016 01:00 PM RESOURCES

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Audio Topic
01:29:51 PM Start
01:30:34 PM HB247
03:05:22 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
-- Delayed to 15 minutes Following Session --
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
-- Testimony <Invitation Only> --
+ Bills Previously Heard/Scheduled TELECONFERENCED
           HB 247-TAX;CREDITS;INTEREST;REFUNDS;O & G                                                                        
                                                                                                                                
1:30:34 PM                                                                                                                    
                                                                                                                                
CO-CHAIR  NAGEAK announced  that the  only order  of business  is                                                               
HOUSE BILL NO. 247, "An  Act relating to confidential information                                                               
status and public record status  of information in the possession                                                               
of the Department of Revenue;  relating to interest applicable to                                                               
delinquent tax; relating to disclosure  of oil and gas production                                                               
tax credit information;  relating to refunds for  the gas storage                                                               
facility tax  credit, the liquefied natural  gas storage facility                                                               
tax   credit,   and   the   qualified   in-state   oil   refinery                                                               
infrastructure expenditures  tax credit; relating to  the minimum                                                               
tax for certain  oil and gas production; relating  to the minimum                                                               
tax  calculation for  monthly installment  payments of  estimated                                                               
tax;  relating to  interest on  monthly  installment payments  of                                                               
estimated  tax; relating  to limitations  for the  application of                                                               
tax credits; relating  to oil and gas production  tax credits for                                                               
certain  losses and  expenditures;  relating  to limitations  for                                                               
nontransferable oil and  gas production tax credits  based on oil                                                               
production  and  the  alternative  tax credit  for  oil  and  gas                                                               
exploration;  relating to  purchase  of  tax credit  certificates                                                               
from the oil  and gas tax credit fund; relating  to a minimum for                                                               
gross  value  at  the  point of  production;  relating  to  lease                                                               
expenditures  and tax  credits for  municipal entities;  adding a                                                               
definition   for  "qualified   capital  expenditure";   adding  a                                                               
definition for  "outstanding liability  to the  state"; repealing                                                               
oil  and   gas  exploration  incentive  credits;   repealing  the                                                               
limitation on  the application of  credits against  tax liability                                                               
for  lease   expenditures  incurred   before  January   1,  2011;                                                               
repealing provisions related to  the monthly installment payments                                                               
for  estimated tax  for oil  and gas  produced before  January 1,                                                               
2014;  repealing  the  oil  and gas  production  tax  credit  for                                                               
qualified  capital expenditures  and  certain well  expenditures;                                                               
repealing   the  calculation   for  certain   lease  expenditures                                                               
applicable before January 1,  2011; making conforming amendments;                                                               
and providing for an effective date."                                                                                           
                                                                                                                                
1:31:09 PM                                                                                                                    
                                                                                                                                
THOMAS RYAN,  Managing Director, Structured Solutions  Group, ING                                                               
Bank, provided a PowerPoint  presentation entitled, "Alaska State                                                               
Legislature: HB  247."  He  noted that  ING is a  Dutch domiciled                                                               
commercial bank  and recounted that  at a fall [2015]  hearing he                                                               
discussed  the tax  credit  financing  done by  ING  and the  tax                                                               
credit program  in general.   He explained  that slides 3  and 4,                                                               
"Overview  of  Alaska  State  Tax  Credit  Program,  and  "Lender                                                               
Feedback  on   Tax  Credit  Program  as   Currently  Structured,"                                                               
respectively  reiterate some  of  that discussion.   Rather  than                                                               
revisiting  those slides,  he  said he  will  address what  could                                                               
change should HB 247 be passed as currently drafted.                                                                            
                                                                                                                                
REPRESENTATIVE SEATON  requested that Mr. Ryan  review ING's fall                                                               
[2015] testimony  because not every committee  member was present                                                               
for that hearing.                                                                                                               
                                                                                                                                
1:33:33 PM                                                                                                                    
                                                                                                                                
MR.  RYAN turned  to  slide  4, "Lender  Feedback  on Tax  Credit                                                               
Program as  Currently Structured,"  and addressed what  ING likes                                                               
about the program.   Key about the program, he  said, is that the                                                               
tax credits  are assignable.   If  ING lends  to somebody  on the                                                               
basis of tax credits earned,  those credits are assignable to ING                                                               
and ING can take a security  interest in them, which is extremely                                                               
positive.  The  ability to monetize the tax  credits is extremely                                                               
helpful.   He explained  that when lending  to an  exploration or                                                               
development company that has earned  tax credits, it is uncertain                                                               
that the  company will  ever actually be  able to  monetize those                                                               
credits  and   that  uncertainty   would  make  it   pretty  much                                                               
impossible  to lend  against them.   However,  the credits  being                                                               
exchangeable  for cash  from the  state  makes them  financeable,                                                               
which is  a key positive  of the program.   Also very  helpful is                                                               
that the Department  of Revenue (DOR) will, once  the credits are                                                               
assigned, pay  the money to  ING directly, which avoids  the risk                                                               
of  the  money  getting  waylaid.     Another  positive  is  that                                                               
historically any  changes to the  program have  been prospective,                                                               
not retroactive.   It is very  important to ING that  the program                                                               
not change  in the  middle of transactions;  that changes  in the                                                               
law are  not retroactive  such that  ING finds  itself in  a very                                                               
different  position from  when it  entered into  the transactions                                                               
from a  legal perspective.  Of  comfort to ING is  that the State                                                               
of Alaska's  credit risk is extremely  good, it is a  very highly                                                               
rated state.   Further, ING  likes that the program  supports all                                                               
developers equally  so that  some of  the smaller  developers are                                                               
significantly helped  by the program.   The  actual qualification                                                               
of credits  themselves, what expenses  do and do not  qualify, is                                                               
fairly well codified  and there are clear milestones  in terms of                                                               
what  is to  be delivered  and what  has to  be done  to actually                                                               
qualify for the  credits.  That is important to  ING because when                                                               
lending against credits  ING wants to make sure  that nothing can                                                               
come up after  the fact that could jeopardize  the actual ability                                                               
for the exploration and development company to qualify for them.                                                                
                                                                                                                                
1:36:31 PM                                                                                                                    
                                                                                                                                
MR.  RYAN,  regarding the  neutral  elements  of Alaska's  credit                                                               
program, stated  that a key piece  of the program for  ING is the                                                               
appropriations  issue.    Historically there  was  an  open-ended                                                               
appropriation  and  the willingness  of  the  state to  fund  the                                                               
program was always  fairly clear.  Last year, ING  started to get                                                               
concerned about where  the money will come from  to actually fund                                                               
the program going  forward.  Another neutral element  is that the                                                               
credits are  tradeable.  While cash  refund is ideal, if  that is                                                               
not  available  the  credits  are  tradeable.    Having  to  find                                                               
somebody to buy the credits is  not something that ING would care                                                               
to do  if it could  not get a cash  refund for them;  however, if                                                               
that had to be done, it would be possible.                                                                                      
                                                                                                                                
MR. RYAN  addressed where the  credit program could  be improved.                                                               
Key for  ING is  the appropriation  risk.   Every year  having to                                                               
wait to  see whether there is  an appropriation made to  fund the                                                               
program  the  following  year  is  something  that  can  be  very                                                               
worrisome.   The  governor's  veto risk  is  also something  that                                                               
causes a  lot of concern.   Another concern is a  bankruptcy risk                                                               
issue in federal bankruptcy law,  wherein if a borrower files for                                                               
bankruptcy before  actually filing  its tax  returns, uncertainty                                                               
exists  as to  whether the  assignment  of those  credits in  the                                                               
previous  year will  be respected  by the  bankruptcy courts.   A                                                               
hope of  ING is that  this point could  be clarified so  that the                                                               
risk is  taken off the  table.  A related  point is delay  in the                                                               
lien perfection.                                                                                                                
                                                                                                                                
1:39:33 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  recalled Mr. Ryan saying  the certificates                                                               
are  tradeable.   He inquired  whether  Mr. Ryan  meant they  are                                                               
tradeable among financers instead of just among oil companies.                                                                  
                                                                                                                                
MR. RYAN  replied he  meant tradeable amongst  taxpayers.   If an                                                               
entity never  actually has  taxable income  and [cannot]  use the                                                               
credits itself  and the  credits are  not exchangeable  for cash,                                                               
there is the opportunity to trade  those credits and sell them to                                                               
another taxpayer that could use them against its tax liability.                                                                 
                                                                                                                                
