Legislature(2015 - 2016)HOUSE FINANCE 519

02/17/2015 01:30 PM House FINANCE



Audio Topic
01:32:26 PM Start
01:33:24 PM Presentation: Aklng Project - Lazard Interim Report
02:35:54 PM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+ AKLNG Project - Lazard Interim Report TELECONFERENCED
+ Bills Previously Heard/Scheduled TELECONFERENCED
                  HOUSE FINANCE COMMITTEE                                                                                       
                     February 17, 2015                                                                                          
                         1:32 p.m.                                                                                              
                                                                                                                                
                                                                                                                                
1:32:26 PM                                                                                                                    
                                                                                                                                
CALL TO ORDER                                                                                                                 
                                                                                                                                
Co-Chair  Thompson   called  the  House   Finance  Committee                                                                    
meeting to order at 1:32 p.m.                                                                                                   
                                                                                                                                
MEMBERS PRESENT                                                                                                               
                                                                                                                                
Representative Mark Neuman, Co-Chair                                                                                            
Representative Steve Thompson, Co-Chair                                                                                         
Representative Dan Saddler, Vice-Chair                                                                                          
Representative Bryce Edgmon                                                                                                     
Representative Les Gara                                                                                                         
Representative Lynn Gattis                                                                                                      
Representative David Guttenberg                                                                                                 
Representative Scott Kawasaki                                                                                                   
Representative Cathy Munoz                                                                                                      
Representative Lance Pruitt                                                                                                     
Representative Tammie Wilson                                                                                                    
                                                                                                                                
MEMBERS ABSENT                                                                                                                
                                                                                                                                
None                                                                                                                            
                                                                                                                                
ALSO PRESENT                                                                                                                  
                                                                                                                                
Randall  Hoffbeck,  Commissioner,   Department  of  Revenue;                                                                    
George  W. Bilicic,  Vice  Chairman  of Investment  Banking,                                                                    
Lazard Freres; Representative Chris Tuck.                                                                                       
                                                                                                                                
SUMMARY                                                                                                                       
                                                                                                                                
^PRESENTATION: AKLNG PROJECT - LAZARD INTERIM REPORT                                                                          
                                                                                                                                
1:33:24 PM                                                                                                                    
                                                                                                                                
Co-Chair Thompson  discussed the agenda for  the meeting. He                                                                    
communicated that  the Lazard  Freres and  Co. LLC  had been                                                                    
engaged  to provide  assistance in  reviewing and  analyzing                                                                    
various financial  options for  the state's interest  in the                                                                    
AKLNG Project  pursuant to SB 138  [gas pipeline legislation                                                                    
passed in 2014].                                                                                                                
                                                                                                                                
RANDALL  HOFFBECK,  COMMISSIONER,   DEPARTMENT  OF  REVENUE,                                                                    
communicated that SB 138 had  contracted Lazard to conduct a                                                                    
financial  analysis for  a pipeline.  He  detailed that  the                                                                    
company  would provide  an interim  report  that included  a                                                                    
high-level  overview  of  financing  options.  A  follow  up                                                                    
report would be presented later  in the fall [2015] specific                                                                    
to the AKLNG  Project. He noted that the  final report would                                                                    
dovetail with various  project decisions to be  made by that                                                                    
point in time.                                                                                                                  
                                                                                                                                
GEORGE  W. BILICIC,  VICE  CHAIRMAN  OF INVESTMENT  BANKING,                                                                    
LAZARD  FRERES, introduced  his  colleagues.  He provided  a                                                                    
PowerPoint  presentation   titled  "Lazard   Interim  Report                                                                    
Overview  - Discussion  Materials" dated  February 17,  2015                                                                    
(copy  on  file).  He  shared  the  team's  excitement  over                                                                    
working  on  the  project.  The goal  was  to  recommend  an                                                                    
optimal financing plan or plans  for the state pertaining to                                                                    
the  AKLNG Project.  He  pointed to  a  disclaimer from  the                                                                    
company's legal  department at the beginning  of the report.                                                                    
He  highlighted  that  the  presentation  would  provide  an                                                                    
introduction to  the company, an  overview of  Lazard's role                                                                    
on the  project, topics covered  in the interim  report, and                                                                    
steps that would be taken to  get to the final report (slide                                                                    
1).                                                                                                                             
                                                                                                                                
Mr.  Bilicic  provided   background  information  about  the                                                                    
company that  been founded in  the mid-1850s (slide  2). The                                                                    
firm   had  become   a  public   company   and  its   market                                                                    
capitalization was  currently listed  on the New  York Stock                                                                    
Exchange  at $6.5  billion. He  discussed the  firm's global                                                                    
presence and  noted the  importance of  understanding global                                                                    
dynamics  to give  sound advice  pertaining to  the project.                                                                    
The  firm  was  client  focused  and  senior  advisors  were                                                                    
motivated by  client relationships and serving  the interest                                                                    
of the  clients. He relayed  that the company  was conflict-                                                                    
free and  was only  in the  advice business.  He highlighted                                                                    
that  a  large  part  of  the firm's  business  was  in  the                                                                    
representation of  governments. He noted that  his biography                                                                    
was included in the back of the presentation.                                                                                   
                                                                                                                                
Co-Chair  Thompson   noted  that  Representative   Gara  and                                                                    
Representative Munoz had joined the committee meeting.                                                                          
                                                                                                                                
