Legislature(2015 - 2016)SENATE FINANCE 532

04/13/2016 05:00 PM FINANCE

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* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ HB 254 EXTEND BIG GAME COMMERCIAL SERVICES BOARD TELECONFERENCED
Heard & Held
+ HB 314 AK REG ECON ASSIST. PROGRAM; EXTEND TELECONFERENCED
Heard & Held
+ SB 206 REINSURANCE PROGRAM; HEALTH INS. WAIVERS TELECONFERENCED
Heard & Held
+= SB 130 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
Heard & Held
Invited Testimony
+= HB 247 TAX;CREDITS;INTEREST;REFUNDS;O & G TELECONFERENCED
<Pending Referral> Invited Testimony
+ Bills Previously Heard/Scheduled TELECONFERENCED
SENATE BILL NO. 130                                                                                                           
                                                                                                                                
     "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."                                                                                                                     
                                                                                                                                
6:23:55 PM                                                                                                                    
                                                                                                                                
BENJAMIN JOHNSON, CEO, BLUECREST  ENERGY, DALLAS, TEXAS (via                                                                    
teleconference), read  from a prepared  statement "BlueCrest                                                                    
Testimony to Senate  Finance Committee" (copy on  file) on a                                                                    
PowerPoint presentation:                                                                                                        
                                                                                                                                
     Good  afternoon   Madam  Chair   and  members   of  the                                                                    
     Committee.                                                                                                                 
                                                                                                                                
     For the  record, my  name is  J. Benjamin  Johnson, and                                                                    
    I'm the president and CEO of BlueCrest Energy Inc.                                                                          
                                                                                                                                
     Since BlueCrest  only has operations in  the Cook Inlet                                                                    
     at  this  time,  I  will   only  speak  to  the  issues                                                                    
     particular to the Cook Inlet,  with a specific focus on                                                                    
     the following points:                                                                                                      
                                                                                                                                
     First,  I want  to  emphasize  that, specifically  with                                                                    
     regard to  what BlueCrest is  doing in the  Cook Inlet,                                                                    
     the tax credit program  is an extremely good investment                                                                    
     for the State.                                                                                                             
                                                                                                                                
     Second, the State's  investment in Cosmopolitan through                                                                    
     the  credit  program  will provide  significant  future                                                                    
     positive value  to the State,  even at low  oil prices.                                                                    
     And  it  is  the  State's investment  through  the  tax                                                                    
     credits   that   has   facilitated   success   in   the                                                                    
     Cosmopolitan  Unit.  I'm going  to  show  you that  the                                                                    
     State's  investments in  the  Cosmopolitan tax  credits                                                                    
     will provide  high returns even  at low oil  prices. In                                                                    
     fact,  the tax  credit  investments  under the  current                                                                    
     laws  can actually  provide higher  rates of  return to                                                                    
     the  State   than  the   average  investments   in  the                                                                    
     Permanent Fund.                                                                                                            
                                                                                                                                
     Third, I will speak to  several specific issues we have                                                                    
     identified in SB 130 and the CS from Resources.                                                                            
                                                                                                                                
     Slide 2:                                                                                                                   
                                                                                                                                
     For your  reference, the  Cosmopolitan Unit  is located                                                                    
     about three  miles offshore  in the  Cook Inlet,  a few                                                                    
     miles  north of  Anchor  Point. All  of the  productive                                                                    
     area in the unit is on State leases.                                                                                       
                                                                                                                                
     Slide 3:                                                                                                                   
                                                                                                                                
     The   Cosmopolitan  Unit   actually  consists   of  two                                                                    
     separate  development  projects.   There  are  numerous                                                                    
     productive  gas  zones  directly above  underlying  oil                                                                    
     zones, and the gas reservoirs  are not connected to the                                                                    
     oil reservoirs.                                                                                                            
                                                                                                                                
     We haven't yet started  developing the Cosmopolitan gas                                                                    
     zones.  The offshore  Cosmopolitan  gas development  is                                                                    
     now on hold, due to  economic questions on tax credits,                                                                    
     costs  and  confirmation  of  stable  long-term  market                                                                    
     demand.                                                                                                                    
                                                                                                                                
     But development  of the deeper oil  reservoirs was more                                                                    
     straightforward. And  two years  ago, based on  the tax                                                                    
     regime  in  the  Cook  Inlet  under  current  laws,  we                                                                    
     committed  to begin  development of  the oil  reserves.                                                                    
     BlueCrest is  a small  private company with  a singular                                                                    
     focus of  developing the Cosmopolitan Unit,  and we are                                                                    
     very  careful in  development  of  our business  plans.                                                                    
     This is  a large project  for our company, and  we were                                                                    
     faced with the challenge of  how to pay for development                                                                    
     of the  new field.  We teamed  up with  a group  of oil                                                                    
     industry investors,  and we very carefully  created our                                                                    
     plan  with  them  for   financing  the  development  of                                                                    
     Cosmopolitan.                                                                                                              
                                                                                                                                
     Slide 4:                                                                                                                   
                                                                                                                                
     I  have   shown  this  conceptual  slide   in  previous                                                                    
     testimony,  so I  won't go  into the  details. However,                                                                    
     the main  point to  see here  is that  any oil  and gas                                                                    
     development  is  a long  process.  It  takes a  lot  of                                                                    
     spending  just  to  get  to  the  point  where  we  are                                                                    
     bringing  in enough  cash to  cover  our monthly  costs                                                                    
     without additional investment or borrowing.                                                                                
                                                                                                                                
     We  estimate that  it will  have  taken investments  of                                                                    
     over   $500   million   to   reach   that   point   for                                                                    
     Cosmopolitan, and BlueCrest is  within about 6-9 months                                                                    
     of getting there.                                                                                                          
                                                                                                                                
     As you  can see, we still  have considerable additional                                                                    
     investments to make  in drilling a few  new wells later                                                                    
     this year  that should provide  enough cash flow  to at                                                                    
     least  make our  debt service  payments going  forward.                                                                    
     And we've already committed to  that spending, based on                                                                    
     the  existing tax  credit structure.  So the  timing of                                                                    
     any changes over the next  few months is very important                                                                    
     to us.                                                                                                                     
                                                                                                                                
     Slide 5:                                                                                                                   
                                                                                                                                
     So  let's talk  specifically about  Cosmopolitan. We've                                                                    
     been  working  on  the oil  development  for  over  two                                                                    
     years, and right now, we  are literally a few days away                                                                    
     from  the  very  first commercial  production  of  oil.                                                                    
     Next,  we will  bring in  our new  specialized drilling                                                                    
     rig  and  start drilling  new  wells  to bring  on  the                                                                    
     production  that  can  finally  start  paying  off  our                                                                    
     loans.  And that  new drilling  cannot begin  until the                                                                    
     second half of this year.                                                                                                  
                                                                                                                                
     These  photos show  the progress  we have  made so  far                                                                    
     with the  onshore Cosmo production facility.  The total                                                                    
     site is 38  acres, and contains the drill  sites for up                                                                    
     to 20 wells  and the facilities to process  the oil. We                                                                    
     are almost  complete in  our construction  process, and                                                                    
     we are  now running the final  operational tests today.                                                                    
     We will  have our  new drilling rig  in place  to begin                                                                    
     drilling the new wells by July 1 of this year.                                                                             
                                                                                                                                
     Slide 6:                                                                                                                   
                                                                                                                                
     So  let's  look   at  what  the  tax   credits  from  a                                                                    
     successful   development   project  like   Cosmopolitan                                                                    
     actually mean to Alaska. When  the tax credits are used                                                                    
     for development  of new proven  reserves in  the State,                                                                    
     they  are  - without  question  -  a valuable  low-risk                                                                    
     investment.  The tax  credits make  new projects  work,                                                                    
     and  they bring  new sources  of long-term  revenues to                                                                    
     the State  for decades  into the  future. At  Cosmo, we                                                                    
     are sitting  on a large  proven resource of  future oil                                                                    
     and  gas  that  now   simply  requires  additional  new                                                                    
     investments to bring it to full production.                                                                                
                                                                                                                                