1:40:14 PM                                                                                                                    
                                                                                                                                
MR. RYAN [addressed  slide 6, "Tax Credit Amendment."]   He noted                                                               
that at the  fall [2015] presentation ING  acknowledged the world                                                               
has changed significantly given  what has happened with commodity                                                               
prices and given the size of  Alaska's program as it has evolved.                                                               
Therefore,  ING recognizes  the program  is unsustainable  in its                                                               
current form and  welcomes modifications to it.  As  a lender ING                                                               
is reasonably  agnostic as to the  size of credits and  only asks                                                               
that the  payouts on  those credits be  predictable and  that any                                                               
changes be  prospective.  From ING's  perspective, an improvement                                                               
would be  solving the appropriations  issue and that  any changes                                                               
be prospective and add some  clarity to the program.  Reiterating                                                               
that ING  is agnostic as  to the actual  size of the  credits, he                                                               
qualified that  it would be  bad for ING  if the credits  were so                                                               
small  that its  borrowers  went  out of  business  or could  not                                                               
complete their  projects.   But, he added,  for operation  of the                                                               
program  itself,  ING  is  looking  for  more  predictability  in                                                               
appropriations and functioning of the program.                                                                                  
                                                                                                                                
MR. RYAN explained slide 7,  "Key Risk Factors and Considerations                                                               
- Lender Perspective," is a list  of risk issues that a bank like                                                               
ING worries about,  what the lender considerations  are, and what                                                               
HB 247 actually does  to make that risk worse or  better.  If the                                                               
bill makes  a risk worse  or neutral, the slide  offers potential                                                               
solutions for how it could be  changed to make it function better                                                               
for  ING.   Regarding the  risk issue  of borrower  liquidity, he                                                               
said  a  lender's  consideration  is  that  a  borrower  requires                                                               
sufficient  liquidity  to  continue to  finance  exploration  and                                                               
extraction activities over the medium  term.  The tax credits are                                                               
a significant source  of liquidity for a lot  of these borrowers.                                                               
The  proposal in  HB  247 would  cap tax  credit  refunds at  $25                                                               
million per  year.  This is  problematic to ING from  a liquidity                                                               
perspective.  Because drilling in  Alaska is incredibly expensive                                                               
and unpredictable, a cap of $25  million per year would put these                                                               
borrowers under extreme liquidity pressure.   A fix to that would                                                               
be that if there is a  bankruptcy event, or these entities go out                                                               
of business  or are acquired, the  lender be able to  continue to                                                               
earn/receive the $25  million going forward.  This  comes down to                                                               
the functioning of the program so  that it would be assignable to                                                               
the lender, would  give the lender senior claim, and  if there is                                                               
a bankruptcy  then that claim  would be respected and  the lender                                                               
would continue  to earn the credits  as they are paid  over time;                                                               
the credit payment does not stop if the borrower goes bankrupt.                                                                 
                                                                                                                                
1:44:25 PM                                                                                                                    
                                                                                                                                
MR. RYAN, continuing on slide 7,  pointed out that the tax credit                                                               
qualification risk is a key issue for  ING.  He said ING needs to                                                               
be able  to rely on  the fact that once  the credit is  earned it                                                               
will  become the  property of  the borrower  and in  turn can  be                                                               
assigned to  ING.  If  a performance component happens  after the                                                               
fact, it  is obviously a concern  for ING because if  the company                                                               
does not  comply or ING  cannot comply on the  borrower's behalf,                                                               
then there is  a danger that the company's credits  are no longer                                                               
available.  The addition of  the employment requirement in HB 247                                                               
concerns ING  because what if  the borrower does not  comply with                                                               
that?   Would the credits  then go away,  would they cease  to be                                                               
refundable, and  then how  would that  affect ING?   It  would be                                                               
helpful to  ING, and the  easiest, to not have  that requirement.                                                               
But, if it  is important that this stays in,  then ING would look                                                               
for  a way  that it  could satisfy  it somehow  on behalf  of the                                                               
borrower or  that ING can satisfy  it in a quantifiable  way such                                                               
that ING is able to continue to claim the credit refund.                                                                        
                                                                                                                                
MR. RYAN,  continuing on slide  7, said the lien  perfection risk                                                               
is where  the lender worries  about the bankruptcy of  a borrower                                                               
before the  lender actually  has a perfected  claim.   Last fall,                                                               
ING  requested  that if  there  is  legislation that  it  somehow                                                               
strengthen that  analysis and  reduce that  risk for  the lender.                                                               
However, ING  does not see anything  in HB 247 that  would change                                                               
that position.   Therefore, ING would  ask that a change  be made                                                               
that  would  somehow  improve  the legal  position  or  at  least                                                               
strengthen the security interest in the case of a bankruptcy.                                                                   
                                                                                                                                
1:46:50 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON understood Mr. Ryan  to not be opposing the                                                               
cap,  but that  ING  would like  to  be able  to  own the  credit                                                               
certificate  and then  get it  reimbursed at  that cap  amount in                                                               
future years.   He  further understood that  Mr. Ryan  is wanting                                                               
the state  to protect ING  from federal bankruptcy law  by saying                                                               
something like  the state's general  fund will be liable  even if                                                               
the federal  bankruptcy takes some  of the credit  obligation and                                                               
absorbs it to other creditors.                                                                                                  
                                                                                                                                
MR. RYAN  confirmed this is what  he is asking.   Bankruptcy risk                                                               
happens in  one of two  ways, he said.   One  is that there  is a                                                               
bankruptcy before the  tax returns are filed  and therefore there                                                               
is  actually  an assignable  tax  credit.    The second  is  what                                                               
happens during the earn-out period  because the cap on the refund                                                               
would  make the  term longer  over which  the payout  occurs; ING                                                               
would  ask for  some  clarity as  to what  would  happen in  that                                                               
instance.  So, if there was  a bankruptcy, then what would happen                                                               
to those  unclaimed or unrefunded  credits?  Would  they continue                                                               
to  become the  property of  the assignee  and would  the refunds                                                               
continue to be paid long after the company is gone?                                                                             
                                                                                                                                
REPRESENTATIVE SEATON asked  whether that would be  like a double                                                               
payment.  For  example, if the bankruptcy court  assigned that to                                                               
another creditor, the state is  supposed to then obligate further                                                               
money from the general fund to pay the tax credits.                                                                             
                                                                                                                                
MR. RYAN replied he does not  know that he is being that specific                                                               
as to  how it would be  solved and he is  not sure that he  has a                                                               
specific solution in  mind.  But that would be  one solution - if                                                               
credits that the state had already  agreed to and assigned to ING                                                               
were reassigned to somebody in  a bankruptcy, the state would pay                                                               
twice.  However,  he added, he has  not spent a lot  of time with                                                               
bankruptcy attorneys and  legislators and does not  know if there                                                               
is another way  to fix it legally such that  that situation could                                                               
not arise, so he is not saying that that is the only answer.                                                                    
                                                                                                                                
1:50:01 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON  posed a  scenario  of  a vendor  of  a                                                               
product in  the Cook  Inlet who  uses secured  transactions under                                                               
the Uniform  Commercial Code (UCC) to  get a security risk  and a                                                               
lien of some sort.  He asked  whether Mr. Ryan is saying that ING                                                               
should always get in the queue before that creditor.                                                                            
                                                                                                                                
MR. RYAN  qualified he  isn't sure  he understands  the question,                                                               
but thinks  he is saying  yes.  If  ING is lending  against these                                                               
tax  credits and  they are  assigned to  ING, and  ING has  a UCC                                                               
filing/claim  on those  credits,  then that  seniority should  be                                                               
respected in  the case of the  unsecured creditors.  He  asked if                                                               
that is Representative Josephson's question.                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON  replied yes, and then  inquired whether                                                               
Mr. Ryan is  asking for some statutory  presumption of seniority,                                                               
of which the state may not be  able to afford to ING anyway under                                                               
federal law.   He said he is  unsure what Mr. Ryan  is asking for                                                               
that the state could guarantee.                                                                                                 
                                                                                                                                