1:39:14 PM                                                                                                                    
                                                                                                                                
Mr. Bilicic  moved to  slide 3  and discussed  the company's                                                                    
global presence;  it employed 900 investment  bankers in all                                                                    
major   global  business   cities.  He   discussed  Lazard's                                                                    
assignment pertaining to the legislature  (slide 5). He read                                                                    
from a statement:                                                                                                               
                                                                                                                                
     Our  mandate  was  issued  by Senate  Bill  138  and  a                                                                    
     Department  of Revenue  request  for proposals.  Senate                                                                    
     Bill  138 calls  for the  "development of  a plan"  for                                                                    
     Alaska   municipalities,  regional   corporations,  and                                                                    
     residents to  participate in the  ownership of  a North                                                                    
     Slope   natural   gas   pipeline.  Pursuant   to   this                                                                    
     legislation   the  Department   of  Revenue   solicited                                                                    
     proposals   from  qualified   firms  to   serve  as   a                                                                    
     "financial consultant  on the state's  participation in                                                                    
     the continued  development of  a liquefied  natural gas                                                                    
     project  from   Alaska's  North  Slope."   The  interim                                                                    
     report,  which   was  requested  by   the  legislature,                                                                    
     provided  a detailed  description  of  the project,  an                                                                    
     overview of  the state's finances, and  an introduction                                                                    
     in  an  outcome  agnostic   way  to  various  financing                                                                    
     considerations for the project  in advance of the final                                                                    
     report.                                                                                                                    
                                                                                                                                
Mr.  Bilicic  noted that  the  interim  report outlined  all                                                                    
options available to the state  to pursue the project from a                                                                    
financing point of view.                                                                                                        
                                                                                                                                
Vice-Chair Saddler asked if there  were two missions for the                                                                    
interim  report:   first,  to  describe  methods   by  which                                                                    
municipalities and residents of  the state could participate                                                                    
in ownership  of the AKLNG  Project; and second,  to address                                                                    
the state's financing options.                                                                                                  
                                                                                                                                
Mr. Bilicic  replied in the  affirmative. He noted  that the                                                                    
missions  wound  up merging  because  one  could also  be  a                                                                    
source of  financing. He  stated that  the first  clause was                                                                    
really a source  of potential financing for  the project. He                                                                    
continued  on slide  6 that  provided a  high level  process                                                                    
timeline.  Lazard  had  been  working  on  the  project  for                                                                    
slightly  over  four months;  the  interim  report had  been                                                                    
delivered   on   schedule.   The   company   was   currently                                                                    
undertaking work  on the final  report and would  deliver it                                                                    
by October  1, 2015. He  communicated that the  advice would                                                                    
be delivered  when many  of the variables  would not  yet be                                                                    
determined; therefore,  it was necessary to  create a report                                                                    
that identified the variables that  would allow people using                                                                    
the report  in the future  to view  the report in  a modular                                                                    
way so  variables could  be inserted  into the  analysis and                                                                    
changes could be made.                                                                                                          
                                                                                                                                
1:44:25 PM                                                                                                                    
                                                                                                                                
Mr.   Bilicic  relayed   that   the   interim  report   took                                                                    
approximately 13  hours to  read. He turned  to slide  7 and                                                                    
discussed his  intent to provide  a brief background  of the                                                                    
project  including   the  state's   objectives,  preliminary                                                                    
financing  considerations  for  the  state,  and  evaluative                                                                    
criteria.  He stated  that a  significant part  of the  work                                                                    
would  be done  around financing  alternatives and  then the                                                                    
company would filter its  advice through evaluative criteria                                                                    
that were  important to  the state.  He detailed  that there                                                                    
were a  number of  objectives the state  would hope  to meet                                                                    
through participation  in the  project; the  objectives were                                                                    
economically,    non-economically,     qualitatively,    and                                                                    
quantitatively motivated. He read  state objectives on slide                                                                    
7:                                                                                                                              
                                                                                                                                
        · Develop Natural Resources for Maximum Benefit to                                                                      
          the State                                                                                                             
        · Realize Investment Returns                                                                                            
        · Support State Budget                                                                                                  
        · Replenish Reserve Accounts                                                                                            
        · Stimulate In-State Job Growth                                                                                         
        · Provide Investment Opportunity for In-State                                                                           
          Individuals and Entities                                                                                              
        · Provide Natural Gas to Alaskans                                                                                       
        · Support Local Municipalities                                                                                          
                                                                                                                                
Mr. Bilicic expounded  that Lazard's ultimate recommendation                                                                    
to the state  would be informed by the  objectives set forth                                                                    
on  slide  7.  He   addressed  the  AKLNG  Project  economic                                                                    
overview  on  slide  8.  He  detailed  that  the  state  was                                                                    
currently contemplating project ownership  up to 25 percent.                                                                    
The project was anticipated to  cost between $45 billion and                                                                    
$65 billion in  2012 dollars (as time  passed dollar amounts                                                                    
would  evolve based  on  overall  economic conditions);  the                                                                    
state's share would be approximately  $11.3 billion to $16.3                                                                    
billion (the total cost divided  by 4). He communicated that                                                                    
the vast  majority of the  cost was expected to  be incurred                                                                    
during the engineering,  procurement, and construction phase                                                                    
that  was  estimated  to  start in  2019.  He  relayed  that                                                                    
project  costs may  change over  time  as a  result of  many                                                                    
factors   including   project  developments,   negotiations,                                                                    
market dynamics, and  the passage of time.  He remarked that                                                                    
the risk factor was important because costs could evolve.                                                                       
                                                                                                                                
