JUNEAU -- When Alaska first looked to drive construction of a natural gas pipeline rather than wait for others to do it, the state had billions in readily available savings and more surpluses flowing into its treasury.
Now, facing deficits of $3 billion a year or more, the state's investment banker is warning that Alaska may be out of money by the time construction begins and it needs to come up with billions of dollars for its share of the project.
It will be the job of Lazard Freres & Co. to advise the state on how to finance its share, possibly a quarter of the $45 billion to $65 billion project. Lawmakers on Tuesday reviewed for the first time Lazard's preliminary report on financing options.
The analysis "shows a material weakening of the state's financial position in the coming years, which is the period over which the project will need to be financed," said George Bilicic, Lazard's vice chairman and global head of power, energy and infrastructure.
"At some point in time, we don't have any cash," acknowledged Rep. Scott Kawasaki, D-Fairbanks.
A Bloomberg News story recently described Lazard as "banker to the broke," describing the firm's role in advising Greece and Ukraine, and other countries in financial distress over the years.
But Bilicic told legislators that because they only provide recommendations and aren't participating in financing Alaska's deals, they can give unvarnished advice.
"We are representing the state of Alaska and no one else," he said.
He promised that Lazard would be "zealous advocates" for the state. The company also provides project advice.
And Bilicic said that despite the weakened position he warned of, the deal could still be financed with borrowed money or with the state's other savings, like the Alaska Permanent Fund.
"There are many sources of funds, both internal and external, that the state could take advantage of to finance the project," he said.
Lazard's final report, scheduled for October, will look at those options as well as risks. Bilicic warned that the risks are substantial. Construction cost overruns could cause the gas line to be abandoned, as has happened in some other projects.
If that were to happen "it is entirely possible that the state could lose all the investment it has made to date," he said.
Other risks include the project being canceled before it gets going, or global natural gas prices falling and the project failing to produce profits.
"You are going to get nothing but unvarnished candid advice from us, almost to a fault," Bilicic said.
But he also said Lazard would provide ways to consider, and in some cases, mitigate those risks.
For example, risk from construction cost overruns can be transferred to construction companies, and the project can be financed with long-term take-or-pay contracts in which buyers assume risks as well, he said.
Looking at charts showing the state's reliance on rapidly declining and always volatile oil revenues, Bilicic saw another message as well.
"It illustrates the apparent need for the state to have a new source of revenue as time passes," he said, and a gas line can be that source.
That's what Alaska leaders have for years been hoping a big export gas line would do for the state, and highlights just how important the coming decisions are.
Financing the project externally can mean that some of the profits that would have gone to run the state would instead go to the financiers.
One option is that TransCanada, once the state's partner on an overland natural gas pipeline, would help finance the natural gas pipeline that would run from the North Slope to a liquefied natural gas export terminal on the Kenai Peninsula.
That's been part of previous agreements, but Lazard's preliminary presentation didn't show participation by TransCanada.
Questioned by legislators, Bilicic said TransCanada's role is yet to be determined, no matter what was in the presentation slides.
"This is not to suggest anything at all about the TransCanada arrangement," he said.
And legislators also questioned whether Gov. Bill Walker had altered what Lazard had been asked to do when its report was requested by the Legislature and the previous Parnell administration.
"Has this administration changed the intent of the legislation that went forward?" asked Sen. Anna MacKinnon, R-Anchorage, co-chair of the Senate Finance Committee.
"There's been no change at this point," responded Randy Hoffbeck, commissioner of the Department of Revenue.
Sen. Click Bishop. R-Fairbanks, wanted to know how important maintaining the state's "triple-A" credit rating is to the project, but was told that it might not actually be important.
"I don't think this project is going to require a triple-A credit rating to be successful," Bilicic said.
The crucial aspect to financing the project will be whether investors are confident that the project will be profitable, he said.