MR.  RYAN responded  that  as  he understands  it,  and as  ING's                                                               
experience  has been,  most times  the bankruptcy  court is  very                                                               
fact  circumstance specific.    He allowed  he  does not  believe                                                               
there is an  easy state legislated fix for this.   Last fall, ING                                                               
requested  that any  legislation proposing  to change  the credit                                                               
program  make it  clear that  the state's  intention is  that the                                                               
assignee  of  tax  credits  should   rank  senior  to  all  those                                                               
creditors in  the case of a  bankruptcy that occurs prior  to the                                                               
actual  filing of  the  tax  return.   This  would improve  ING's                                                               
position in the bankruptcy and that would be helpful.                                                                           
                                                                                                                                
1:53:18 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON, in  regard  to  borrower liquidity  on                                                               
slide 7,  recalled Mr. Ryan's  statement that ING is  agnostic on                                                               
the tax credit refund cap of  $25 million, although Mr. Ryan said                                                               
it increases the  risk of bankruptcy before all  credits are paid                                                               
out.  Representative Josephson  posited that a conservative-paced                                                               
exploration and  development project  that wasn't  absorbing lots                                                               
of credits  suddenly would be  a sign of more  predictability and                                                               
stability.   As an example he  posed a scenario in  which the tax                                                               
credit system is uncapped like  it is today and someone qualifies                                                               
for $100 million  all of a sudden.  He  inquired whether there is                                                               
some  risk  associated  with  that  approach,  because  he  would                                                               
surmise  there  is  less  risk   with  someone  who  has  a  more                                                               
conservative approach to exploration  and development by having a                                                               
more cautious practice of borrowing  since the company must match                                                               
35 or 45 cents with what the state is paying.                                                                                   
                                                                                                                                
MR. RYAN  posed an example of  a project that qualifies  for $100                                                               
million in  credits in the first  two years.  Under  the existing                                                               
system of  no cap,  the company  would get  the $100  million in,                                                               
say, 9-12  months after the  date of filing  its tax return.   He                                                               
explained that  when ING  finances a company  it is  a short-term                                                               
transaction, so  the interest  rates are  very, very  low because                                                               
ING expects to  get the money back fairly quickly.   As a result,                                                               
the advance rates  are higher.  The borrower  therefore pays less                                                               
interest and  gets more of that  money quicker to pay  its bills,                                                               
stay liquid,  and stay in business.   If the borrower  was capped                                                               
to  $25 million  [a year]  in the  amount of  credit refunds  and                                                               
received that  amount over  a period  of four  to five  years, it                                                               
would then  be a  longer term  loan for ING  and so  the interest                                                               
rates  would be  higher  and  the advance  rates  would be  lower                                                               
against the  same amount  of credits,  meaning the  company would                                                               
get less  cash.  There  is also the risk  of what will  happen to                                                               
those  credits if  the company  gets  into trouble  in the  short                                                               
term.  If  there is uncertainty around that, then  ING may not be                                                               
willing to  lend against  the full amount,  maybe ING  would only                                                               
lend against the first two years of the credits.                                                                                
                                                                                                                                
REPRESENTATIVE   JOSEPHSON  thanked   Mr.  Ryan   and  said   the                                                               
aforementioned helps to explain the context.                                                                                    
                                                                                                                                
1:56:42 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  HERRON  brought  attention   to  the  tax  credit                                                               
qualification risk on  slide 7.  He said Alaska  hire is near and                                                               
dear  to legislators  for many  reasons and  inquired why  ING is                                                               
asking for a solution when the lay of the land is known.                                                                        
                                                                                                                                
MR. RYAN replied  he is absolutely sympathetic  to the situation;                                                               
from his perspective,  hiring in Alaska should  not really matter                                                               
as  far  as  ING's  willingness  to  lend  against  the  credits.                                                               
However,  if it  is a  future obligation  to hire  Alaskans, then                                                               
what  happens  if  the  company  doesn't  comply  and  no  longer                                                               
qualifies for the right to get a  refund of the credits?  In that                                                               
case ING  will have loaned money  against the refund of  a credit                                                               
that then does  not materialize and ING would  make a significant                                                               
loss on that  loan simply because the company  didn't comply with                                                               
its requirements to hire a certain  number of Alaskans in a given                                                               
period.   Ideally, what he is  asking for, is whether  there is a                                                               
way that if that should happen  that he can actually perform that                                                               
responsibility on the  company's behalf in order  for the company                                                               
to continue to qualify for the refund of the credits.                                                                           
                                                                                                                                
REPRESENTATIVE HERRON said he believes  it is ING's best interest                                                               
that a  company maintains Alaska  hire.  Therefore it  would seem                                                               
somewhat  odd for  a policymaker  to say  the state  is going  to                                                               
protect ING when actually the company should be protecting ING.                                                                 
                                                                                                                                
MR. RYAN noted there are  different kinds of financing that these                                                               
companies can  get.  He explained  that if he took  an "operation                                                               
project  success risk"  on  a company,  then he  would  not be  a                                                               
secured bank  lender charging 5-7  percent interest on  his loan.                                                               
Rather, he would be an equity  investor or some kind of mezzanine                                                               
investor  earning 17-18  percent return  on his  money.   This is                                                               
purely  about  trying to  keep  the  cost  of funding  for  these                                                               
companies as low as possible.   He is the cheap funding here, the                                                               
guy who  comes in on  a secured basis and  doesn't take a  lot of                                                               
project risk.   If he were to  take a lot of  project risk, which                                                               
would mean that if the  company isn't successful and doesn't hire                                                               
the  people and  he is  going to  lose his  money, then  he would                                                               
expect a  much higher return on  his investment.  So,  while what                                                               
Representative Herron  is saying is perfectly  valid for somebody                                                               
who is  taking equity risk  on a project,  that would not  be the                                                               
case for him because his is a different type of credit.                                                                         
                                                                                                                                
2:00:49 PM                                                                                                                    
                                                                                                                                
MR. RYAN  resumed his discussion of  slide 7, turning to  the key                                                               
risk factor  of intercreditor risk.   Reiterating that  there are                                                               
different sources  of capital for  these projects, he  noted that                                                               
with  the credits  at today's  levels and  the refund  program in                                                               
place now, the tax credit  component and therefore the cheap bank                                                               
financing component  of the capital structure  of these borrowers                                                               
is  a lot  larger.   This means  the borrower  needs less  of the                                                               
really  expensive money  and less  of the  equity investors  in a                                                               
project.   If  the  mix is  switched  so that  it  is more  risky                                                               
capital,  and  less credits  and  bank  financing that  monetizes                                                               
those credits,  then the bargaining  power of the banks  would be                                                               
reduced  significantly.   This would  mean that  banks have  much                                                               
less control over how the loans  are structured and the terms and                                                               
operations of  the borrower.   That would increase  ING's funding                                                               
costs and make ING's funding more expensive for the borrower.                                                                   
                                                                                                                                
MR. RYAN moved  to slide 8, "How has 247  effected risks - Lender                                                               
Perspective," and  discussed appropriation risk.   He pointed out                                                               
that the  annual appropriation process  has become a  little more                                                               
unpredictable and  is causing  ING some concern.   A  solution to                                                               
the short-term appropriation issue is  proposed in HB 247 in that                                                               
it would contain a large  appropriation to cover all credits that                                                               
had been earned up  to the point of the change  of law.  However,                                                               
while that is  helpful because it would cover credits  up to July                                                               
1,  it  would increase  the  appropriation  risk on  the  backend                                                               
because there would now be  longer term earn-outs and there would                                                               
be no  certainty that  the appropriation and  the funds  would be                                                               
there to pay those credits over  a longer period of time into the                                                               
future.   Therefore, ING  would suggest  either a  legislative or                                                               
permanent  funding fix  such  that if  there was  a  cap for  the                                                               
credits of $25  million a year over several  years that something                                                               
be  put  in  place  that would  essentially  remove  that  annual                                                               
appropriation risk.                                                                                                             
                                                                                                                                
MR.  RYAN,  regarding  the construction/project  operating  risk,                                                               
explained  that the  [current] credit  program creates  certainty                                                               
for the lender  that there will be  cash to pay back  the loan it                                                               
has made, that ING does not  necessarily take success risk on the                                                               
project.   The  proposed annual  cap on  the credit  refund would                                                               
push that  repayment much  further into the  future, so  it would                                                               
increase the  risk that if  there is  a significant event  in the                                                               
future or the project does not  get completed, ING would be faced                                                               
with the issue of getting its money back in the future.                                                                         
                                                                                                                                