Co-Chair  Thompson asked  if  TransCanada's involvement  was                                                                    
taken into consideration in the economic overview.                                                                              
                                                                                                                                
Mr. Bilicic  replied that the  larger report looked  at what                                                                    
the state's  economic participation would be  if TransCanada                                                                    
were  participating. He  continued  to discuss  slide 8.  He                                                                    
noted  that financial  numbers used  in  the interim  report                                                                    
were based on  a Black and Veatch model.  He addressed slide                                                                    
9 that  included an AKLNG  Project economic  overview chart;                                                                    
the chart  illustrated cumulative projected cash  flows over                                                                    
time. As an investor in the  project the state would need to                                                                    
invest  money in  the  beginning to  develop  and build  the                                                                    
project; as  the project became  operational it  would begin                                                                    
producing  cash flows  that would  start  to offset  capital                                                                    
spent. The  chart showed the  crossover point at  2026 (when                                                                    
cash flows  to the  state would begin).  He stated  that the                                                                    
actual  crossover point  would  depend on  actual costs  and                                                                    
revenues. He noted that the  crossover point did not account                                                                    
for the  passage of time  or time  value of money.  He added                                                                    
that   the  chart   was  not   atypical  from   other  large                                                                    
infrastructure projects.                                                                                                        
                                                                                                                                
Mr.  Bilicic turned  to  slide 10  titled  "State of  Alaska                                                                    
Financial Overview." The slide  depicted the state's current                                                                    
financial situation. The chart  illustrated the state's need                                                                    
of a  new revenue  source because of  the way  its financial                                                                    
position  evolved   over  time;  the  AKLNG   Project  could                                                                    
potentially fill  the need.  He pointed  out that  the chart                                                                    
depicted  a  material  weakening of  the  state's  financial                                                                    
position  in the  coming years,  which was  the period  over                                                                    
which the  project would  need to  be financed.  He remarked                                                                    
that the projections  were based on an assumed  price of oil                                                                    
that was materially higher than  the current spot price. The                                                                    
firm's analysis  would look at the  overall long-term budget                                                                    
position of the  state as part of  considering the financing                                                                    
alternatives   and  assessing   the   project  through   the                                                                    
different evaluative criteria.                                                                                                  
                                                                                                                                
1:49:57 PM                                                                                                                    
                                                                                                                                
Mr.  Bilicic addressed  slide  11  titled "Selected  Project                                                                    
Risks  and  Potential  Mitigants."   He  remarked  that  the                                                                    
project had numerous risks,  opportunities, and mitigants to                                                                    
risks. For  example, there was  risk that the  project would                                                                    
never  make it  out of  the development  phase or  that cost                                                                    
overruns  during   construction  would  force   sponsors  to                                                                    
abandon the project. He relayed  that under the scenarios it                                                                    
was possible the  state could lose all of  its investment it                                                                    
had  made up  to that  point. He  advised that  the specific                                                                    
risk would be difficult to  ever eliminate from the project.                                                                    
Mitigants related  to the quality  of the  state's partners,                                                                    
planning, and the analysis. Other  potential risks were that                                                                    
relevant commodity prices  could change in a  way that could                                                                    
negatively  impact project  viability or  that an  influx of                                                                    
numerous competing  projects could  result in a  global over                                                                    
supply.  He relayed  that Lazard  was  watching projects  in                                                                    
Australia,  Russia, and  other;  some of  the projects  were                                                                    
being canceled and others were  being announced. He stressed                                                                    
the  importance of  the global  perspective on  the project.                                                                    
The slide listed potential mitigants as:                                                                                        
                                                                                                                                
        · ongoing/iterative     assessment    of     project                                                                    
          feasibility                                                                                                           
        · risk transfer provisions/third-party contracts                                                                        
        · partner/sponsor marketing                                                                                             
        · political support and strategy                                                                                        
        · take-or-pay contracts/hedging strategy                                                                                
        · in-depth market analysis                                                                                              
        · delivery flexibility                                                                                                  
        · other                                                                                                                 
                                                                                                                                
Mr.  Bilicic relayed  that the  firm would  take all  of the                                                                    
potential  risks into  account and  would provide  advice in                                                                    
the final report.                                                                                                               
                                                                                                                                
Vice-Chair    Saddler    believed   take-or-pay    contracts                                                                    
represented  potential  liabilities.  He  wondered  how  the                                                                    
state would hedge against the  commitment to make a take-or-                                                                    
pay contract from transportation commitment.                                                                                    
                                                                                                                                
Mr. Bilicic  replied that take-or-pay contracts  referred to                                                                    
entering  into long-term  contracts  with  people who  would                                                                    
want  the   LNG.  The  contract  would   provide  cash  flow                                                                    
stability,   which   could   be    used   to   enhance   the                                                                    
financeability of the project.                                                                                                  
                                                                                                                                
Representative Gara  discussed that when the  state had been                                                                    
making a  large amount  of oil  revenue the  legislature had                                                                    
passed a law specifying  that companies that became involved                                                                    
in a gasline could deduct  certain upstream costs from their                                                                    
oil  taxes. He  observed  that  financial circumstances  had                                                                    
changed and  the state was currently  bringing in negligible                                                                    
revenue. He wondered  if the firm had advice on  how to move                                                                    
forward  with a  law that  would allow  the "big  three" oil                                                                    
companies  to  deduct  the   significant  portion  of  their                                                                    
gasline expenses from their oil tax payments.                                                                                   
                                                                                                                                