     On February  19, the DOR  provided its analysis  of the                                                                    
     financial impact to  the State on development  of a new                                                                    
     Cook  Inlet oil  field,  assuming that  no changes  are                                                                    
     ever  made to  the  existing tax  laws. DOR's  analysis                                                                    
     modeled an  "example" Cook Inlet field  that happens to                                                                    
     be  somewhat  similar to  Cosmopolitan  -  but is  more                                                                    
     expensive   and  less   productive   than  the   actual                                                                    
     Cosmopolitan    oil   development.    So   the    DOR's                                                                    
     calculations are, in fact,  conservative with regard to                                                                    
     Cosmo.                                                                                                                     
                                                                                                                                
     Slide 7:                                                                                                                   
                                                                                                                                
     This chart  is a  summary of  the calculations  the DOR                                                                    
     provided for their "example" field.  It shows the total                                                                    
     net   future  benefit   received  by   the  State   and                                                                    
     municipalities,  as a  function of  various future  oil                                                                    
     prices.  It  shows  that, even  for  this  conservative                                                                    
     example,  the  State would  receive  back  100% of  its                                                                    
     investments in the  tax credits if oil  prices over the                                                                    
     entire  field life  average only  about $35  per barrel                                                                    
     (assuming no changes to the  current law). At about $59                                                                    
     per barrel  average oil price, the  State would receive                                                                    
     back triple its investment in the tax credits.                                                                             
                                                                                                                                
     Slide 8:                                                                                                                   
                                                                                                                                
     The    DOR     also    provided    discounted-cash-flow                                                                    
     calculations for  this example  field, with  a head-to-                                                                    
     head  comparison to  the investments  by the  Permanent                                                                    
     Fund. At  any point  on this  chart greater  than zero,                                                                    
     the  State  would  earn a  better  return  through  its                                                                    
     investments in the tax credits  than its investments in                                                                    
     the Permanent Fund.                                                                                                        
                                                                                                                                
     This chart  shows that,  even in  the case  where there                                                                    
     are never  any changes  to the tax  system in  the Cook                                                                    
     Inlet, the State's investment in  those tax credits for                                                                    
     the  example field  is still  better  than the  average                                                                    
     investment in the Permanent                                                                                                
                                                                                                                                
     Fund  as long  as oil  prices  over the  next 30  years                                                                    
     average only $44 per barrel.                                                                                               
                                                                                                                                
     Slide 9:                                                                                                                   
                                                                                                                                
     Now I'd like to  show you BlueCrest's internal analysis                                                                    
     of  the value  to the  State in  keeping the  Qualified                                                                    
     Capital  and Well  Lease  Expenditure  credits as  they                                                                    
     apply  to new  oil  wells drilled  at Cosmopolitan.  We                                                                    
     projected  the   net  return  to  the   State  using  a                                                                    
     conservative    calculation    including    only    the                                                                    
     incremental  royalty for  each single  new Cosmopolitan                                                                    
     oil well drilled.                                                                                                          
                                                                                                                                
     This chart  shows the  calculated return  on investment                                                                    
     to the  State from the  WLE and  QCE. A 100%  return on                                                                    
     investment means that  100% of the tax  credit would be                                                                    
     repaid to  the State  at an average  oil price  of only                                                                    
     $24 per  barrel. At  $40 per  barrel, the  total return                                                                    
     would be about 170%, and  at $60 per barrel, the return                                                                    
     would  be  about  250%.  So  you  can  see  that  these                                                                    
     credits, at  least for Cosmo,  are likely to be  a very                                                                    
     good low-risk investment for the State.                                                                                    
                                                                                                                                
     Slide 10:                                                                                                                  
                                                                                                                                
     The bottom  line here  is that, in  periods of  low oil                                                                    
     prices, the  QCE and WLE  credits allow us  to continue                                                                    
     drilling  the Cosmopolitan  oil wells  at approximately                                                                    
     $10 lower oil prices than  without the credits. This is                                                                    
     likely  to be  an important  factor over  the next  few                                                                    
     years and may allow us  to continue drilling instead of                                                                    
     shutting down the rig.                                                                                                     
                                                                                                                                
     For us,  the NOL credit  is less important as  we begin                                                                    
     producing.   So   the   most   important   credit   for                                                                    
     continuation of  drilling in  a development  like Cosmo                                                                    
     is the WLE.                                                                                                                
                                                                                                                                
     Slide 11:                                                                                                                  
                                                                                                                                
     Under the CS, the  tax credit repurchases would receive                                                                    
     priority  for  payment  based   on  the  resident  hire                                                                    
     percentage in the prior year.  While we certainly agree                                                                    
     that  we  want to  hire  Alaskans  for our  operations,                                                                    
     imposition  of any  reductions in  credit payments  for                                                                    
     expenditures  that were  made  prior  to the  effective                                                                    
     date of a new law is truly a retroactive tax change.                                                                       
                                                                                                                                
     For credits  filed in 2016 (for  2015 expenditures) and                                                                    
     those  filed in  2017 (for  2016 expenditures  prior to                                                                    
     the new  law taking effect),  there would have  been no                                                                    
     way  for   us  to  even  keep   records.  Retroactively                                                                    
     changing  the laws  is  grossly  unreasonable. If  this                                                                    
     provision is  adopted, a longer transition  time should                                                                    
     be considered.                                                                                                             
                                                                                                                                
     Slide 12:                                                                                                                  
                                                                                                                                
     For  the record,  BlueCrest  is  strongly committed  to                                                                    
     hiring Alaskans. At  this point, 100% of  all our long-                                                                    
     term operations employees are  Alaskans. But making the                                                                    
     future credit  payments subject to  hiring in  the past                                                                    
     is probably  impossible to even  measure. We can  do it                                                                    
     going  forward, but  I don't  know  how we  go back  in                                                                    
     time.                                                                                                                      
                                                                                                                                
     Slide 13:                                                                                                                  
                                                                                                                                
     Another factor  in SB 130  was setting a  limitation in                                                                    
     the credits  that can be  paid annually. If  this limit                                                                    
     is too low, it would  be particularly damaging to small                                                                    
     companies like  BlueCrest who have already  invested in                                                                    
     good faith, based  on the tax policy  in existence when                                                                    
     we entered  into the  commitments for  our investments.                                                                    
     We came  to Alaska  based on  the credits.  We invested                                                                    
     our  cash, and  we have  borrowed  a lot  of money  and                                                                    
     committed to  spending a  lot more -  all based  on the                                                                    
     tax credits.  And the  timing of  the receipt  of those                                                                    
     payments for  the credits is  paramount in  our ability                                                                    
     to make  the payments  on the  loan obtained  for those                                                                    
     investments.                                                                                                               
                                                                                                                                
     Slide 14:                                                                                                                  
                                                                                                                                
     Most important of any of  these provisions to BlueCrest                                                                    
     is  the  timing  of   implementation  of  any  changes,                                                                    
     whatever  they  may  be.  It  is  now  April,  and  the                                                                    
     proposed changes  in the  original SB130  were supposed                                                                    
     to  take place  on July  1. The  CS has  somewhat moved                                                                    
     that date back, which would  certainly help but may not                                                                    
     completely solve the problem.                                                                                              
                                                                                                                                
     It's  important  to  understand that,  before  we  ever                                                                    
     started the oil development  project, we made sure that                                                                    
     we  would have  enough funds  to allow  us to  complete                                                                    
     construction  of  the  onshore drill  site,  production                                                                    
     facilities, bring in the most  powerful drilling rig in                                                                    
     Alaska, and  use that rig  to drill at least  the first                                                                    
     two new  oil wells.  We calculated  that we  would need                                                                    
     approximately  $525  million  to reach  that  point  of                                                                    
     self-sufficiency  (where  we  no longer  have  to  keep                                                                    
     borrowing additional  money to  put into  the project).                                                                    
     The timing  here is very  important, because  we expect                                                                    
     that should happen in the first half of 2017.                                                                              
                                                                                                                                