2:05:14 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON interpreted Mr. Ryan  to be saying that the                                                               
credits  give the  opportunity  for  someone to  get  a lot  more                                                               
reasonably   priced  capital   without   bringing  in   partners.                                                               
However,  he posited,  it would  seem that  bringing in  partners                                                               
with good balance  sheets would create less risk  for ING because                                                               
there are more parties that  have stronger balance sheets than if                                                               
it is  just a single  small company  relying on financing  by the                                                               
credits.   Therefore, he  continued, he is  trying to  figure out                                                               
the balance  between risk, the  level of credits, and  the amount                                                               
that is  needed.  He recalled  Mr. Ryan saying that  ING does not                                                               
mind the  cap because that is  not ING's portion of  the problem;                                                               
rather, it is the payout later.   He postulated that the more the                                                               
credits,  the  greater the  risk  to  ING,  because it  would  be                                                               
smaller companies just  working off this loan  capital instead of                                                               
having a balance sheet that supports the project risk.                                                                          
                                                                                                                                
MR.  RYAN agreed,  but  pointed  out that  what  ING likes  about                                                               
Alaska's program  is that  it allows  ING to  bank some  of these                                                               
smaller companies.   He understood that one of  the objectives of                                                               
the  credit program  in  general is  to  encourage these  smaller                                                               
exploration companies.   The larger  oil and gas  exploration and                                                               
development companies  have significant  balance sheets  of their                                                               
own and so do not particularly  need ING's funding.  Many of them                                                               
have  tax liabilities  for which  they can  actually use  the tax                                                               
credits and  therefore do not need  to finance them.   One of the                                                               
impacts of  the proposed  changes, he predicted,  will be  to put                                                               
some of  these smaller companies  out of business, they  will not                                                               
be doing the  projects that they currently plan to  do, which, he                                                               
allowed, means less business for ING, too.                                                                                      
                                                                                                                                
REPRESENTATIVE SEATON remarked  that he is trying  to balance the                                                               
risk situation, the amount of  return here, and also the creation                                                               
of bigger  risk by having  smaller companies not taking  on other                                                               
partners  to  have a  stronger  balance  sheet to  undergo  these                                                               
projects, and then asking for bankruptcy protection.                                                                            
                                                                                                                                
MR.  RYAN concurred  that reducing  the credits  would force  the                                                               
smaller  exploration companies  to  partner  with companies  with                                                               
larger balance sheets, or, if  they could, to find larger sources                                                               
of  equity  funding,   as  opposed  to  being   able  to  finance                                                               
themselves on a stand-alone basis by monetizing credits.                                                                        
                                                                                                                                
2:08:56 PM                                                                                                                    
                                                                                                                                
MR.  RYAN continued  his  review  of slide  8,  stating that  the                                                               
interest rate risk  is a fairly neutral risk.   He explained that                                                               
it is  a purely operational  issue with  the loans in  that draws                                                               
happen  periodically  and the  draws  are  at the  interest  rate                                                               
prevailing  at the  time.   The interest  rates are  set for  the                                                               
period of loan, which is the period  from the date of the draw to                                                               
the date  that the credit  refunds are paid  out.  To  the extent                                                               
the  terms  would be  stretched  out  by  the proposed  cap,  the                                                               
interest rate  exposure would be  increased because  the borrower                                                               
would  be dealing  with interest  rates over  a longer  period of                                                               
time.   This is not particularly  a material issue in  HB 247, he                                                               
allowed, as it is easy to hedge  that risk, but there is a slight                                                               
cost associated with it.                                                                                                        
                                                                                                                                
MR. RYAN  addressed the  change in  law risk,  noting that  it is                                                               
particularly  important  to  ING  that any  laws  be  prospective                                                               
rather  than retroactive.   He  offered his  appreciation to  the                                                               
governor and the  legislature for being careful to  make sure any                                                               
changes  to the  program  are prospective.   Regarding  potential                                                               
fixes,  he said  he  does not  think anything  needs  to be  done                                                               
there, but  it would  be nice  if the  effective date  was pushed                                                               
back a  bit farther in  2016 to provide  more time from  when the                                                               
legislation is finalized so that  ING's deals can be restructured                                                               
if necessary.                                                                                                                   
                                                                                                                                
MR. RYAN stated  that the rest of the slides  in his presentation                                                               
cover ING's  background, the  companies, what  ING is  active in,                                                               
and ING's  position in  the oil  and gas  exploration field.   He                                                               
added that because  of the uncertainty around the  changes in the                                                               
program, ING  has not closed  any new deals since  fourth quarter                                                               
2015  and  currently ING's  advances  against  2016 are  on  hold                                                               
pending some clarity  as to what the changes to  the program are.                                                               
The sooner these proposed changes  can be clarified, he said, the                                                               
better for  everybody.   In response  to Representative  Tarr, he                                                               
confirmed  that in  regard to  ING's advances  for 2016  he means                                                               
calendar year 2016.                                                                                                             
                                                                                                                                
2:11:58 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON understood  Mr. Ryan to have  said that the                                                               
size of the loans  or credits is not the issue as  much as is the                                                               
predictability of the repayments.                                                                                               
                                                                                                                                
MR. RYAN  responded yes and  no.  He  said yes, ING  is agnostic,                                                               
predictability is key,  but stretching the credits  over too long                                                               
of a  period, or  making them too  small, increases  other risks.                                                               
The  other  risks  include  the   success  of  the  project,  the                                                               
viability  of  the  borrower,  and  potential  bankruptcy  issues                                                               
should the borrower  file for bankruptcy before ING  gets all its                                                               
money back.   In an  ideal world banks  like their money  to come                                                               
back quickly  and predictably; therefore anything  that stretches                                                               
out the repayment period is an issue for ING.                                                                                   
                                                                                                                                
REPRESENTATIVE SEATON  surmised ING would probably  be happier if                                                               
the credit  percentage was smaller  because that  would represent                                                               
less  portion of  the project  itself,  but that  ING wants  very                                                               
predictable repayment terms.                                                                                                    
                                                                                                                                
MR. RYAN  answered that smaller does  not mean it is  less risky.                                                               
He said ING generally looks to  the importability of its claim to                                                               
get the  refunds and looks  to the creditworthiness of  the State                                                               
of Alaska.  The larger the  credits the more that ING can advance                                                               
and that is better for ING  because for the same amount of effort                                                               
it can do larger deals.   Smaller credits mean ING would be doing                                                               
smaller  deals and  earning less.   The  creditworthiness of  the                                                               
State of  Alaska would  not have  changed, but  ING would  now be                                                               
doing a  smaller deal.   Also, the  viability of  ING's borrowers                                                               
and the  bargaining would  now be  diminished because  they would                                                               
have  less  credits,  and  the bargaining  power  of  the  equity                                                               
investors would go  way up because they would be  putting in much                                                               
more of the money.   So, while ING is kind  of agnostic in regard                                                               
to  the size  of the  credits,  at a  certain point  in time  the                                                               
credits  become  too small,  which  would  jeopardize both  ING's                                                               
business and the viability of its  borrowers, and then for ING it                                                               
would become detrimental to the program.                                                                                        
                                                                                                                                
2:15:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON understood  Mr. Ryan to be  saying that ING                                                               
is not  having to do  much due  diligence on the  project because                                                               
ING  is  relying on  the  enforceability  of  the claim  and  the                                                               
balance sheet  of the State  of Alaska,  not that of  the project                                                               
sponsor, as  to whether ING is  going to make the  loan.  Whether                                                               
the  project has  problems, other  than  somebody going  bankrupt                                                               
before the credits are issued, would not be ING's worry.                                                                        
                                                                                                                                
MR. RYAN  replied he is  saying the opposite.   If he  is worried                                                               
about  getting  his money  back,  it  would  be  for one  of  two                                                               
reasons:   the State of Alaska  does not pay out  or defaults, or                                                               
appropriations.   Given the state's creditworthiness,  not paying                                                               
out or  defaulting is less  of a concern than  is appropriations.                                                               
He  stressed  that  he  cares  very  much  about  his  underlying                                                               
companies.  Bankruptcy  is one thing, but he  likes his borrowers                                                               
to  stay in  business, to  be  viable, to  be liquid,  and to  be                                                               
successful.   If everything  goes to plan  - the  company doesn't                                                               
file  for bankruptcy  and stays  in business  and ING's  security                                                               
interest is  perfected - then what  ING really has at  the end of                                                               
the day is  State of Alaska risk.   He said he does  not think he                                                               
ever said  that he does not  look at the viability  or care about                                                               
the viability of the project; it is the opposite.                                                                               
                                                                                                                                