1:53:44 PM                                                                                                                    
                                                                                                                                
Mr. Bilicic replied that the  company had not considered the                                                                    
scenario. He  elaborated that the  firm would focus  on that                                                                    
the state's consideration  of risk had to  be different than                                                                    
that  of  the other  partners  that  operated as  for-profit                                                                    
entities. Lazard would look at  ways to mitigate risk and to                                                                    
structure  the  investment  in a  way  that  would  minimize                                                                    
Alaska's exposure. He  relayed that the company  was open to                                                                    
ideas.                                                                                                                          
                                                                                                                                
Mr.  Bilicic  moved  on  to  discuss  preliminary  financing                                                                    
considerations on  slide 12. The slide  provided an overview                                                                    
of the  framework Lazard  believed the  state should  use to                                                                    
think about  its investment  in the  project (i.e.  how much                                                                    
money  the state  would  need, where  the  money would  come                                                                    
from,  and  how  to  structure its  investment).  The  slide                                                                    
illustrated three  key points including:  1) the  state must                                                                    
identify  sources of  funds  (internal  and/or external)  to                                                                    
provide the  capital required to  invest in the  project; 2)                                                                    
the  state  can  structure  its  economic  interest  in  the                                                                    
project via a  mix of debt and  equity financing structures;                                                                    
and 3)  construction of the  project is expected  to require                                                                    
$13.7 billion of capital in  the scenario in which the state                                                                    
invests in  the project on its  own. He noted that  the list                                                                    
was  not  meant to  be  all  encompassing. He  relayed  that                                                                    
Lazard would  provide advice on  the mix of debt  and equity                                                                    
that would  make sense;  debt was  cheaper than  equity, but                                                                    
too  much debt  would not  make sense.  He added  that there                                                                    
would be a  period of time when the project  would not well-                                                                    
support  significant   debt.  He  listed  the   three  large                                                                    
components  of  the  project  including  the  gas  treatment                                                                    
plant,  the pipeline,  and  the LNG  plant  [all related  to                                                                    
point 3 above].                                                                                                                 
                                                                                                                                
Representative  Edgmon  pointed  to  the  Sources  of  Funds                                                                    
category on  slide 12. He  asked about the inclusion  of the                                                                    
Power Cost Equalization Endowment Fund.                                                                                         
                                                                                                                                
Mr. Bilicic  responded that the  firm did not  have anything                                                                    
in mind  related to  the item;  the point  was to  note that                                                                    
there were funds  at the state level  that could potentially                                                                    
support  the  project.  He continued  to  address  potential                                                                    
funding sources  on slide  13. As part  of the  final report                                                                    
Lazard would offer its point  of view on the various funding                                                                    
sources   because   each   source   had   different   return                                                                    
requirements  and had  a different  investment appetite  for                                                                    
the  project  at  different  stages.  The  firm  would  also                                                                    
comment   on   availability   of   capital,   marketability,                                                                    
financeability,  and precedence  for  making investments  in                                                                    
items  like the  project.  He  noted that  the  back of  the                                                                    
interim report  included case  studies of  similar projects.                                                                    
The firm would  also look at how use of  the funding sources                                                                    
would impact  the state's  borrowing capacity  and/or future                                                                    
borrowing costs.                                                                                                                
                                                                                                                                
1:59:09 PM                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler  pointed   to  examples  of  third-party                                                                    
investors on  the lower  left hand portion  of slide  13. He                                                                    
wondered  if  the  firm  envisioned  looking  for  potential                                                                    
overseas equity investors (e.g. from Asia).                                                                                     
                                                                                                                                
Mr. Bilicic replied that there  were at least four potential                                                                    
"buckets" of investors that were  non-U.S. The first was the                                                                    
emerging  class  of  infrastructure investors.  He  detailed                                                                    
that  portions of  the  project  looked like  infrastructure                                                                    
(i.e. roads, bridges, utilities,  tunnels, and other), which                                                                    
was  currently a  "hot" area  for  investment. He  expounded                                                                    
that the  party raising capital could  receive an attractive                                                                    
return profile  in exchange  for offering  investments; some                                                                    
of the investors were in  the form of sovereign wealth funds                                                                    
or pension funds in other  countries (e.g. Canada, Asia, and                                                                    
other).  The second  category included  people who  want the                                                                    
gas  and  may   find  it  interesting  to   take  an  equity                                                                    
investment in  the project directly or  indirectly including                                                                    
as  part  of entering  into  long-term  projects. The  third                                                                    
category  included   bank  lenders   that  happened   to  be                                                                    
organized  overseas.  The  fourth  category  included  other                                                                    
investors who were active in  the LNG area. He detailed that                                                                    
there were  a significant number  of trading firms  that may                                                                    
be interested in entering into  arrangements to take the LNG                                                                    
to resell to  utilities or others in different  parts of the                                                                    
world.                                                                                                                          
                                                                                                                                
Vice-Chair Saddler  had heard that  it was possible  for the                                                                    
state  to  offload its  risk  in  exchange for  equity.  Mr.                                                                    
Bilicic replied that the company had the idea in mind.                                                                          
                                                                                                                                
Mr.   Bilicic  advanced   to  slide   14  that   included  a                                                                    
description  of   structuring  alternatives  for   debt  and                                                                    
equity.  The  slide  indicated   that  the  least  expensive                                                                    
financing came from recourse debt;  the party that purchased                                                                    
the  debt  would have  recourse  against  the state.  Taking                                                                    
traditional   common  equity   at   the   lowest  level   of                                                                    
subordination in  the capital structure  would tend  to have                                                                    
the highest cost.  He noted that the factors  that went into                                                                    
choosing  a  financing structure  were  not  limited to  the                                                                    
lowest  or   highest  cost.   Other  factors   included  the                                                                    
efficiency of capital raising,  market capacity, and whether                                                                    
the state  wanted to be an  obligor. The firm would  look at                                                                    
all of the alternatives in its analysis.                                                                                        
                                                                                                                                
