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Lazard: financing if project reasonable Interim report from state’s investment banker will form basis for final report which will provide financing options, recommendations Kristen Nelson Petroleum News
The Alaska Legislature’s House and Senate Finance committees heard reports in mid-February from Lazard Frères & Co. LLC, the investment banker selected by the Department of Revenue to advise the state on investment in the Alaska LNG project.
George Bilicic, Lazard vice chairman of investment banking, told legislators that because Lazard will be delivering advice in the fall when a lot of variables will not have been determined, its advice in the final report will be in modular format, so changes can be made.
Bilicic said Lazard is a global, client-focused organization, which is conflict free because it is not in the municipal underwriting business so would never be lending the state money.
The firm is just in the advice business, he said, so is independent in that regard.
He also said that a large part of the firm’s work is in representing governments.
Analysis required Financial analysis was required by Senate Bill 138, which allows state equity participation in the Alaska LNG project. The bill called for a report on financing options for state ownership and participation in a North Slope natural gas project and a plan for municipalities, regional corporations and residents to participate in ownership.
A request for proposals from the Department of Revenue called for an interim report - which Lazard delivered in January - and a final report due in the fall.
The interim report is broad based. The final report will provide specific analysis and recommendations on funding sources and alternatives based on a number of criteria, including: potential impact on the state’s debt capacity; potential impact on the state’s credit rating; key risks (such as potential for default, potential for the state to lose all or a portion of its project investment and potential for lenders to have recourse to state assets); cost; execution flexibility; and alignment of interests among key parties.
Next steps Lazard will participate in the legislative session this year; continue monitoring global LNG market dynamics; continue monitoring project developments; do further analysis of potential sources of funds; do further analysis of potential structuring alternatives; further refine evaluation criteria; work on formation of potential financing alternatives; analyze implementation issues associated with potential financing alternatives; assess financing alternatives against evaluative criteria; identify optimal finance alternatives via an iterative process; and draft the final report.
Individual investment Asked how usual it was for municipalities and individuals to be investors in LNG projects - an option provided for in SB 138 - Bilicic said you do see governments at the municipal level investing in infrastructure, but said he was not aware of any situation in which individuals invested, except to the extent infrastructure became a public company, such as the airport in Paris, which is a publicly traded company.
So the mix envisioned in SB 138 of oil companies, a pipeline, the state, municipalities, regional corporations and individuals would be unusual.
He said there have been instances in Australia where provincial governments have sold infrastructure to a provincial pension fund, something done to provide long-term return for a very young population in Australia.
Bilicic said they would look for any instances of individual investors being brought in, except as part of a public offering, although he did note that labor unions have been brought in as investors.
Availability of financing Bilicic said if the project is viable, there will be money available. If the project makes sense, there will be financing, he said; it it’s not that certain, it will be more difficult.
He also said that financing was more problematic in the early stages of a project. The cost of financing is highest now because of project uncertainty, Bilicic said, and becomes less costly as the project moves forward. There is not a lot of capital for green-field development, but an overwhelming amount of capital available when you have an operating project.
Lazard will start with sources of funds, different capital structures and the state’s funding needs and then develop financing plans, looking at different financing approaches, evaluating them and providing advice to the state.
Bilicic said Lazard will create a work product and process where the company evaluates all options and the client can understand the pros and cons and how Lazard got to its recommendation. He said Lazard undertook this because it thought the project could be successful for the state, although it is complicated and subject to a lot of variables.
Lazard has a three-year contract with the state, he said, but the company likes to see things through to completion and would like to work on this project for a long time.
As to state participation, Bilicic said the state’s presence in the project adds a lot of credibility to the idea that this could move forward and on balance is a positive for the project.
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