REPRESENTATIVE SEATON clarified he didn't  mean that Mr. Ryan did                                                               
not care  at all, but that  ING's issues and ING's  security were                                                               
really with the State of Alaska.                                                                                                
                                                                                                                                
2:17:32 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR  noted that  the issue  of the  annual refund                                                               
cap has come up in other  conversations.  She said it sounds like                                                               
Mr. Ryan is saying he does  not have a specific number.  However,                                                               
she continued,  [a number]  might be  interesting from  a lending                                                               
perspective because  the state's division of  taxation provided a                                                               
graph showing  that without  the cap the  state could  be getting                                                               
into hundreds of millions of dollars  per year in the early years                                                               
of  development versus  having  a cap  of $25  million.   From  a                                                               
lender's  perspective it  seems  that Mr.  Ryan  might have  some                                                               
insight into  the area in between  those numbers if he  is saying                                                               
that  increasing the  annual cap  might be  a possible  solution.                                                               
Regarding the  statement on slide  7, "for smaller  explorers and                                                               
developers," she noted that the  committee talks about explorers,                                                               
development, and then  operators.  She asked whether  Mr. Ryan is                                                               
saying that the  developers are also the operators  or is talking                                                               
about the stage  of development for projects prior  to them being                                                               
in operations.                                                                                                                  
                                                                                                                                
2:18:48 PM                                                                                                                    
                                                                                                                                
MR.  RYAN   opined  that  Representative  Tarr   was  asking  two                                                               
questions, and he  thought the first question was  whether he had                                                               
a number  in mind  between the  $25 million  and the  100 percent                                                               
refund.   He  asked  whether  she was  asking  him  to suggest  a                                                               
number,  or  just  a  general  question of  how  he  feels  about                                                               
something in between the two.                                                                                                   
                                                                                                                                
REPRESENTATIVE TARR clarified  that HB 247 proposes a  cap of $25                                                               
million and that  the committee saw graphs  depicting the state's                                                               
spending  in  the  range  of $300-$700  million.    She  inquired                                                               
whether  Mr.  Ryan   has  anything  to  offer   from  a  lender's                                                               
perspective as far as a number in between.                                                                                      
                                                                                                                                
MR. RYAN responded that it is  a balancing act.  First, ING would                                                               
like to  see the  program be  sustainable and  be a  program that                                                               
everybody  is supportive  of in  the  current oil  and gas  price                                                               
environment.  Second, ING recognizes  that the program has gotten                                                               
very,  very  big and  the  annual  payouts are  extremely  large;                                                               
therefore ING would be happy to  see a reduction in the amount of                                                               
payouts.   Also,  in some  ways the  caps would  be good  for ING                                                               
because it  would mean  the money is  outstanding longer  and ING                                                               
would  be earning  more  interest.   But  reducing and  extending                                                               
would not  be good  for ING  if it  is so  much that  it actually                                                               
jeopardizes the project.   Where is the right number?   That is a                                                               
very  difficult  question to  answer  and  he  does not  have  an                                                               
answer, but  certainly somewhere in  between is the  ideal answer                                                               
but  he cannot  say whether  it is  halfway in  between the  two.                                                               
Additionally, it may be different depending upon the project.                                                                   
                                                                                                                                
2:21:13 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  TARR  reiterated  her second  question  regarding                                                               
"smaller explorers and developers."                                                                                             
                                                                                                                                
MR.  RYAN answered  that ING's  interest is  in companies  before                                                               
they are  actually paying tax.   The exploration  and development                                                               
phase are  when a company is  spending the money and  not earning                                                               
any revenue.   Once in  production a company is  actually earning                                                               
revenue, in theory  is paying taxes, and can use  the tax credits                                                               
themselves.   It is at  that point  that these facilities  are no                                                               
longer  of interest;  it  is  the two  phases  prior to  actually                                                               
generating revenue.                                                                                                             
                                                                                                                                
REPRESENTATIVE TARR,  in regard to suggesting  a different amount                                                               
for  a  tax  cap,  asked  whether Mr.  Ryan  could  see  using  a                                                               
percentage of overall project cost.                                                                                             
                                                                                                                                
MR. RYAN replied that that would  be a good solution because that                                                               
would allow  it to be  tailored to the  actual size of  the spend                                                               
that  the  companies are  making  and  therefore their  need  for                                                               
liquidity.   So, a percentage  of the  actual credits would  be a                                                               
better solution than a dollar number.                                                                                           
                                                                                                                                
2:22:56 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON observed  slide  10, "A  Leader in  Alaska                                                               
State  Tax  Credit  Financings,"  states that  ING  has  financed                                                               
Caracol  Petroleum, LLC,  a North  Slope exploration  project, at                                                               
$30  million, and  Cornucopia Oil  and Gas  Company, LLC,  a Cook                                                               
Inlet exploration  project, at  $150 million.   He  asked whether                                                               
ING has financed any other companies.                                                                                           
                                                                                                                                
MR. RYAN  responded that ING  has only  closed those two.   Three                                                               
other deals  were in the  pipeline that  are now on  hold pending                                                               
some  clarity on  the changes  to  the program.   Similarly,  the                                                               
borrowers themselves  are a bit  concerned because  their capital                                                               
spend and  planning for the future  are also on hold  pending the                                                               
proposed changes to the program.                                                                                                
                                                                                                                                
2:24:05 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  noted that  Alaska's statutes  provide for                                                               
an amount that  is appropriated for paying  credits, dependent on                                                               
the price  of oil,  at either  10 percent  of the  production tax                                                               
paid or  15 percent  of the  production tax paid  in Alaska.   He                                                               
inquired  whether  that statutory  limit  is  something that  ING                                                               
recognizes  or  is something  ING  has  ignored because  all  the                                                               
credits submitted a few years ago were paid.                                                                                    
                                                                                                                                
MR. RYAN replied  that if he understands the  question, the issue                                                               
has  not been  material for  ING  because all  credits that  were                                                               
issued  were  paid  out  and  there  was  a  sort  of  open-ended                                                               
appropriation historically.  The statutory  limit has not been in                                                               
effect historically.                                                                                                            
                                                                                                                                
2:25:16 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON  concurred that  it has not  been utilized,                                                               
but said high  production tax values were coming to  the state so                                                               
it was not  much of an issue.   Under the tax  credit program, he                                                               
explained,  there  is some  assurance  that  there will  be  some                                                               
because it is  in statute that that amount  will be appropriated.                                                               
He asked  whether that  seems to  Mr. Ryan  to be  an appropriate                                                               
mechanism to ensure that there will be money for paying those.                                                                  
                                                                                                                                
MR. RYAN replied that as  a mechanism to solve the appropriations                                                               
risk issue, it would seem to him to  be a way to fix it if it was                                                               
set at the right level commensurate with the expected payout.                                                                   
                                                                                                                                
2:26:59 PM                                                                                                                    
                                                                                                                                
The committee took a brief at-ease.                                                                                             
                                                                                                                                
2:27:47 PM                                                                                                                    
                                                                                                                                
LARRY  PERSILY, Oil  and  Gas Assistant  to  Mayor Mike  Navarre,                                                               
Kenai  Peninsula  Borough,  provided  a  PowerPoint  presentation                                                               
entitled, "DIFFERENT  WAYS TO LOOK AT  TAX CREDITS."  He  said he                                                               
will mostly  talk about  Cook Inlet and  Kenai Peninsula  oil and                                                               
gas  exploration   development  tax   credits.     Responding  to                                                               
Representative Josephson,  he said he  is speaking for  the mayor                                                               
and the  Kenai Peninsula Borough.   He added that he  is a former                                                               
deputy commissioner  at the  Department of  Revenue and  a former                                                               
federal official on  the Alaska gasline, but  his testimony today                                                               
is on behalf of the Kenai Peninsula Borough.                                                                                    
                                                                                                                                