Mr.  Bilicic   turned  to  slide  15   titled  "Illustrative                                                                    
Financing Cost - Project Lifecycle."  He discussed that as a                                                                    
project began and  the work continued the  cost of financing                                                                    
was the  highest due  to the most  risk and  uncertainty. He                                                                    
detailed that  as the project  became more certain  the cost                                                                    
of financing would decrease; when  the project was completed                                                                    
a  large portion  would be  viewed  as a  set of  reasonably                                                                    
risk-free cash  flows. He added  that the  related financing                                                                    
would   be  extremely   efficient.   The   firm  had   spent                                                                    
significant  time on  the consideration  because the  global                                                                    
capital markets demonstrated that  there was not significant                                                                    
capital   available  that   was  efficient   for  greenfield                                                                    
development. However,  there was  an overwhelming  amount of                                                                    
capital  for operating  brownfield infrastructure  projects.                                                                    
He elaborated that  there was a value  arbitrage between the                                                                    
greenfield and brownfield pools of  capital that was able to                                                                    
be  captured   by  the  successful  party   constructing  an                                                                    
infrastructure  project.  He  reiterated that  the  cost  of                                                                    
financing was the highest at the beginning of a project.                                                                        
                                                                                                                                
2:04:38 PM                                                                                                                    
                                                                                                                                
Mr.  Bilicic   turned  to  slide  16   that  included  other                                                                    
considerations  reflected  in   the  interim  report.  Other                                                                    
considerations included  ways to get credit  support for the                                                                    
project from  third-parties; looking  at whether  there were                                                                    
insurance   products   that   would   allow   certain   risk                                                                    
mitigation; and ways for investments  by the state or others                                                                    
to  be  syndicated to  other  investors  over time  (perhaps                                                                    
capturing  some  of  the  value   dynamics  covered  on  the                                                                    
previous slide).                                                                                                                
                                                                                                                                
Representative  Gara wondered  if Lazard  would look  at the                                                                    
state's  law that  allowed the  big three  oil companies  to                                                                    
deduct a certain  portion of their gasline  costs from their                                                                    
oil  taxes. He  wondered  about the  net  present value  the                                                                    
state would receive  under the current terms  of the project                                                                    
given upfront costs paid by the state.                                                                                          
                                                                                                                                
Mr. Bilicic  replied that Lazard  would inform the  state of                                                                    
the  value proposition  when it  provided the  final report;                                                                    
explicit  and implicit  in that  would  be a  point of  view                                                                    
based  on the  assumptions about  project viability  well in                                                                    
advance of  when project construction  took place.  The firm                                                                    
would also  look further  at Representative  Gara's question                                                                    
related to tax.                                                                                                                 
                                                                                                                                
Co-Chair Thompson asked for the  information to be channeled                                                                    
through his office for dissemination.                                                                                           
                                                                                                                                
Mr.  Bilicic  turned  to slide  17  related  to  preliminary                                                                    
selected evaluative  criteria. The  criteria was  the method                                                                    
the firm would use to  analyze and filter through the myriad                                                                    
financing  alternatives.  Lazard's  goal in  identifying  an                                                                    
optimal financing  plan for the  state would be  to optimize                                                                    
how  the financing  plan or  plans compared  to other  plans                                                                    
when taking into account the  evaluative criteria. The first                                                                    
criteria    was    the     potential    impact    on    debt                                                                    
capacity/opportunity cost  for the state. He  explained that                                                                    
the criteria  examined how to  account for  lost opportunity                                                                    
if the state invested money in  one project and was not able                                                                    
to  invest  it  elsewhere.  The firm  would  factor  in  the                                                                    
potential impact  of its recommendations on  Alaska's credit                                                                    
rating;  it  would  also  look  at  the  potential  cost  of                                                                    
borrowing  or  issuing  equity. Additionally,  Lazard  would                                                                    
consider  whether an  option under  discussion was  feasible                                                                    
and  practical.  Lastly, the  firm  would  look at  how  the                                                                    
relevant  financing  plan did  or  did  not align  interests                                                                    
among  key  parties;  the  state's view  of  risk  could  be                                                                    
different than  one of  its partners,  which may  affect the                                                                    
financing structure.                                                                                                            
                                                                                                                                
2:08:54 PM                                                                                                                    
                                                                                                                                
Mr.  Bilicic  moved to  slide  18  titled "Recommended  Next                                                                    
Steps." He relayed  that the firm would focus  on the global                                                                    
LNG market  dynamics and project developments  in the coming                                                                    
months in relation to advice  the firm would give to Alaska.                                                                    
Other  recommendations  would  include further  analysis  of                                                                    
potential sources of  funds, capital structure alternatives,                                                                    
further  refinement  of   preliminary  evaluative  criteria,                                                                    
formation of  potential financing alternatives,  analysis of                                                                    
the plans,  and a  drafting of the  final report.  The final                                                                    
report would  include advice on  the optimal  financing plan                                                                    
or plans including how the  plans may be affected by changed                                                                    
circumstances. He  turned to  slide 19  titled "Illustrative                                                                    
Process   Review."  Lazard's   process   would  begin   with                                                                    
potential  fund sources,  different capital  structures, and                                                                    
the state financing need including  as affected by potential                                                                    
partner  arrangements.  The  firm  would  develop  financing                                                                    
plans  (there would  be more  than  three alternatives);  it                                                                    
would also  look at various financing  approaches that could                                                                    
be pursued  to be folded  into an overall plan.  Plans would                                                                    
be  analyzed based  on the  evaluative  criteria and  advice                                                                    
would be provided to the state.                                                                                                 
                                                                                                                                