     As I  mentioned a  few minutes  ago, based  on existing                                                                    
     law, we  very carefully  planned how  we could  pay for                                                                    
     development  of  the  Cosmo   project  before  we  ever                                                                    
     started. Our  shareholders invested  approximately $200                                                                    
     million  in cash.  We borrowed  $30 million  from AIDEA                                                                    
     for a  loan on  the drilling  rig (kind  of like  a car                                                                    
     loan but for a drilling  rig). We have already received                                                                    
     a total  of $24 million  to date in tax  credits. Under                                                                    
     current  laws,  $121  million would  come  from  future                                                                    
     payment of  credits earned for  2015 and  2016 spending                                                                    
     (that's the total  for two years). We then  made up the                                                                    
     difference  by securing  a  $150 million  high-interest                                                                    
     development loan. We  have spent a lot of  money to get                                                                    
     to the point where we  can now start drilling these new                                                                    
     wells, but an abrupt termination  of the tax credits on                                                                    
     which  we  have  based our  entire  financial  planning                                                                    
     would be devastating. Any reduction  in the credits for                                                                    
     our  spending through  at least  early 2017  would mean                                                                    
     that  we have  to come  up  with that  money from  some                                                                    
     other  source.  That's  not  easy  in  this  oil  price                                                                    
    environment, and it may just simply be unworkable.                                                                          
                                                                                                                                
     We have finally  reached the point -  by completing all                                                                    
     this  work and  spending all  this money-  to where  we                                                                    
     will finally have our rig  ready to drill in the second                                                                    
     half  of this  year. We  need the  production from  the                                                                    
     first new wells  to pay for the costs we  have spent so                                                                    
     far.  Those drilling  costs -  at  least through  early                                                                    
     2017 - are  all based upon the assumption  that we will                                                                    
     be able  to obtain the  credits under existing  law for                                                                    
     those  investments.  We have  done  all  this work  and                                                                    
     spent  all  this  money  to date,  and  it  seems  only                                                                    
     reasonable  for us  to be  able to  claim the  existing                                                                    
     credits  for the  spending that  is the  result of  our                                                                    
     investments  based on  the expectation  that the  State                                                                    
     would honor  its share of  the investments. We  need to                                                                    
     be able  to be able to  get to the finish  line. If the                                                                    
     date for  changes is too  soon, we won't have  the full                                                                    
     funding  for finishing  the project,  although we  have                                                                    
     already  committed  those   investments.  We've  signed                                                                    
     contracts, bought  a drilling  rig, built  facilities -                                                                    
     all based on the current laws in effect.                                                                                   
                                                                                                                                
     Slide 15:                                                                                                                  
                                                                                                                                
     In conclusion,  I'd like to reemphasize  the importance                                                                    
     of  phasing-into any  changes  over  a reasonable  time                                                                    
     period.                                                                                                                    
                                                                                                                                
     Everyone  in  Alaska  understands   that  when  we  are                                                                    
     driving  on  slippery  icy roads,  the  most  dangerous                                                                    
     thing we can do is suddenly slam on the brakes.                                                                            
     Thank you.                                                                                                                 
                                                                                                                                
6:33:44 PM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon pointed  to slide  14 and  mentioned the                                                                    
Alaska Industrial  Development and Export  Authority (AIDEA)                                                                    
loan that the  state provided for $30  million. She wondered                                                                    
if the  development loan was  with an entity other  than the                                                                    
State of Alaska.                                                                                                                
                                                                                                                                
Mr. Johnson responded, "Yes, the development loan is with a                                                                     
private lender".                                                                                                                
                                                                                                                                
Co-Chair MacKinnon referred to the tax credits received to-                                                                     
date wondering if she should subtract the amount from the                                                                       
2015-2016 time period or if it was in addition.                                                                                 
                                                                                                                                
Mr. Johnson  replied that  it was in  addition and  that the                                                                    
total credits  associated with the project  would equal $145                                                                    
million.                                                                                                                        
                                                                                                                                
Co-Chair MacKinnon wanted to confirm her math.                                                                                  
                                                                                                                                
Vice-Chair  Micciche  asked  if Mr.  Johnson  could  provide                                                                    
slide  7 and  slide  8 without  the  municipal revenues.  He                                                                    
wanted to see the state royalty figures by themselves.                                                                          
                                                                                                                                
Mr. Johnson explained  that the slides were a  result of the                                                                    
Department  of Revenue's  calculations. He  thought Director                                                                    
Alper would  be able to  supply the information. He  did not                                                                    
have the underlying data, only the final numbers.                                                                               
                                                                                                                                
6:35:48 PM                                                                                                                    
                                                                                                                                
BRUCE   WEBB,  FURIE   OPERATING   ALASKA,  ANCHORAGE   (via                                                                    
teleconference),  relayed  that  Furie came  into  existence                                                                    
through  Escopeta  Oil Company  in  2010.  Since that  time,                                                                    
Furie  brought  the  first  jack-up  rig  to  Alaska.  Furie                                                                    
recently installed  the first offshore  platform in  about 2                                                                    
decades. It  was comprised  of 16  miles of  subsea pipeline                                                                    
and a new  gas processing facility in  Nikiski, Alaska. Over                                                                    
the previous 5 years  the company had invested approximately                                                                    
$700  million   in  the  wells,  pipeline,   and  processing                                                                    
facility.  During  the  peak  of  construction  the  company                                                                    
employed over 300  people in Alaska and  invested about $200                                                                    
million. He mentioned  that the offshore season  in the Cook                                                                    
Inlet was  from April  15th to October  31st of  every year.                                                                    
During  the  period outside  of  the  drilling season  Furie                                                                    
still had to  pay for storage for the  jack-up drilling rig.                                                                    
Offshore development  was very  expensive. At  the beginning                                                                    
of  the  project Furie  viewed  the  State  of Alaska  as  a                                                                    
partner.  The company  made all  of its  financial decisions                                                                    
based on the tax system in effect at the time.                                                                                  
                                                                                                                                
Mr. Webb continued that the  result of the company's impacts                                                                    
on exploration and development was  the local Cook Inlet gas                                                                    
market.  The company  recently signed  contracts with  Homer                                                                    
Electric Association,  Inc. and ENSTAR Natural  Gas Company.                                                                    
As a result  of those contracts beginning in  April 2016 the                                                                    
cost  of energy  to  consumers in  the  Kenai Peninsula  was                                                                    
lowered by  12 percent. In 2018  the cost would be  about 16                                                                    
percent  lower than  the  cost in  2015.  He furthered  that                                                                    
Furies'  contract  with  ENSTAR Natural  Gas  Company  would                                                                    
begin in 2018. In 2018 the  cost of gas to ENSTAR customers,                                                                    
roughly half of  the population of Alaska,  would be reduced                                                                    
by 17  percent. Aside  from the  direct influence  Furie has                                                                    
had on  the local gas  market the  company had also  seen it                                                                    
trickle  down to  other companies.  The  Chugach Electric  -                                                                    
Hilcorp contract  resulted and  would lead  to an  8 percent                                                                    
reduction  in costs  to their  customers. He  explained that                                                                    
the reductions were  due to the competition  Furie and other                                                                    
small independents brought to the market.                                                                                       
                                                                                                                                
Mr. Webb  opined that without  the tax credit  program Furie                                                                    
would  not   have  been  able  to   undertake  the  project.                                                                    
Otherwise, it  would have  been too  risky in  the beginning                                                                    
and too  expensive towards the  end of development.  The tax                                                                    
program  was  needed  in order  to  meet  obligations  Furie                                                                    
entered  into  years ago.  Going  forward,  if there  was  a                                                                    
change  in the  tax credit  program the  company would  have                                                                    
time to  adjust. He noted  that the way the  governor's bill                                                                    
was  currently  structured.  The tax  credit  program  would                                                                    
change  in 2016  and would  be devastating  to the  company.                                                                    
Some  certainty through  the rest  of the  current year  was                                                                    
necessary  in order  for Furie  to  fulfill its  commitments                                                                    
that were made in 2013 and  2014. He deferred to David Elder                                                                    
to provide further testimony on Furie's behalf.                                                                                 
                                                                                                                                
6:39:37 PM                                                                                                                    
                                                                                                                                
DAVID  ELDER, CEO,  FURIE OPERATING  ALASKA, HOUSTON,  TEXAS                                                                    
(via teleconference),  had three important points  he wanted                                                                    
to cover in  terms of tax credits and  the proposed changes.                                                                    
The tax  credits were intended  to incentivize  companies to                                                                    
make investments  in the industry.  Furie moved  quickly and                                                                    
raised capital  to come to  Alaska. The company  brought the                                                                    
first  major production  to Nikiski  and the  Anchorage area                                                                    
from the Cook Inlet since the 80's.                                                                                             
                                                                                                                                