MR.  PERSILY  brought attention  to  slide  2, "Return  on  state                                                               
investment,"  and pointed  out that  when looking  at what  to do                                                               
with  tax credits  there  is no  production tax  on  oil in  Cook                                                               
Inlet, and there  has not been since the 1980s.   For natural gas                                                               
the production tax is hardwired at  the minimal rate of about 2.5                                                               
percent  of  today's gas  prices  to  the  utilities.   There  is                                                               
royalty,   property  tax,   and   corporate  income   tax  on   C                                                               
corporations  as opposed  to other  business entities.   However,                                                               
when looking  at the payback  to the  state over the  years, with                                                               
discount inflation and  opportunity cost of what  could have been                                                               
done  with the  money  elsewhere, there  realistically  is not  a                                                               
positive  return on  the investment  to the  state general  fund.                                                               
That does not  make it wrong, he said, it  is just something that                                                               
people should be aware of  as the legislature wrestles with tough                                                               
decisions.   Certainly,  return to  the general  fund is  not the                                                               
only way to look at what the state gets for those tax credits.                                                                  
                                                                                                                                
2:30:32 PM                                                                                                                    
                                                                                                                                
MR. PERSILY turned  to slide 3, "Local benefits  count," and said                                                               
the local benefits  are substantial.  Over the last  10 years the                                                               
assessed value  of oil  and gas property  in the  Kenai Peninsula                                                               
Borough has  more than doubled,  reaching more than  $1.4 billion                                                               
in  2016.   Much of  the past  year's increase  comes from  Furie                                                               
Operating Alaska,  LLC, ("Furie")  developing the  Kitchen Lights                                                               
Unit   offshore,  and   BlueCrest  Energy,   Inc.,  ("BlueCrest")                                                               
developing the Cosmopolitan Unit on  a pad onshore.  The assessed                                                               
value  of those  two entities  in 2016  approaches $300  million.                                                               
These  two companies  are the  borough's top  property taxpayers.                                                               
Of the top 20  taxpayers in the borough a few  years ago, 17 were                                                               
oil and  gas related.  The  three non-oil and gas  taxpayers were                                                               
Fred Meyer,  WalMart, and NACS.   Income is up,  the unemployment                                                               
rate  is down,  and sales  tax  is back  to where  it was  before                                                               
taking a dive  a few years ago.  The  borough and the communities                                                               
are capturing economic benefits  from that activity through sales                                                               
tax, property tax, and new homes.   However, the state, without a                                                               
state sales  tax or state income  tax, has no way  to capture any                                                               
benefit from  the economic  activity that is  spurred by  new oil                                                               
and gas  development.  The  state is relegated to  production tax                                                               
royalty, corporate income tax, and  such.  The borough knows that                                                               
an  upward trajectory  is  not going  to  continue; for  example,                                                               
Apache Corporation left the Cook  Inlet despite knowing there was                                                               
oil and having its federal permit.                                                                                              
                                                                                                                                
MR. PERSILY addressed slide 4,  "More oil, more gas," noting that                                                               
[oil production in  Cook Inlet has doubled since  2010].  Average                                                               
oil production  in 2015 was 18,000  barrels a day, the  best in a                                                               
decade, with nearly 20,000 barrels a  day in April 2015.  Natural                                                               
gas production  is ahead [of  2013 numbers].  ENSTAR  Natural Gas                                                               
Company  ("ENSTAR") has  signed  a contract  with Hilcorp  Energy                                                               
Company ("Hilcorp")  to meet most  of ENSTAR's gas  needs through                                                               
2023.  Furie  signed a contract with  Homer Electric Association,                                                               
Inc., that starts  in April.  There is potential  for more gas in                                                               
Cook Inlet, but the  problem is that no one is  going to look for                                                               
gas unless there is a market for it, regardless of tax credits.                                                                 
                                                                                                                                
2:33:37 PM                                                                                                                    
                                                                                                                                
MR. PERSILY drew attention to slide  5, "It's been more than just                                                               
credits,"  and  looked  at  what   has  created,  added  to,  and                                                               
incentivized the resurrection of Cook  Inlet oil and gas.  First,                                                               
he  said, was  that with  higher oil  prices it  paid to  explore                                                               
because good money could be made  selling the oil.  Second, state                                                               
tax credits  helped because credits  reduced the capital  risk to                                                               
the explorers and  provided financing.  Third,  several years ago                                                               
the Regulatory Commission  of Alaska (RCA) changed  how it looked                                                               
at  gas supply  contracts for  Southcentral Alaska  utilities and                                                               
that reassured  producers they could  get a fair return  on their                                                               
investment.   Fourth, the Cook  Inlet Natural Gas  Storage Alaska                                                               
(CINGSA) facility  created a  year-round market  for the  gas for                                                               
the first time.  Fifth, there is  a market for the gas as long as                                                               
ConocoPhillips  Alaska, Inc.  ("ConocoPhillips") can  continue to                                                               
export liquefied natural gas (LNG)  during the summer when gas is                                                               
surplus  to local  needs.    The U.S.  Department  of Energy  has                                                               
granted    ConocoPhillips   export    authority,   but    whether                                                               
ConocoPhillips  or  any  other producer  in  Southcentral  Alaska                                                               
liquefies  and sends  gas  overseas  is going  to  depend on  the                                                               
market.   Currently the spot  market prices  in Asia for  LNG are                                                               
under $5  per thousand cubic feet  (Mcf) of gas.   In its filings                                                               
with federal  regulators, ConocoPhillips  shows it  was receiving                                                               
$7-$8 in  2015 and $15-$16 in  2014.  He advised  that low prices                                                               
in  Asia  are  going  to  make  it  harder  to  export  LNG  from                                                               
Southcentral  Alaska, and  those exports  have been  important in                                                               
creating and enabling that year-round market.                                                                                   
                                                                                                                                
2:35:46 PM                                                                                                                    
                                                                                                                                
MR. PERSILY  presented slide  6, "Why  credits worked,"  and said                                                               
credits worked  for a lot  of reasons.   For example,  there were                                                               
explorers that  did not have deep  pockets and did not  have easy                                                               
access to  investment capital.   Oil prices were  high, investors                                                               
were looking  to earn an  interest rate higher than  1-3 percent,                                                               
and opportunities  were good in  Southcentral Alaska.   There was                                                               
someone  who needed  money and  someone who  was looking  to lend                                                               
money to get a  higher rate of return, so it  was a marriage made                                                               
in Wall Street and it worked  for everyone.  Because the State of                                                               
Alaska was  rich with  high oil  prices it  could afford  to take                                                               
that  risk, shoulder  some of  the burden,  to hopefully  lead to                                                               
more  oil and  gas production,  gas in  particular for  the local                                                               
market.   It was an  era of  relatively risk-free payback  on the                                                               
part of the  state.  It was  not like the state said  it was only                                                               
going to  loan to prospects that  it judged to be  in the state's                                                               
best interest or  see a company's reservoir data to  decide if it                                                               
was worth  putting money into.   It was a  "check the box"  - the                                                               
company spends  the money, turns  in the application, and  if all                                                               
goes well the investor gets the  check.  That reduced the risk to                                                               
the investor,  worked out well,  and there was public  support in                                                               
recent years  for tax credits  to bring new entrants  into Alaska                                                               
because as  a maturing  oil and gas  province Alaska  needed more                                                               
money and new players.                                                                                                          
                                                                                                                                
2:37:46 PM                                                                                                                    
                                                                                                                                
MR.  PERSILY showed  slide 7,  "Looking ahead,"  and pointed  out                                                               
that regardless of  credits, producers must have a  market.  Even                                                               
if the  exploration is funded,  if the  producer has no  place to                                                               
sell that gas the producer is not  going to look for gas.  Oil is                                                               
a little different because a producer  can send as much oil as it                                                               
has  to [Tesoro's  Kenai  Refinery].   BlueCrest's  plan for  the                                                               
Cosmopolitan Unit is to start producing  oil this year, get it to                                                               
the Tesoro refinery, and hold off  on gas production until it has                                                               
contracts and a  market for the gas.  Cook  Inlet's history shows                                                               
that large  customers are needed  - the fertilizer plant  and the                                                               
liquefaction  and   export  terminal  in  the   1960s  and  1970s                                                               
justified  the investment.   Looking  ahead, the  issue for  Cook                                                               
Inlet  is  finding  that demand  growth  to  justify  large-scale                                                               
production.    For  example,  the  state  has  now  selected  its                                                               
preferred  participant  in the  LNG  trucking  project from  Cook                                                               
Inlet to  Fairbanks.  About 8  million cubic feet a  day is being                                                               
looked at,  which is  about 4 percent  of Cook  Inlet production.                                                               
This is great  for Fairbanks if it works, and  certainly it could                                                               
work  for  the producer's  contractor,  but  that volume  is  not                                                               
enough to justify  someone going out and spending a  lot of money                                                               
to develop a huge resource, or even a large resource.                                                                           
                                                                                                                                