Representative  Guttenberg  asked about  international  risk                                                                    
factors and  market volatility. He  observed that  the price                                                                    
swing  had  been  phenomenal.  He  wondered  how  volatility                                                                    
played  into the  firm's analysis.  He recalled  use of  the                                                                    
expression "we're  always one car  bomb away from  $100 oil"                                                                    
during a  past legislative  oil tax  debate. He  stated that                                                                    
the  price of  oil had  actually reached  $100. He  used the                                                                    
statements  in  context of  the  current  volatility of  the                                                                    
world.                                                                                                                          
                                                                                                                                
Mr. Bilicic answered that the  firm anticipated that a large                                                                    
portion of  the project  would be contracted  with long-term                                                                    
contracts. He  explained that the contracts  would provide a                                                                    
stability  of  cash flows  and  the  state's risk  would  be                                                                    
credit risk  of the counterparty.  He detailed that  most of                                                                    
the  potential long-term  contract  counterparties had  good                                                                    
credit  (i.e.  utilities,  trading   firms,  or  other).  He                                                                    
suspected that another  portion of the project  would not be                                                                    
contracted and would be subject  to the whims of the market;                                                                    
therefore, the  value at  any given  point would  be greatly                                                                    
impacted by LNG prices. He  communicated that the LNG market                                                                    
had historically  been an oil  indexed market.  However, one                                                                    
of  the  Gulf [of  Mexico]  projects  in  the Lower  48  had                                                                    
entered  into   contracts  with  a  price   index  that  was                                                                    
different than the traditional  index; Lazard believed there                                                                    
may be flexibility for the  state to structure its contracts                                                                    
differently.  He  stated  that   there  was  a  "whiteboard"                                                                    
dynamic that was an opportunity for the state.                                                                                  
                                                                                                                                
Mr. Bilicic  discussed a third consideration  related to the                                                                    
global  power  generation  market. He  elaborated  that  the                                                                    
power  generation market  was very  different globally.  The                                                                    
firm believed the  coal market would continue  to come under                                                                    
significant  pressure  in  every country;  new  coal  plants                                                                    
would continue  to be constructed  in places like  India and                                                                    
China,  but it  was almost  impossible to  build a  new coal                                                                    
plant in  the U.S.  and Europe.  Nuclear power  continued to                                                                    
grow, but not as rapidly  as the overall global power needs.                                                                    
Additionally, nuclear  power was expensive  and complicated;                                                                    
sometimes  the  risk  was  not  fully  taken  into  account.                                                                    
Renewable  energy was  improving  and wind  and solar  power                                                                    
were  cheaper, but  did not  work in  many places.  He added                                                                    
that a good  full-time energy storage solution  had not been                                                                    
developed. He  stated that for  a while the answer  was gas.                                                                    
He  elaborated  that  many  parts of  the  world  that  were                                                                    
growing and in  need of power did not have  access to gas or                                                                    
their  nuclear  programs  were under  stress,  which  was  a                                                                    
positive  for   the  Alaska  project.  However,   there  was                                                                    
associated technology risk because  someone would figure out                                                                    
a storage solution in the  future. Additionally, where other                                                                    
gas sources would be discovered  was not known. For example,                                                                    
it  had been  clear  in 2007  that the  U.S.  would need  to                                                                    
import LNG, which was no longer  the case. He added that the                                                                    
general front-page-of-the-newspaper  risk would  continue to                                                                    
be a  part of everything  done in  the [LNG] business  for a                                                                    
long time. All  of the items would be taken  into account in                                                                    
the firm's  analysis; the information would  flow through as                                                                    
a  technical matter  on  the returns  the  state and  others                                                                    
should demand  for investing in  the projects.  However, the                                                                    
project would never be a  safe, perfectly easy investment to                                                                    
contemplate.                                                                                                                    
                                                                                                                                
2:16:26 PM                                                                                                                    
                                                                                                                                
Vice-Chair Saddler  wondered how Lazard gauged  its success.                                                                    
He asked  if success was defined  by a good outcome  for the                                                                    
state or a  good process leading to a decision.  He asked if                                                                    
the firm's goal was a  well-crafted "yes" or a well-informed                                                                    
"yes or no."                                                                                                                    
                                                                                                                                
Mr. Bilicic responded that the  firm needed to create a work                                                                    
product  and process  where all  options were  evaluated and                                                                    
the  client  could  understand  the pros  and  cons  of  the                                                                    
different options  and how the  firm reached  its particular                                                                    
advice. The  firm had undertaken  the engagement  because it                                                                    
believed the project  made sense for the state  and could be                                                                    
successful  in different  commodity  price environments.  He                                                                    
opined that  the project could  act as a great  "gap filler"                                                                    
for  the  state  and  could  set  a  nice  foundation  going                                                                    
forward. The firm believed the  project could be successful,                                                                    
but did  not diminish the  complexity and large size  of the                                                                    
project that was subject to  many variables. The goal was to                                                                    
provide a  financing plan  or road map  to a  financing plan                                                                    
that could make the project  successful. He asked members to                                                                    
keep in  mind that the report  would be issued in  2015, but                                                                    
significant time  would pass  prior to  the completion  of a                                                                    
project.                                                                                                                        
                                                                                                                                