Mr. Elder relayed  his second point. Furie was  in the final                                                                    
phases  of  its  project  that began  in  2013.  In  Furie's                                                                    
business  it had  to plan  several years  ahead in  order to                                                                    
meet logistics of  such a project. In  addition, the company                                                                    
had to  enter into financing  commitments in 2013  and 2014.                                                                    
Furie needed certainty going forward  and the opportunity to                                                                    
at least finish what it started based on the existing law.                                                                      
                                                                                                                                
Mr. Elder' third point was that  the tax credits had been an                                                                    
important  source  of liquidity  and  had  enabled Furie,  a                                                                    
development   stage   company,    to   obtained   economical                                                                    
financing. Thanks to  the tax credit program  Furie had seen                                                                    
its financing  costs drop from  about a 20 percent  range to                                                                    
an 8 percent financing cost.  As a result of the uncertainty                                                                    
of  what legislation  might pass  and whether  credits filed                                                                    
for  in  the  previous  year  would be  paid,  it  was  more                                                                    
difficult to  secure financing. People had  pulled away from                                                                    
the markets.  The most recent  bid for financing off  of the                                                                    
current year's tax credits was  about 60 percent of the face                                                                    
value of  the credits.  He was  certain the  legislature and                                                                    
the  people of  Alaska would  rather see  the additional  40                                                                    
percent  invested  in  important infrastructure  and  energy                                                                    
production  which  would  result  in  employment  and  other                                                                    
activities.   Moving   forward,   Furie   was   asking   the                                                                    
legislature  for  some  certainty  to make  sure  Furie  was                                                                    
funded  for  expenditures  already  made and  to  allow  the                                                                    
company to complete the project  without mid-year changes to                                                                    
the tax credit structure. He was available for questions.                                                                       
                                                                                                                                
Co-Chair MacKinnon  indicated that  there were  no questions                                                                    
for members and  thanked him for his  statement. She invited                                                                    
the next testifier to begin his testimony.                                                                                      
                                                                                                                                
6:43:25 PM                                                                                                                    
                                                                                                                                
TONY IZZO, GENERAL  MANAGER, MATANUSKA ELECTRIC ASSOCIATION,                                                                    
ANCHORAGE (via  teleconference), explained that  the utility                                                                    
was  the  second  largest electric  utility  and  the  third                                                                    
largest  buyer  of  natural  gas  in  the  Cook  Inlet.  His                                                                    
background  included  having  been  at  ENSTAR  Natural  Gas                                                                    
(ENSTAR) from  the late 90's  to about 2007, serving  as the                                                                    
president  from   2001  through  2006.  His   testimony  was                                                                    
intended to  give his perspective as  a buyer of gas  in the                                                                    
Cook Inlet  and about cause  and effect. The business  was a                                                                    
long  lead  time  capital-intensive business.  He  spoke  to                                                                    
witnessing the changes in the  Cook Inlet market. He noticed                                                                    
that the  excess natural gas discovered  while exploring for                                                                    
oil in  the late  50's and  60's was coming  to an  end. Gas                                                                    
could not  be purchased under  the terms the state  had been                                                                    
able to  for prior decades nor  could gas be found  for sale                                                                    
under legacy  terms. He  continued that  something different                                                                    
occurred  when the  market  shifted -  a  Henry Hubb  linked                                                                    
contract in the  amount of 450 Bcf [billions  of cubic feet]                                                                    
was entered into in 2000 or  2001. It had a trailing average                                                                    
of  Lower 48  prices which  was currently  in the  $2 range.                                                                    
Unfortunately, regulators,  some members of the  public, and                                                                    
certain legislators responded  negatively about linking Cook                                                                    
Inlet  gas to  a market  that the  state was  not physically                                                                    
connected to.  As a buyer  he was negotiating  with entities                                                                    
based outside of  Alaska who had choices of  where they were                                                                    
going to invest their capital  such as Alaska, the Lower 48,                                                                    
or in other  places in the world. He reported  being able to                                                                    
enter into  a long-term  contract that required  millions of                                                                    
dollars in  investment. He thought  the number  was exceeded                                                                    
by a  factor of three. As  a result of some  negative public                                                                    
reactions to  prices being  linked to  the Lower  48, ENSTAR                                                                    
entered  into   another  36-month  contract  in   2005  with                                                                    
Marathon  and   would  have  filled  all   of  ENSTAR's  gas                                                                    
requirements  through  2016  at  a price  of  the  12  month                                                                    
trailing  average  of  the  Lower  48. As  a  buyer  he  was                                                                    
currently  paying $7.42  for gas.  If Lower  48 prices  were                                                                    
available he would  pay about $2.00 for  gas. The perception                                                                    
of the  contract and the  pricing mechanism was  so negative                                                                    
that it was not approved. He  observed that the state sent a                                                                    
signal to the market and to  investors that it was no longer                                                                    
open  for  business.  Over  the   following  few  years  the                                                                    
investments slowly  dried up  and assets  in the  inlet were                                                                    
sold. In 2009 and 2010  the utility was looking at importing                                                                    
LNG because  only 20 percent  of the contract  fulfilled the                                                                    
utility's demand  for more than 1  or 2 years at  a time. To                                                                    
the  legislature's  credit  the   Cook  Inlet  Recovery  Act                                                                    
created and fostered an  environment that brought investment                                                                    
and  new players  back to  Alaska.  He found  that prior  to                                                                    
Hilcorp purchasing the Marathon  and Chevron assets he could                                                                    
only purchase 20 percent to  25 percent of the gas Matanuska                                                                    
Electric at  about $10  per MCF  [million cubic  feet]. Upon                                                                    
Hilcorp's  arrival  in  the aging  and  mature  fields  they                                                                    
improved  production  and  made  gas  supply  available  for                                                                    
purchase to utilities through  2018 which Matanuska Electric                                                                    
took part.                                                                                                                      
                                                                                                                                
6:49:30 PM                                                                                                                    
                                                                                                                                
Mr.  Izzo continued  that the  price was  negotiated by  the                                                                    
attorney  general  through a  consent  decree  to address  a                                                                    
Federal  Trade Commission  concern. He  thought Hilcorp  had                                                                    
done  a great  job.  However, currently  the  state had  new                                                                    
players  investing real  capitol.  He reviewed  some of  the                                                                    
industry companies  that have brought on  production. He was                                                                    
afraid  of sending  the wrong  signal to  industry investors                                                                    
which  would  likely  lead  to   dried  up  investment.  The                                                                    
unintended consequence  was insecurity. He thought  the good                                                                    
and  bad  news  was  that the  state  had  temporary  energy                                                                    
security.  Many of  the new  reserves were  not behind  pipe                                                                    
which required millions of dollars  in investments. It would                                                                    
be  in the  better  interest  of his  customers  for him  to                                                                    
purchase  imported  LNG at  the  right  price than  to  risk                                                                    
entering  into the  exploration and  production business  to                                                                    
bring new reserves  online. He concluded that,  based on his                                                                    
experience, uncertainty  was the  enemy of  energy security.                                                                    
He believed the state was  very close to seeing real results                                                                    
from  the Cook  Inlet Recovery  Act and  the tax  credits in                                                                    
place  currently.  He  clarified his  understanding  of  the                                                                    
monumental  task   before  the  legislature   regarding  the                                                                    
state's  fiscal gap.  He hoped  the  legislature would  take                                                                    
action that  would minimize uncertainty  and help to  get to                                                                    
the results that were sought in growing the market.                                                                             
                                                                                                                                
6:52:41 PM                                                                                                                    
                                                                                                                                
Co-Chair  MacKinnon  wondered   if  the  legislature  should                                                                    
institute a  tax on all rate  payers so the state  could pay                                                                    
the credits to secure the energy.                                                                                               
                                                                                                                                