2:39:58 PM                                                                                                                    
                                                                                                                                
MR. PERSILY  displayed slide  8, "What  industry/investors need,"                                                               
and noted that certainty [of  payback] is what an investor needs.                                                               
As was  discussed by  ING, right now  the refundable  tax credits                                                               
are essentially short-term, one-year  loans.  There certainly are                                                               
investors that would be interested  in longer-term paybacks.  For                                                               
example, a pension  fund may take a 10-year  payback because that                                                               
fits  into  its investment  portfolio  and  earns more  interest.                                                               
Going in,  the pension fund just  needs to know the  certainty of                                                               
whether this will be a 1-year,  10-year, or 5-year payback.  Even                                                               
with a longer payback, he  advised, investors will still be found                                                               
to buy  those refundable  credits.  Those  investors want  to see                                                               
that  Alaska is  tax  stable,  which gets  to  the  point of  the                                                               
state's  budget   deficit  and   fiscal  crisis   or  non-crisis.                                                               
Investors are  looking at Alaska  and starting to get  nervous as                                                               
to whether the state will fund  this.  So, in addition to dealing                                                               
with tax  credits and finding  some solutions that the  state can                                                               
afford going ahead,  the fiscal problems must also  be dealt with                                                               
so that  investors, be they oil  and gas companies or  the people                                                               
who loan  them money, feel confident  that they are not  going to                                                               
go through this every year.                                                                                                     
                                                                                                                                
MR. PERSILY  turned to  slide 9, "The  elusive best  answer," and                                                               
said  he  does  not  have proposed  amendments  for  the  perfect                                                               
answer.  But, he continued, he  thinks the elusive best answer is                                                               
the same  that all  committee members  are looking  for -  to not                                                               
hurt  a  development  investment  that  is  underway.    Reducing                                                               
credits,  changing credits,  and amending  credits may  mean that                                                               
someone  who  might   have  come  here  before   might  not  come                                                               
otherwise, so members don't want  to discourage future investment                                                               
any more than they  have to by the fact that  the State of Alaska                                                               
is not  as rich  as it  used to  be and  is cutting  services and                                                               
reducing funding.   But, as members try to  make those decisions,                                                               
clearly it pays to look at  the benefits to the state economy and                                                               
local benefits, not  just the gain to the general  fund, and then                                                               
balance  the benefits  against all  the other  public needs  that                                                               
members are  having to  make tough  choices on  every day  on the                                                               
fiscal year 2017 budget and those budgets further ahead.                                                                        
                                                                                                                                
2:43:07 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE HERRON  requested Mr. Persily to  provide examples                                                               
regarding the  statement on  slide 8:   "Phase-in of  any changes                                                               
should  reflect  lead  time  for  multiyear  investment  spending                                                               
before production."                                                                                                             
                                                                                                                                
MR. PERSILY replied  that BlueCrest, for example,  plans to start                                                               
oil production  this year, but  is going to keep  drilling wells,                                                               
adding storage  tanks, expanding  to get  up to  full production,                                                               
and looking  at gas.  While  he is not speaking  for BlueCrest or                                                               
proposing  specific changes,  he said  he thinks  the legislature                                                               
would want to be careful that  any changes made do not jeopardize                                                               
a development  that is midway through  construction, because that                                                               
is more painful  than for a project  not yet off the  ground.  If                                                               
someone has not  spent any money yet and changes  are made, there                                                               
is no harm  done other than the  time that was spent on  it.  But                                                               
when someone  has sunk a lot  of money, has a  business plan that                                                               
is based on  getting to X barrels  a day, and is  at a percentage                                                               
of that  because more needs to  be spent to finish  the buildout,                                                               
the  state  must  consider  that  out  of  fairness  and  because                                                               
production will actually be seen from them.                                                                                     
                                                                                                                                
2:44:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  SEATON noted  that the  legislature's consultant,                                                               
enalytica, provided  information showing  that $5-$7 per  Mcf has                                                               
been an  adequate price  to develop even  the most  expensive gas                                                               
projects around the world.   Given the new contracts extending to                                                               
2023 and ending  at $8.19, he requested Mr.  Persily's opinion as                                                               
to  whether price  support of  those  contracts basically  should                                                               
take care of  making those economical and profitable  for gas for                                                               
the Cook Inlet, Southcentral, and the Fairbanks region.                                                                         
                                                                                                                                
MR. PERSILY  responded he is not  privy to the capital  costs and                                                               
operations  expenses  of the  companies.    However, Hilcorp  has                                                               
signed a  multi-year contract with ENSTAR  without any assurances                                                               
that in  years 2017-2020 it is  going to be getting  back any tax                                                               
credits,  so   Hilcorp  must  feel  comfortable   enough  in  the                                                               
economics to  sign a  deal through  2023 based  on what  it knows                                                               
today.  If credits were  eliminated, the question is whether that                                                               
would show  up in a  lower return to  the producer or  higher gas                                                               
prices to customers.  His guess is  that it might be a little bit                                                               
of both,  but is probably company  specific.  As required  by RCA                                                               
regulation, the  2010 gas storage  legislation mandated  that any                                                               
tax  credit  benefit to  the  gas  storage [facility]  must  flow                                                               
through to the customers  and RCA must watch over that.   It is a                                                               
little  different here  because there  is no  guarantee that  the                                                               
credits flow through to the  customers.  The initial concern with                                                               
Cook Inlet was  to just get gas and worry  about the price later.                                                               
It may be  very difficult to put in statute  that every dollar of                                                               
credit show up at a dollar reduction  in the bill.  Any change in                                                               
the credits would change the  economics for sponsors, but he does                                                               
not know how much of it,  if any, would flow through to customers                                                               
in future contracts.                                                                                                            
                                                                                                                                
2:48:20 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  OLSON  asked whether  Mr.  Persily  knows of  any                                                               
other jurisdictions that have changed  their tax regime six times                                                               
in ten or eleven years.                                                                                                         
                                                                                                                                
MR. PERSILY  answered he is unaware  of any that have  changed it                                                               
as  much, however  he is  also unaware  of any  that have  had as                                                               
robust  of a  tax credit  program  as Alaska.   British  Columbia                                                               
gives some credits  for road building if a  company is developing                                                               
oil and gas  fields and Alberta had some royalty  relief for cost                                                               
recovery.   But he is  unaware of  any other jurisdiction  in the                                                               
free world that changes as much.   On the other hand, he said, he                                                               
is  unaware of  another that  has as  varied and  multi-layered a                                                               
system of tax credits as Alaska.   So, Alaska has sort of dug its                                                               
own hole on this one, although a well-meaning hole.                                                                             
                                                                                                                                
2:49:51 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR observed  the bullet on slide  8 that states,                                                               
"Investor needs  to know  the 1-year loan  will not  be stretched                                                               
into a  10-year payback."   She recalled  Mr. Persily  stating an                                                               
investor would  not mind that as  long as the investor  knew that                                                               
was going  to happen.   She requested  Mr. Persily to  comment on                                                               
the idea  that $25 million is  too small of  a cap.  She  posed a                                                               
scenario in  which the cap  is amended to  be larger and  is paid                                                               
over a certain number of  years, and asked whether something like                                                               
that is what Mr. Persily is suggesting.                                                                                         
                                                                                                                                
MR. PERSILY replied  he is talking about what  the investor wants                                                               
to know going in.  Pension  funds are different than day traders.                                                               
A   pension  fund   might  look   for  longer-term   investments.                                                               
Investors just want to  know when it pays off.  As  long as it is                                                               
stated  upfront, there  will still  be investors,  as opposed  to                                                               
saying payoff  will be in one  year and then changing  it to five                                                               
years.                                                                                                                          
                                                                                                                                