Vice-Chair Saddler  wondered if  the duration of  the firm's                                                                    
contract would  last up to  the FEED [Front  End Engineering                                                                    
and  Design] decision  or longer.  Mr. Bilicic  replied that                                                                    
the  firm  had a  three-year  contract.  He elaborated  that                                                                    
Lazard would  like to work  on the  project for a  long time                                                                    
and  liked to  see things  through to  completion. The  firm                                                                    
anticipated that  questions may arise after  the delivery of                                                                    
the final  report and  that a  supplemental analysis  may be                                                                    
needed. He added that the  firm could answer questions after                                                                    
the completion of its contract.                                                                                                 
                                                                                                                                
Vice-Chair  Saddler asked  if the  contract included  a flat                                                                    
fee  or  other.  Mr.  Bilicic   replied  that  the  contract                                                                    
included  a flat  work fee  and was  "outcome agnostic."  He                                                                    
stated that the request for  proposal had been designed with                                                                    
the  flat  fee,  which  he   believed  was  the  appropriate                                                                    
structure.                                                                                                                      
                                                                                                                                
Representative Kawasaki spoke to  the Black and Veatch slide                                                                    
that was  shown as an  example on the economic  overview. He                                                                    
believed committee  members saw the  example as a  great way                                                                    
to stem  off the state's  revenue decline. He  remarked that                                                                    
the  information was  predicated  on fiscal  terms that  the                                                                    
committee   had  yet   to  discuss.   He  wondered   if  the                                                                    
information  [on slide  9] would  be factored  into Lazard's                                                                    
analysis.  He observed  that similar  cash flow  charts were                                                                    
provided for  most projects. He  spoke to the  importance of                                                                    
timing for the project. He noted  that there would be a time                                                                    
the  state would  not  have any  cash;  the legislature  was                                                                    
working to  ensure that the  state would make money  at some                                                                    
point. He wondered whether Lazard  was factoring timing into                                                                    
its analysis.                                                                                                                   
                                                                                                                                
Mr. Bilicic  answered that  the firm would  try to  create a                                                                    
report that identified the sensitivities  and was modular in                                                                    
nature in  order to identify  what would change  if revenues                                                                    
were different.  For example, what  would happen  to revenue                                                                    
if 68.2  percent of the  project was contracted  compared to                                                                    
43  percent of  the project.  He noted  that in  the example                                                                    
there would  be higher exposure  to the market.  He believed                                                                    
the  timing of  the report  was important,  but it  would be                                                                    
provided before information was  known (including an updated                                                                    
estimate of construction costs).                                                                                                
                                                                                                                                
2:22:21 PM                                                                                                                    
                                                                                                                                
Representative Guttenberg  asked what advantage  a sovereign                                                                    
or government  had in  a negotiation on  a project  like the                                                                    
one  at  hand.  He  wondered  about  advantages  that  other                                                                    
parties did  not have. He asked  if the state was  acting in                                                                    
its best interest thus far.                                                                                                     
                                                                                                                                
Mr.  Bilicic  responded  that  the  state's  presence  added                                                                    
credibility  and conviction  to  the idea  that the  project                                                                    
could move forward. He referred  to a global map of projects                                                                    
that were  under contemplation and  offered that  the Alaska                                                                    
project   should   stand   out  because   of   the   state's                                                                    
involvement.  He relayed  that  some  counter parties  would                                                                    
like  the  idea of  the  state's  presence for  purposes  of                                                                    
entering  into  contracts  rather  than  dealing  with  pure                                                                    
industrial players.                                                                                                             
                                                                                                                                
Representative  Guttenberg referred  to  the Alyeska  Trans-                                                                    
Alaska  Pipeline System  (TAPS) in  which the  state was  an                                                                    
owner  but  not  a  partner.  He  noted  that  tariffs  were                                                                    
approached  differently;  there   were  also  royalties  and                                                                    
other. He  wondered if the  state would lose anything  if it                                                                    
entered the project with a partner.                                                                                             
                                                                                                                                
Mr. Bilicic replied  that the state's interests  and the way                                                                    
it evaluated risk  may be different than  the other parties.                                                                    
The state  may need to structure  its ownership differently.                                                                    
He believed the state would gain more than it would lose.                                                                       
                                                                                                                                
2:26:03 PM                                                                                                                    
                                                                                                                                
Representative  Guttenberg  noted   that  the  partners  had                                                                    
different fiscal  needs such as  showing profits.  The state                                                                    
may be more  interested in long-term gains.  He wondered how                                                                    
to use the relationships to the state's advantage.                                                                              
                                                                                                                                
Mr.  Bilicic   responded  that  the  project   was  distinct                                                                    
relative to other governmental  situations. He detailed that                                                                    
in  the private  sector  Lazard had  worked on  partnerships                                                                    
where one party  wanted stable cash flows and  one party did                                                                    
not  care about  the stability  of cash  flows and  believed                                                                    
they  could  manage the  commodity  price  risk. Lazard  had                                                                    
structured the party  concerned about price risk  in a long-                                                                    
term security  situation that provided more  stability (some                                                                    
of the  upside was  given away with  lower risk);  the other                                                                    
party assumed the  variability of cash flows.  He noted that                                                                    
the structure could be considered for the project.                                                                              
                                                                                                                                
