It's all been very well documented.
Alfredsson's account of the situation is that he signed a deal with a "fake" year on the end where his salary was 1M per season. This fake year was added to lower his overall cap hit to help Ottawa win. This was back when Ottawa spent money, and before the 2012 CBA changes.
When Alfredsson realized he was feeling good enough to play that year, he approached management about negotiating an extension that would make him whole if he were to play through the upcoming season at his deflated salary. Alfredssson claims both sides agreed to do something, but nothing every got done. This was prior to the 12-13 season that he was asking about this extension.
Ultimately when the 2013 season concluded, he asked for one year at 7M per season or two years at 6M per season. The Sens offered 4.5M and were unwilling to compensate Alfredsson for playing at 1M per despite supposedly previously agreeing to do so.
At the time this happened, the Senators were a budget team. So they had the cap space to do this. The issue was that Bryan Murray felt if he were to pay Alfredsson, he would not have the money available to make the Bobby Ryan trade and acquire a superstar he felt was needed to build on what the Sens had accomplished thus far with their re-tool. There was a "blank cheque" offered to Alfredsson once he had both feet out the door, but it's unclear if that blank cheque was Melnyk raising the budget to accommodate Alfredsson, or Murray abandoning plans to make further additions in order to accommodate Alfredsson without the budget rising. I have nothing to back up the following, but it wouldn't surprise me in the least bit if the blank cheque was a PR move. The NHL isn't all that big, Murray was a veteran GM with loads of connections, he had to know what was going down. I don't think they ever expected Alfredsson to call them back and say "oh man you are offering me the money now at the last minute, okay I'll sign"
Murray denied these allegations made by Alfredsson. Murray said that he had no reason to lie himself. It's entirely possible that things were lost in translation between both parties when it came to any commitments to make Alfredsson whole, I don't know, I wasn't there. But it's pretty easy to know the basic principal of NHL contracts and how cap circumvention works, and I can't really think of an alternative reason about why that 1M per season year would be tacked on the end of Alfredssson's contract. Murray's explanation was that Alfredsson wanted his money upfront, but it doesn't really pass the smell test to me. If the Senators wanted Alfredsson for three years, why would they sign him to a contract that would give him such great incentive to retire in year 3?