Mr. Izzo replied that a tax  would be like a fuel surcharge.                                                                    
He was  not taking  a position that  the state  should leave                                                                    
the  credits   alone  or  significantly  change   them.  His                                                                    
recommendation was that whatever  action, it should be taken                                                                    
sooner rather than later to  eliminate uncertainty. He added                                                                    
that when the governor postponed  paying the $200 million in                                                                    
tax  credits  with  a  veto a  gas  deal  between  Matanuska                                                                    
Electric and a new Cook  Inlet producer evaporated. It was a                                                                    
combined supply  with another utility that  would have saved                                                                    
$10 million per year.                                                                                                           
                                                                                                                                
SCOTT  JEPSON,  VICE  PRESIDENT,  EXTERNAL  AFFAIRS,  CONOCO                                                                    
PHILLIPS, ANCHORAGE (via  teleconference), noted that Conoco                                                                    
Phillips  was  not  a  member of  AOGA.  He  introduced  the                                                                    
PowerPoint presentation,  "Senate Finance  Committee CSSB130                                                                    
- April 13,  2016." He turned to slide 2:  "Agenda." He took                                                                    
a few  minutes to  discuss the current  economic environment                                                                    
and  what   had  happened  since   the  passage  of   SB  21                                                                    
[Legislation  passed in  2013  - Short  Title:  Oil and  Gas                                                                    
Production Tax]. He  relayed he would also  be talking about                                                                    
the  company's   concerns  with  SB130  and   the  committee                                                                    
substitute.                                                                                                                     
                                                                                                                                
Mr. Jepsen  addressed slide 3, "Activities  Since Tax Reform                                                                    
(MAPA)  Passed."  He reported  that  since  MAPA was  passed                                                                    
Conoco  Phillips had  followed through  on what  the company                                                                    
stated  could  happen  with  a  more  attractive  investment                                                                    
climate on the  North Slope. The company had  added a number                                                                    
of rigs to  its fleet as well as two  new-build rigs. Conoco                                                                    
had taken delivery  of one of the rigs and  was expecting to                                                                    
take possession  of the  second later  in the  current year.                                                                    
Since the passage of SB 21  the company had gone from 3 rigs                                                                    
in the  western North  Slope rig  fleet to  between 5  and 6                                                                    
rigs.  Currently, Conoco  had 4  running  and anticipated  5                                                                    
running later  in the year when  it took delivery of  one of                                                                    
its new rigs.                                                                                                                   
                                                                                                                                
Mr. Jepsen continued  reporting that Conoco only  had 3 rigs                                                                    
operating  in  the  remainder  of  the  United  States.  The                                                                    
company's   activities  in   Alaska  were   differential  at                                                                    
present.  He had  a list  of other  investments that  Conoco                                                                    
Phillips had made  since the passage of SB 21.  He would not                                                                    
review  it  but  would  briefly discuss  activities  in  the                                                                    
National  Petroleum  Reserve   Alaska  (NPRA).  The  company                                                                    
currently  had  a new  field  in  progress, Greater  Moose's                                                                    
Tooth 1  (GMT1), and  there was another  field 9  miles from                                                                    
GMT1 called Greater Moose's Tooth  2 (GMT2) which was in the                                                                    
process of being  permitted. He noted that  none of Conoco's                                                                    
new fields that  came on stream since SB 21  was passed were                                                                    
receiving  the  gross value  reduction  (GVR).  Some of  the                                                                    
production on  CD5 and drill  site 2S could qualify  for the                                                                    
GVR.  However, some  of the  requirements necessary  made it                                                                    
not cost effective for Conoco to pursue.                                                                                        
                                                                                                                                
6:57:14 PM                                                                                                                    
                                                                                                                                
Mr. Jepsen  advanced to slide 4,  "Capital Spending Trends."                                                                    
He  explained that  the slide  addressed what  was happening                                                                    
with the capital spend as  a corporation operating in Alaska                                                                    
as well as oil price.  He figured everyone was very familiar                                                                    
with what  had happened with  oil prices. He pointed  to the                                                                    
plot in the upper left-hand  corner which showed the effects                                                                    
of  the   decrease  in  oil   prices  on   Conoco's  capital                                                                    
investment. There  was a commensurate drop  in the company's                                                                    
capital investments. On the right-hand  side there were some                                                                    
statistics  outlining the  company's  activities in  Alaska.                                                                    
The company's  capital spend peaked  in 2014, but  even with                                                                    
the  decline in  oil  prices it  still anticipated  spending                                                                    
about $1  billion in  2016. He noted  that the  amount spent                                                                    
during  the  years of  Alaska's  Clear  and Equitable  Share                                                                    
(ACES),  a time  when oil  prices were  considerably higher,                                                                    
was  about  25  percent  less  that  in  2016.  He  directed                                                                    
attention to  the bottom right-hand  part of the  slide that                                                                    
showed  what percentage  of Conoco's  corporate capital  was                                                                    
being spent in  Alaska. It was clear the  company was making                                                                    
a substantial investment in the state.                                                                                          
                                                                                                                                
Mr.  Jepsen  discussed  slide   5,  "North  Slope  Investors                                                                    
Negative at  Current Pricing." He  explained that  the slide                                                                    
was derived  from the  2016 Revenue  Sources Book.  The left                                                                    
side, the "Y"  axis, represented net cash flow,  and the "X"                                                                    
axis represented ANS West Coast  price. The chart showed the                                                                    
relative position of the state  compared to the producers at                                                                    
current  pricing  as  prices increased.  Regardless  of  oil                                                                    
price the state was always  in a positive cash flow position                                                                    
excluding reimbursable  tax credits that might  pay out. The                                                                    
chart did not  include the tax credits but  included the per                                                                    
barrel  credits.  Investors were  in  a  negative cash  flow                                                                    
position. He  stressed that it  would difficult  to increase                                                                    
taxes  on an  industry  that  was in  a  negative cash  flow                                                                    
position without  it impacting investments. In  2015, Conoco                                                                    
Phillips experienced a negative cash  flow of more than a $1                                                                    
million negative  cash flow in  Alaska. The company  did not                                                                    
incur any net operating losses  (NOL's). He was uncertain if                                                                    
the company would be in the same position in 2016.                                                                              
                                                                                                                                
6:59:41 PM                                                                                                                    
                                                                                                                                
PAUL  RUSCH,   VICE  PRESIDENT,  FINANCE   DIVISION,  CONOCO                                                                    
PHILLIPS,  ANCHORAGE (via  teleconference), turned  to slide                                                                    
6,  "Key Concerns  with  Original SB  130  Bill." The  slide                                                                    
identified  areas associated  with  SB 130  that caused  the                                                                    
greatest concerns  for Conoco Phillips and  had the greatest                                                                    
potential  to negatively  impact its  investment in  Alaska.                                                                    
His comments would  address the original bill  but, he would                                                                    
make a  few comments regarding the  committee substitute. He                                                                    
relayed  that the  case  made against  the  increase in  the                                                                    
minimum  from  4  percent  to  5 percent  was  made  in  the                                                                    
previous  slide.   He  reiterated  that  the   industry  was                                                                    
currently in a negative cash  flow position and would remain                                                                    
so  at prices  up to  approximately $50  per barrel  of oil.                                                                    
Increasing taxes  while the company was  experiencing losses                                                                    
would lead to reduced investment.                                                                                               
                                                                                                                                
Mr. Rusch next  argued that hardening the  minimum tax floor                                                                    
effectively served as a tax  increase. Under SB 21 companies                                                                    
were  currently  allowed  to  reduce  their  tax  below  the                                                                    
minimum  with  the  use of  NOL's  resulting  directly  from                                                                    
losses businesses  were incurring in Alaska.  The particular                                                                    
treatment was  consistent with federal income  tax treatment                                                                    
which  allowed recognition  of losses  and  periods where  a                                                                    
company was  no longer  in a  loss position.  Eliminating or                                                                    
delaying  the use  of the  NOL's would  result in  companies                                                                    
reducing  expenditures in  Alaska  for which  they would  no                                                                    
longer  be receiving  a tax  deduction. Although  it was  an                                                                    
important issue for the industry  to help support investment                                                                    
during  periods  of  low  prices, the  size  of  the  future                                                                    
obligation had  likely been exaggerated  by the DOR  in some                                                                    
of their  recent testimony. There were  companies that would                                                                    
adjust  to  the  lower  prices and  would  not  continue  to                                                                    
experience losses  at the projected levels.  Conoco Phillips                                                                    
did not  have an NOL  in 2015  and current prices  were more                                                                    
challenging.                                                                                                                    
                                                                                                                                