Representative  Guttenberg asked  if  the  options would  be                                                                    
provided in  the final  report. Mr.  Bilicic replied  in the                                                                    
affirmative.                                                                                                                    
                                                                                                                                
Vice-Chair  Saddler  noted  that  two  directives  would  be                                                                    
addressed  including local/municipal  participation and  the                                                                    
state's   financing.    He   asked   how    frequently   the                                                                    
municipal/individual participation  was a common  feature in                                                                    
large  infrastructure  projects.   He  cited  Australia  and                                                                    
Indonesia prospects as an example.                                                                                              
                                                                                                                                
Mr. Bilicic answered  that many of the projects  done in the                                                                    
U.S. were done at the  municipal level (e.g. municipal water                                                                    
systems). He  stated that the combination  of oil companies,                                                                    
a pipeline company, state  government, and individuals would                                                                    
be  an unusual  mix  of investors.  He was  not  aware of  a                                                                    
situation    in   which    individuals   invested    in   an                                                                    
infrastructure  project like  the  AKLNG  Project except  in                                                                    
cases  where  the  project  became  a  public  company.  For                                                                    
example, the Charles De Gaul  airport in Paris, France was a                                                                    
publicly traded company.                                                                                                        
                                                                                                                                
2:29:42 PM                                                                                                                    
                                                                                                                                
Vice-Chair   Saddler  envisioned   individual  participation                                                                    
along the lines  of a person investing  their Permanent Fund                                                                    
Dividend in  a big  "good deal"  project, which  he believed                                                                    
was unusual. He  wondered if there were  other projects that                                                                    
included  individual ownership  (such as  a class  B stock).                                                                    
Mr.  Bilicic  replied  that  in  Australia  there  had  been                                                                    
circumstances  where  the  provincial governments  had  sold                                                                    
infrastructure  to the  provincial  pension fund  (investors                                                                    
were all individuals  in the region) to  provide a long-term                                                                    
financial return for  a young population in  the country. He                                                                    
would  look  into the  question  further  and surmised  that                                                                    
there was probably  a situation that included  an attempt to                                                                    
bring  in   individual  investors.  Except  to   the  extent                                                                    
individuals would  have been investing  as part of  a public                                                                    
offering,  there had  been examples  where labor  unions had                                                                    
been brought  in as  investors. He  referred to  the nuclear                                                                    
Bruce Power Plant in Canada  where British Energy had leased                                                                    
the plant  from the  Ontario government  in the  late 1990s;                                                                    
the  lease  had  included  TransCanada,  labor  unions,  and                                                                    
Borealis (a Canadian pension fund  in Toronto) as investors.                                                                    
He reiterated that  he had seen bringing in  labor unions or                                                                    
workers as  investors, but nothing  quite like  the scenario                                                                    
under discussion.                                                                                                               
                                                                                                                                
Vice-Chair  Saddler discussed  that it  had originally  been                                                                    
debated  whether  the Alaska  Permanent  Fund  should be  an                                                                    
investment  return  or  a   development  bank  for  in-state                                                                    
projects. He  stated that many Alaskans  would be fascinated                                                                    
to  see   Lazard's  recommendations   for  or   against  the                                                                    
involvement of the Permanent Fund  in the project financing.                                                                    
Mr. Bilicic hoped the report was not disappointing.                                                                             
                                                                                                                                
Representative Pruitt was looking  forward to the report. He                                                                    
was concerned about the current  state of Alaska's finances.                                                                    
He was concerned whether the  state would have the necessary                                                                    
equity for the project. He  asked how Lazard saw the current                                                                    
state of Alaska's finances playing into the picture.                                                                            
                                                                                                                                
Mr. Bilicic  responded that  if the  project was  viable the                                                                    
state would  be able to  find the  money. He stated  that it                                                                    
may  be  necessary  to cobble  it  together  with  different                                                                    
partners.                                                                                                                       
                                                                                                                                
Representative  Pruitt  asked   for  verification  that  the                                                                    
project  would sell  itself despite  some of  the challenges                                                                    
the state  faced internally. Mr.  Bilicic responded  that if                                                                    
the project made sense, the state  would be able to find the                                                                    
money. However, if the project did  not make sense or it was                                                                    
borderline and the  state took into account  many factors in                                                                    
pushing  the project  forward that  the capital  markets did                                                                    
not  take into  account,  it  would be  harder  to find  the                                                                    
money. He  believed the state's borrowing  capacity would be                                                                    
focused on in the debt/equity  split (e.g. what the internal                                                                    
source  of  funds  looked like,  how  the  partnership  with                                                                    
TransCanada  worked,  and   other  potential  partners).  He                                                                    
reiterated that if the project made sense, Lazard believed                                                                      
the state would find the money.                                                                                                 
                                                                                                                                
Co-Chair Thompson noted Representative Chris Tuck's                                                                             
presence in the committee room.                                                                                                 
                                                                                                                                
Co-Chair Thompson thanked the presenters. He discussed the                                                                      
schedule for the following day.                                                                                                 
                                                                                                                                
ADJOURNMENT                                                                                                                   
                                                                                                                                
2:35:54 PM                                                                                                                    
                                                                                                                                
The meeting was adjourned at 2:35 p.m.                                                                                          
                                                                                                                                
                                                                                                                                

Document Name Date/Time Subjects
AKLNG Project - Lazard Presentation to Legislature (02 17 15) vF.pdf HFIN 2/17/2015 1:30:00 PM
AKLNG-PROJECT-LAZARD-INTERIM-REPORT-2015.pdf HFIN 2/17/2015 1:30:00 PM