2:51:47 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE  JOSEPHSON,   regarding  slide  9,   recalled  Mr.                                                               
Persily saying  that one of the  benefits is that the  state will                                                               
get production.  He offered  his understanding that the state has                                                               
spent over $7 billion  on credits.  He said if  a citizen were to                                                               
ask him what the state has gotten  from that, he would be able to                                                               
answer that.   Relative to  the Cook Inlet renaissance,  there is                                                               
absolute provable  correlation and causation that  the first made                                                               
the second.   However, as  to the North  Slope, he does  not know                                                               
what  he would  say.   Noting he  has data  saying that  everyone                                                               
agrees [the pipeline]  is going to be down to  350,000 barrels in                                                               
about  6-7 years,  he requested  Mr.  Persily to  comment on  the                                                               
merits of what the state is doing on the North Slope.                                                                           
                                                                                                                                
MR. PERSILY concurred it is easier  to look at the Cook Inlet and                                                               
say credits  have been a  significant part  of the growth  in oil                                                               
production,  and also  gas production.   Certainly  in the  North                                                               
Slope  there is  not  gas production  in the  sense  of going  to                                                               
homeowners.   The difference is  that most of the  refundable tax                                                               
credits,  cash out  of the  treasury,  have gone  to Cook  Inlet;                                                               
whereas the  North Slope has  received a much smaller  portion of                                                               
refundable  tax  credits,  given  its structure  of  three  major                                                               
producers.  Much of the tax  credits in the North Slope have gone                                                               
against tax liability.   If the question is how  much more oil is                                                               
in the  pipe today that might  not have been there  had there not                                                               
been credits, he said he thinks  maybe some but he couldn't point                                                               
out which  barrels.  That  is the dilemma  in Cook Inlet  and the                                                               
North Slope,  he continued.   Yes, there  has been  increased oil                                                               
and gas  investment and spending in  Alaska and that is  good for                                                               
local property  taxes, for those  Alaskans who have a  sales tax,                                                               
and for  businesses.   It is  tough to  argue that  long-term net                                                               
present value adjusted  for inflation is a profit  to the general                                                               
fund,  but  it is  good  for  the state  economy.    That is  the                                                               
conundrum because  a lot  of constituents  want to  know it  is a                                                               
profit to the general fund.                                                                                                     
                                                                                                                                
2:55:06 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE JOSEPHSON referred  to the last words  on slide 9,                                                               
"Alaska is oil and  gas dependent."  He said his  view on this is                                                               
that that dependency has paid  huge dividends for decades and now                                                               
it does not.   He recalled Mr. Armstrong [of  Armstrong Oil & Gas                                                               
Inc.]  who  testified that  [legislators]  need  to concede  that                                                               
Alaska  is  a  petro  state.   He  surmised  this  dependency  is                                                               
something  Alaska needs  to shake  loose  from and  that a  means                                                               
needs to be found to break away from that.                                                                                      
                                                                                                                                
MR. PERSILY responded,  "No doubt."  Even with an  income tax and                                                               
use of permanent fund earnings, he  said, Alaska will still be an                                                               
oil and gas  state.  What is being learned  is that Alaska cannot                                                               
be as dependent on oil and gas as  it has in the past, there just                                                               
is not  enough money there.   He related that  Norway's sovereign                                                               
wealth fund is  $800 billion, which is much  bigger than Alaska's                                                               
permanent fund.   If Alaska had  not paid dividends and  had just                                                               
built up its savings account  like Norway did, Alaska's permanent                                                               
fund on a per capita basis  would be about equal to Norway, which                                                               
has  about 5  million  residents.   That  is  not  to attack  the                                                               
dividends, it is that Alaska can  no longer live off of [oil] and                                                               
is going to  have to make some tough  choices while acknowledging                                                               
that oil and gas will always  be the number one industry, but the                                                               
revenue  stream  needs to  be  diversified  because [oil]  cannot                                                               
carry the  state, and throwing tax  credits into it is  not going                                                               
to change that.                                                                                                                 
                                                                                                                                
2:57:35 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE SEATON recounted that  one of the presentations to                                                               
the  committee about  tax credits  looked at  a hypothetical  big                                                               
field of about  120,000 barrels a day, which there  may be on the                                                               
North Slope.   The problem [with  such a field] is  that over the                                                               
next six years the  state would have to put in  $3 billion as tax                                                               
credits under the current bill, and  over time maybe make some of                                                               
that back.   Plus, there would  be other projects in  addition to                                                               
this hypothetical field  requiring $3 billion.   He asked whether                                                               
Mr.  Persily thinks  such  draws  on the  state  budget would  be                                                               
sustainable or would  force Alaska to go through  another oil and                                                               
gas tax rewrite.                                                                                                                
                                                                                                                                
MR. PERSILY quipped that he is  turning 65 this year and the last                                                               
thing  he wants  to  live  through is  another  oil  and gas  tax                                                               
rewrite.   But, he said,  it raises  a good point  as legislators                                                               
look at what to  do with oil and gas tax  credits, the floor with                                                               
the minimum, and the  other issues in HB 247.   As pointed out by                                                               
Representative Olson,  Alaska's tax provisions have  been changed                                                               
frequently.   Legislators want to  come up with the  right answer                                                               
given he does  not think members want to do  something that means                                                               
in two years there will be  special sessions on oil and gas taxes                                                               
all  over again.   Just  like with  the fiscal  plan, legislators                                                               
need to  come up  with a  plan that sets  up future  earnings and                                                               
reasonable spending so  there is not a budget  crisis every year.                                                               
There needs to  be that perfect answer on oil  and gas taxes that                                                               
is stable  for at  least a decade,  given nothing  lasts forever.                                                               
Even though  it may be  wanted and needed  to bring more  oil and                                                               
gas investment  into Alaska, the state  is not in great  shape to                                                               
write those checks.   So, maybe spreading  refundable credits out                                                               
over time  cushions it because not  all of them would  be written                                                               
at $35 oil, and maybe there are other things.                                                                                   
                                                                                                                                
3:00:55 PM                                                                                                                    
                                                                                                                                
REPRESENTATIVE TARR recounted industry  stating something that is                                                               
transitional over  the next year  or two and then  something that                                                               
could be stable for eight to  ten years after that.  She inquired                                                               
whether Mr. Persily  thinks something like that  would put Alaska                                                               
more in line with other jurisdictions.                                                                                          
                                                                                                                                
MR. PERSILY  replied that  it would be  cause for  celebration if                                                               
industry  and  policymakers could  come  up  with something  that                                                               
everyone grumbled about  but could live with for 8-10  years.  It                                                               
would be  impossible to  come up with  something that  would last                                                               
for 50 years.   For example, Alberta just went  through a royalty                                                               
review and does that on a fairly regular basis.                                                                                 
                                                                                                                                
REPRESENTATIVE TARR,  in looking at what  other jurisdictions do,                                                               
such  as   British  Columbia  helping  with   road  building  and                                                               
infrastructure,  asked  whether Mr.  Persily  sees  any of  those                                                               
opportunities  as   being  advantageous   for  Alaska.     It  is                                                               
frequently heard  that it is  much more expensive to  do business                                                               
in Alaska, so she is trying  to think if there are things outside                                                               
of just refundable tax credits that could be of interest.                                                                       
                                                                                                                                
MR. PERSILY answered  that the state has talked  about helping to                                                               
build roads, "roads to resources"  being an example, but that has                                                               
its own  problems.  Since dollars  are so precious right  now, it                                                               
needs to be  ensured that something will be gotten  back from it.                                                               
He  pointed out  that  British Columbia  has  some road  building                                                               
credits but it  is different there because roads  can actually be                                                               
built to the  fields, whereas in Alaska that cannot  be done.  He                                                               
related that  British Columbia  recently held  a monthly  oil and                                                               
gas land  lease sale and for  the first time in  years there were                                                               
absolutely no  bids.  The market  is just that bad  and sometimes                                                               
trying with credits, incentives,  or attractive acreage just does                                                               
not work.                                                                                                                       
                                                                                                                                
[HB 247 was held over.]                                                                                                         

Document Name Date/Time Subjects
HSE RES 3.9.16 HB 247 - Kenai Peninsula Borough.pdf HRES 3/9/2016 1:00:00 PM
HB 247
HSE RES 3.9.16 - ING Alaska Tax Credit Bill 247 presentation.pdf HRES 3/9/2016 1:00:00 PM
HB 247
HSE RES 3.9.16 Inside Energy Report 4.30.15.pdf HRES 3/9/2016 1:00:00 PM
HB 247