Mr.  Rusch  moved to  the  next  item which  surrounded  the                                                                    
increase  in   the  interest   rate.  He   highlighted  that                                                                    
increasing the  interest rate on  lower or under  paid taxes                                                                    
was an issue due to  the lengthy time involved in completing                                                                    
and closing out audits. The  issue was caused by the current                                                                    
6-year  statute  of  limitations. He  provided  two  related                                                                    
examples. Conoco  Phillips just  recently received  its 2009                                                                    
production  tax audit  -  6  years and  3  months after  the                                                                    
completion  of  the  tax year.  The  company  also  recently                                                                    
closed out  its 2006  production tax audit  - 9  years after                                                                    
the end of the audit. It  could lead to tax assessments when                                                                    
the  interest component  was  as much  or  greater than  the                                                                    
underlying audit  findings. The Senate  Resources' committee                                                                    
substitute was  an improvement, as  it reduced  the interest                                                                    
period to 3  years and could lead to  shorter audit periods.                                                                    
The company was concerned  that the applicable interest rate                                                                    
was still  too high.  The federal  rate was  approximately 3                                                                    
percent compared to the 7  percent plus the federal discount                                                                    
rate in the committee substitute.                                                                                               
                                                                                                                                
Mr. Rusch argued that restricting  the use of per barrel and                                                                    
other  tax  credits to  a  specific  month contradicted  the                                                                    
underlying principle  of an  annual tax.  He noted  that the                                                                    
slide  referenced  per  barrel credits.  However,  expressed                                                                    
earlier  in  Exon's  testimony,   it  potentially  had  much                                                                    
broader implications.  It was discussed  in detail  in prior                                                                    
testimony by the DOR. The  concern the department raised was                                                                    
that  companies were  migrating per  barrel credits  between                                                                    
months.  Conoco  Phillips   completely  disagreed  with  the                                                                    
characterization.  It  was  clear  in the  statutes  and  in                                                                    
regulations that  the production tax  was a yearly  tax with                                                                    
monthly  installments made.  He  emphasized that  it was  an                                                                    
annual tax  and any  attempt to characterize  it differently                                                                    
was incorrect.  The proposed  changes by  the administration                                                                    
was a radical from the principle of a yearly tax.                                                                               
                                                                                                                                
Mr.   Rusch  brought   up  that   the  confidentiality   and                                                                    
disclosure provisions  were much  too broad  in SB  130. The                                                                    
company  recognized  the  desire for  greater  transparency,                                                                    
particularly  around  reimbursable   credits.  As  currently                                                                    
written, SB 130 could potentially  lead to the disclosure of                                                                    
all  tax payer  information  which violated  competitiveness                                                                    
and  potentially conflicted  with Internal  Revenue Service,                                                                    
FCC, and other regulations.                                                                                                     
                                                                                                                                
7:04:48 PM                                                                                                                    
                                                                                                                                
Mr.  Jepsen   addressed  slide  7,   "Observations."  Conoco                                                                    
Phillips favored the committee  substitute over the original                                                                    
bill. However,  the company had some  concerns. First, there                                                                    
were  concerns about  the interest  terms.  There were  also                                                                    
concerns about  the time limitations  on the use of  the GVR                                                                    
which negatively  impacted the economics of  the development                                                                    
of  new oil  and would  be  a consideration  as the  company                                                                    
looked  at its  new investments.  He added  that it  did not                                                                    
help Alaska  compete in Conoco Phillips'  overall portfolio.                                                                    
He  also  questioned  the  impacts of  the  removal  of  the                                                                    
ceiling tax  on North Slope  gas used in-state.  The company                                                                    
was unclear about  the goal of the policy  and the potential                                                                    
impact of their business on the North Slope.                                                                                    
                                                                                                                                
Mr.  Jepsen  concluded  that  there  had  been  several  tax                                                                    
changes in Alaska over the  previous ten years. He advocated                                                                    
for a stable,  durable fiscal policy for  oil investment and                                                                    
investment on  any major North  Slope gas project.  A stable                                                                    
tax regime  would foster  confidence and  further investment                                                                    
in the  state. It had  only been 19  months since SB  21 had                                                                    
been  ratified  by voters  and  another  change to  the  tax                                                                    
regime was  being contemplated. Conoco  Phillips appreciated                                                                    
the challenge legislators had in  front of them. His goal of                                                                    
the presentation  was to  provide some  insight in  terms of                                                                    
how tax policy affected the company's investments.                                                                              
                                                                                                                                
Vice-Chair  Micciche wondered  about the  time limit  on the                                                                    
GVR  and  referred  to  slide 7.  He  noted  that  enalytica                                                                    
[Legislative  oil and  gas consultant]  had  shown that  the                                                                    
lower  the  price  of  oil,   the  greater  the  impact  for                                                                    
companies over  a longer period  of time. At a  higher price                                                                    
the limit  on the GVR  would have less  of an impact  on the                                                                    
value of  the project.  He wondered  if an  alternative time                                                                    
limit would be better.                                                                                                          
                                                                                                                                
Mr.  Jepsen answered  that any  kind of  change to  the time                                                                    
limit was  negative. He thought  enalytica had done  work to                                                                    
show relative  impacts. He would  leave it to  the committee                                                                    
to  determine  the  appropriate  balance  point.  Obviously,                                                                    
anything   that  reduced   the  time   period  reduced   the                                                                    
competitiveness of the project.                                                                                                 
                                                                                                                                
Co-Chair  MacKinnon  thanked   the  presenters  from  Conoco                                                                    
Phillips.  She  invited  the last  presenter  to  begin  his                                                                    
testimony.                                                                                                                      
                                                                                                                                
JARED GREEN,  PRESIDENT, ENSTAR NATURAL GAS,  ANCHORAGE (via                                                                    
teleconference),  introduced  the PowerPoint,  "Presentation                                                                    
to the  Senate Finance Committee,  April 13, 2016"  (copy on                                                                    
file). ENSTAR  was the largest  purchaser of natural  gas in                                                                    
the   Cook   Inlet.   Ultimately,   their   customers   were                                                                    
beneficiaries  of the  tax program  that had  been in  place                                                                    
since  2010. Their  customers depended  on natural  gas from                                                                    
the  Cook Inlet  to heat  their homes,  businesses, schools,                                                                    
hospitals, and industries.  Fundamentally, ENSTAR's interest                                                                    
was in the  fostering of a stable and  appealing natural gas                                                                    
environment  in   the  Cook  Inlet.  He   claimed  that  the                                                                    
environment needed to exist  in the short-term, medium-term,                                                                    
and the long-term.                                                                                                              
                                                                                                                                
Mr. Green looked at slide 2, "Natural Gas Supply Needs."                                                                        
                                                                                                                                
     141,075 Customers                                                                                                          
                                                                                                                                
     Anchorage, Anchor Point, Big Lake, Girdwood, Homer,                                                                        
     Houston, Kenai, Palmer, Soldotna, Wasilla, and                                                                             
     Whittier                                                                                                                   
                                                                                                                                
     33 Bcf/year                                                                                                                
                                                                                                                                
     Peak deliverability 287 MMcf/day                                                                                           
                                                                                                                                
ENSTAR's number one priority was  safe, reliable natural gas                                                                    
service to its  customers. The company was  founded in 1959,                                                                    
the same year as statehood.  On average their customers used                                                                    
about 33 BCF  of Natural gas per year. In  a warm year, such                                                                    
as the previous year, use could be  as low as 30 Bcf or in a                                                                    
cold year upwards  of 35 Bcf. Recently  enalytica prepared a                                                                    
report that indicated total state use at about 80 Bcf.                                                                          
                                                                                                                                
7:09:22 PM                                                                                                                    
                                                                                                                                
Mr.  Green  addressed  slide  3,  "Supply  and  Demand."  He                                                                    
remarked that ENSTAR had a  very high seasonality to its gas                                                                    
needs. The  company generally  varied by roughly  a 12  to 1                                                                    
ratio of winter  to summer gas needs which  meant that their                                                                    
customers burned about  12 times more gas on  average in the                                                                    
winter as what they did  in the summer. He reported ENSTAR's                                                                    
daily  variability.  Living in  Alaska  meant  living in  an                                                                    
environment that  could have substantial variability  in gas                                                                    
demands due  to weather.  With the current  company customer                                                                    
base they had  a potential daily demand of 287  Bcf per day.                                                                    
He  pointed  to  the  thin  red  line  on  the  graph  which                                                                    
represented the 287 Bcf per day.  Such a level of demand was                                                                    
likely to  occur in January  of any given year.  ENSTAR also                                                                    
had the  potential of meeting less  than 100 Bcf per  day if                                                                    
there was a warm spell happening  on the same day. There was                                                                    
a significant  variance to  what could  occur purely  due to                                                                    
weather. He  highlighted the  graph showing  the variability                                                                    
in their customers'  daily demand as well  as ENSTAR's daily                                                                    
supply through the years 2014  and 2015. The chart contained                                                                    
the actual data  which the company supplied gas  each of the                                                                    
days listed  for the years  listed. Each of the  natural gas                                                                    
suppliers  were  represented by  a  different  color on  the                                                                    
chart as  well as how much  gas was consumed on  each day in                                                                    
the  2-year  period represented    by  the black  line  that                                                                    
topped  off   the  chart.  He  noted   that  the  day-to-day                                                                    
variability was marked.  ENSTAR's customers' demands changed                                                                    
as weather changed  seen as the constant spike  up and down.                                                                    
The second piece  was the seasonal variability. The  12 to 1                                                                    
ration could be  seen with the summer troughs  and the hills                                                                    
through the winter.                                                                                                             
                                                                                                                                
7:11:12 PM                                                                                                                    
                                                                                                                                
Mr. Green looked at slide  4, "Supply Contracts 2016-23." He                                                                    
stated that  when ENSTAR planned  its natural  gas portfolio                                                                    
they  looked at  many years  in advance.  Operating in  such                                                                    
small,  closed  supply  networks  such  as  the  Cook  Inlet                                                                    
required very  long lead times.  The company needed  to know                                                                    
that there was firm gas  supply for their customers at least                                                                    
2 years  in advance. Anything  less put the market  place at                                                                    
risk of supply  shortages. In ENSTAR's business  they had to                                                                    
have gas available  for their customers on  the coldest days                                                                    
no matter the circumstance. He  expanded that when it was 20                                                                    
degrees  Fahrenheit below  zero  on a  dark January  evening                                                                    
every single one of 141,075  customers had to have their gas                                                                    
needs  met. Their  number of  customers represented  over 50                                                                    
percent of the population of Alaska.                                                                                            
                                                                                                                                
Mr.  Green posed  the  question of  what it  meant  to be  a                                                                    
natural gas supplier  to ENSTAR. There was no  doubt that it                                                                    
was challenging to  supply natural gas in the  Cook Inlet in                                                                    
current times.  ENSTAR was the largest  purchaser of natural                                                                    
gas and they  had very demanding needs.  Between the storage                                                                    
facility, Cook  Inlet Natural  Gas Storage  Alaska (CINGSA),                                                                    
and their producer contracts the  company needed to have the                                                                    
287 MMcf  of gas available  in case it was  needed. However,                                                                    
they  did not  need it  every  day. It  meant producers  and                                                                    
CINGSA  needed  to  have  significant  capacity  beyond  the                                                                    
average  production  rates.  It also  meant  that  producers                                                                    
needed  to  have  the  operational  capability  to  ramp  up                                                                    
production and also the ability  to throttle it back. Alaska                                                                    
was  a very  different world  than  the Lower  48. With  the                                                                    
integrated  transmission and  storage network,  producers in                                                                    
the Lower  48 could simply  drill a  well, open up  the taps                                                                    
100 percent, and  the large market simply  absorbed it. From                                                                    
a utility  perspective it was  a nice, easy  road. Utilities                                                                    
had a  line-up of  marketers that were  trying to  sell them                                                                    
gas. In  a case where a  contract was not fulfilled  for any                                                                    
reason the  utility went  back to  their trading  screen and                                                                    
sourced the gas  from one of the 1000  other suppliers lined                                                                    
up to  sell it to them.  ENSTAR did not have  that luxury in                                                                    
Alaska.                                                                                                                         
                                                                                                                                
Mr. Green explained that the  market was very small and ill-                                                                    
liquid, with  only a handful  of buyers and an  even smaller                                                                    
number of suppliers.  Layer on to that the  fact that Conoco                                                                    
was  selling its  assets which  would take  another supplier                                                                    
out of  the market. It  would also shrink the  buying market                                                                    
with  Municipal  Light  and  Power  becoming  largely  self-                                                                    
supplied.  It left  ENSTAR in  an extremely  delicate market                                                                    
place.  He was  not saying  that  the sky  was falling.  The                                                                    
company was in a much better place than in 2010.                                                                                
                                                                                                                                
Mr.  Green continued  that ENSTAR  had  transitioned from  a                                                                    
time  where  they  were  looking  at  shortages,  the  total                                                                    
supply,  and  from  a  deliverability  perspective.  He  was                                                                    
pleased  to inform  the committee  that in  the current  day                                                                    
ENSTAR received the Regulatory  Commission of Alaska's (RCA)                                                                    
approval for  their gas supply agreement  with Hilcorp which                                                                    
extended through 2023. The contract  was a key foundation in                                                                    
the  company's supplier  portfolio,  as it  provided both  a                                                                    
significant  quantity  of gas  and  a  significant level  of                                                                    
winter  deliverability. The  Hilcorp  contract would  supply                                                                    
approximately  70 percent  of ENSTAR's  customer needs  from                                                                    
2018 through  2023. It  had both  firm and  optional volumes                                                                    
and would supply  approximately 22 Bcf per year  of firm gas                                                                    
supply.  It  also  offered  optional  volumes  to  help  the                                                                    
company  manage its'  weather-related variability.  It meant                                                                    
that ENSTAR  could ramp-up deliveries  up or  down depending                                                                    
on  customer  needs  -  a  key feature  in  light  of  their                                                                    
variable annual demand.                                                                                                         
                                                                                                                                
Mr. Green  informed committee members  that one of  the most                                                                    
important features  of the contract  had to do with  what it                                                                    
did  not do.  It did  not meet  all of  ENSTAR's gas  supply                                                                    
requirements.  The  company had  left  30  percent of  their                                                                    
supply portfolio open  for other producers to fill  in. As a                                                                    
public  utility the  company valued  safety and  reliability                                                                    
above  all and  understood the  need to  have a  diversified                                                                    
supply portfolio. It not only  diversified supplier risk but                                                                    
also helped  foster investment and  drilling which  was good                                                                    
for the long-term stability of the Cook Inlet supply.                                                                           
                                                                                                                                
Mr. Green  reiterated that the contract  took ENSTAR through                                                                    
2023,  just  beyond  the  short-term  window.  He  mentioned                                                                    
ENSTAR's  3-year   gas  supply  contract  with   Furie.  The                                                                    
contract  supplied  about 20  percent,  the  signing of  the                                                                    
contract was  key for Furie  to continue the  development of                                                                    
its  new  Kitchen Lights  Unit.  ENSTAR  wanted to  see  the                                                                    
success  of the  field and  wanted  to see  it brought  into                                                                    
production.                                                                                                                     
                                                                                                                                
Mr. Green  thought he  had fairly  good visibility  into the                                                                    
company's  supply  into 2021.  He  suggested  that with  the                                                                    
continuation of activity by Hilcorp  and by Furie along with                                                                    
the hope of  growth of the others in the  Cook Inlet, he was                                                                    
optimistic  that the  company could  see its  supply horizon                                                                    
out to 2025. However, it  hinged on the continued activities                                                                    
of current  and new producers. He  opined that encouragement                                                                    
and fostering of the environment  would be necessary to keep                                                                    
producers engaged.  He strongly believed that  the utilities                                                                    
in  the  inlet  had  a responsibility  for  encouraging  and                                                                    
fostering the environment. He  noted ENSTAR's contribution -                                                                    
the company had provided  support for Furie's development of                                                                    
the Kitchen  Lights Unit and  left 10 percent of  its supply                                                                    
portfolio for other producers.  The Regulatory Commission of                                                                    
Alaska had  also shown  its commitment  to the  viability of                                                                    
the long-term  Cook Inlet  gas supply  with its  approval of                                                                    
the  Hilcorp  contract  and  its  narrative  in  the  letter                                                                    
supporting  ENSTAR's  gas supply  diversification  approach.                                                                    
The commission  recognized that ENSTAR's approach  set aside                                                                    
and  carved  out  a  portion  of  its  supply  portfolio  to                                                                    
encourage  the development  of small  independent producers.                                                                    
Since  2010 the  state had  provided a  huge support  to the                                                                    
viability of the gas supply market in the Cook Inlet.                                                                           
                                                                                                                                
Mr. Green acknowledged ENSTAR being cognizant of the short-                                                                     
term budget  challenges facing the state.  The company would                                                                    
love to see the state  continue to help the encouragement of                                                                    
the  market  place in  whatever  form  that  kept it  as  an                                                                    
attractive investment.                                                                                                          
                                                                                                                                
Mr. Green concluded that ENSTAR was  in a -good place in the                                                                    
Cook Inlet at  present. However, the company  was sitting in                                                                    
a position where  there was one well going  into the Kitchen                                                                    
Lakes  Unit. He  emphasized  that there  were no  production                                                                    
wells in Cosmo. There were 4  large fields in the inlet that                                                                    
were old and aging every year.  With cold weather or even if                                                                    
one  of  the existing  platforms  or  fields had  an  issue,                                                                    
ENSTAR  did   not  have  a  large   contingency  of  back-up                                                                    
alternatives. He  furthered that there were  no interties to                                                                    
the Lower 48  or Canada and they were  100 percent dependent                                                                    
in the small  ill-liquid market to keep half  of the state's                                                                    
population warm. He thanked members for their time.                                                                             
                                                                                                                                
7:18:12 PM                                                                                                                    
                                                                                                                                
Vice-Chair Micciche  queried the  struggles prior to  FY 16,                                                                    
and the  increase in  supplies in Cook  Inlet. He  wanted to                                                                    
better understand  the credits' in improving  the outlook as                                                                    
well as the  tax structure in Cook Inlet.  Mr. Green replied                                                                    
that much of the work that had  been going on was with a gas                                                                    
supply group. It  was very much a joint project  with all of                                                                    
the utilities together  from the Cook Inlet  looking for the                                                                    
solutions to a marketplace that  was just looking for short-                                                                    
-term  contracts.  Some of  the  gas  the company  had  been                                                                    
procuring was upwards  of $23 per Mcf. The  producers in the                                                                    
marketplace  were   not  willing  to  commit   to  long-term                                                                    
contracts. ENSTAR was dancing  along on a month-by-basis not                                                                    
knowing whether  the future would come  together. There were                                                                    
a few  things that came into  alignment with a lot  of work.                                                                    
There was the significant  commitment and investment made by                                                                    
ENSTAR's  shareholders, Northern  Natural,  Siri, and  First                                                                    
Alaskan.  They  came together  for  the  development of  the                                                                    
CINGSA  storage   facility,  a   key  aspect   in  enhancing                                                                    
deliverability in  the inlet. The  first winter  that CINGSA                                                                    
came online in  2012 was very cold. If the  facility had not                                                                    
been  in operation  both ENSTAR  and Chugach  Electric would                                                                    
have had  delivery shortfalls. Hilcorp coming  to the market                                                                    
place  was also  a very  large component  as well  and their                                                                    
commitment to getting their  facilities working quickly. The                                                                    
consent  decree contracts  that  were put  in place  secured                                                                    
ENSTAR's gas  supply out  to the first  quarter of  2018. It                                                                    
fashioned with  some of the  power utilities also. It  was a                                                                    
very real activity  for the gas supply group to  look at LNG                                                                    
imports  because  ENSTAR  was   committed  making  sure  its                                                                    
customers had  gas running through their  meters. ENSTAR had                                                                    
previously  been  in  very  dire  straits  looking  for  any                                                                    
mechanism  to get  the methane  molecules going  through the                                                                    
meters.  The tax  credits were  integral in  shoring up  the                                                                    
local  market  place  with Hilcorp.  Since  then,  Buccaneer                                                                    
(currently in  bankruptcy) drilled  a well. Even  though the                                                                    
company was  going bankrupt the molecules  coming from their                                                                    
well had  been uninterrupted  to ENSTAR for  their contract.                                                                    
Although  there  were  financial challenges,  the  gas  came                                                                    
through.                                                                                                                        
                                                                                                                                
Vice-Chair  Micciche interrupted  Mr. Green's  testimony and                                                                    
requested  that he  provide an  illustration of  the history                                                                    
due to  time constraints. Mr.  Green agreed to  provide that                                                                    
information in the form of a timeline summary.                                                                                  
                                                                                                                                
Co-Chair MacKinnon concluded the invited public testimony.                                                                      
                                                                                                                                
SB  130  was  HEARD  and   HELD  in  committee  for  further                                                                    
consideration.                                                                                                                  
                                                                                                                                
She reviewed the agenda for the following day.                                                                                  
                                                                                                                                

Document Name Date/Time Subjects
SB 130 Enstar Alaska State Senate Finance Committee 04 13 16.pdf SFIN 4/13/2016 5:00:00 PM
SB 130
SB 130 Senate Finance Committee _Furie Alaska_April 13 2016.pdf SFIN 4/13/2016 5:00:00 PM
SB 130
HB254 - DCCED Fee Types.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - DCCED Report.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - LB&A Audit.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - McDowell Report Economic Impacts of Guided Hunting.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Oppose - RHAK.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Oppose - Rolan Ruoss.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Sponsor Statement.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Support - AK Trophy Adventures.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Support - APHA.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Support - Henry D Tiffany.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Support - James P Jacobson.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Support - Joe Klutsch.PDF SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Support - Paul A Chervenak.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Support - Sam Rohrer.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Support - SCI Alaska.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB254 - Support - Steve H Perrins II.pdf SFIN 4/13/2016 5:00:00 PM
HB 254
HB 314 ver N to P Summary of Changes 4-12-16.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Sectional Analysis.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Sponsor Statement.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Huna Totem 11-2-2015.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter AK Fisheries Dev Foundation 1-19-2016.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter Alakanuk Traditional Council 11-12-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter Aniak Tradional Council 11-12-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter AVCP 11-12-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter City of Coffman Cove 11-3-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter City of Craig 10-27-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter City of Hydaburg 10-26-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter Hooper Bay 11-12-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter Kalskag 11-13-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter Organized Village of Kake 10-26-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter Organized Village of Kasaan 10-21-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter SE Delegation 10-29-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter Sealaska 10-27-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter Thorne Bay 10-26-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter Village of Eek 11-16-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letter-Rick Roeske-KPEDD 03-14-16.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Letters of Support Compiled.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Report FY15 ARDOR Annual Report.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
HB314 Supporting Documents-Yukon-Letter Kuskokwim Economic Development Council 11-12-15.pdf SFIN 4/13/2016 5:00:00 PM
HB 314
SB 130 April 13 2016 Senate Finance COP.pdf SFIN 4/13/2016 5:00:00 PM
SB 130
SB 130 BlueCrest 4-13-2016 testimony to Senate Finance Committee.pdf SFIN 4/13/2016 5:00:00 PM
SB 130
SB 130 BlueCrest 4-13-2016 testimony to Senate Finance Committee.pdf SFIN 4/13/2016 5:00:00 PM
SB 130
SB 206 - APCA Testimony Letter.pdf SFIN 4/13/2016 5:00:00 PM
SB 206
SB 206 ASHNHA Letter.pdf SFIN 4/13/2016 5:00:00 PM
SB 206
SB 206 Public Testimony AAHU Meyhoff.pdf SFIN 4/13/2016 5:00:00 PM
SB 206
SB 206 Public Testimony Reinwand.pdf SFIN 4/13/2016 5:00:00 PM
SB 206
SB 206 Support Testimony Moda Health.docx SFIN 4/13/2016 5:00:00 PM
SB 206
SB 130 04 13 16 AOGA Testimony SFIN SB 130 FINAL.pdf SFIN 4/13/2016 5:00:00 PM
SB 130