Citigroup Global Markets Inc. Municipal Securities Division February 4, 2015 State of Louisiana Financing Tools for Managing Budgetary Stress Citigroup is providing the information contained in this document for discussion purposes only in anticipation of serving as underwriter to the State of Louisiana (the “State”). The primary role of Citigroup, as an underwriter, is to purchase securities, for resale to investors, in an arm’s-length commercial transaction between the State and Citigroup and that Citigroup has financial and other interests that differ from those of the State. Citigroup is not acting as a municipal advisor, financial advisor or fiduciary to the State or any other person or entity. The information provided is not intended to be and should not be construed as “advice” within the meaning of Section 15B of the Securities Exchange Act of 1934. The State should consult with its own financial and/or municipal, legal, accounting, tax and other advisors, as applicable, to the extent it deems appropriate. The State should consider whether to engage an advisor to act in a fiduciary capacity on its behalf in connection with this transaction. Table of Contents 1. Citi’s Understanding of Louisiana’s Budget Situation 1 2. State Financial Toolkit 2 3. Debt Refinancings 8 4. Tobacco Securitization Market Update 12 5. Oil & Gas Royalty Securitization (GOMESA) 19 6. Transportation Financing 29 7. Lottery & Gaming Revenue Bonds 40 8. PPP Solutions 43 Appendix A - State Rating Landscape 48 1. Citi?s Understanding of Louisiana?s Budget Situation Citi’s Understanding of the State’s Budget Situation Like many other states, Louisiana is facing budgetary hurdles related to continued revenue weakness and additional pressure from the recent drop in oil prices. Fiscal Year 2015  Continued economic pressures and limited areas to trim expenses have created a need for a two midyear budget cuts  The most recent adjustment was attributed largely to the drop in oil prices  Thanks to several non-recurring items, the FY2015 budget has been impacted less than anticipated Fiscal Year 2016  Continued oil price weakness has put additional strain on Fiscal Year 2016, which has been projected to incur a shortfall of well in excess of $1.0 billion  All parties agree that those areas that are easiest to cut are the least appealing, including education and healthcare  Economic and political realities make it challenging to raise taxes or meaningfully increase revenues, therefore the State may wish to utilize the capital markets to bridge this structural gap Potential for Capital Markets Solutions  The financing tools outlined herein could potentially “buy more runway” for Louisiana to restore structural budgetary balance  It is critical for maintaining the State’s strong ratings that such tools are used as part of a balanced overall strategy aimed at reaching a structurally balanced budget  Many of the tools available have been used by other states, including Louisiana, during prior periods of fiscal strain  The following sections outline several alternatives that may warrant the State’s consideration 1 2. State Financial Toolkit Financial Alternative Toolkit Below are financial strategies that have been used by public sector entities to address budget challenges and finance long-term capital needs. High Grade Rating Low Investment Grade Rating Medium Investment Grade Rating Aaa/AAA Aa/AA A/A Baa/BBB Strong and stable revenue base Stable revenue base Stable and narrow revenue base Volatile and narrow revenue base Sales Taxes / Gross Receipts Lottery Securitization Personal Income Tax Payroll Tax Transportation Lease Revenue Bonds Motor Fuel Tax Vehicle Registration/Tags Vehicle Weight/Mileage taxes Petroleum Business Tax Transit Grant Anticipation Notes ("GANs") Tobacco Settlement Revenues Public/Private Partnerships ("PPP" or "P3s") Public/Public Parternships ("P2Ps") Cigarette Tax Alcoholic Beverage Taxes Enhanced Tobacco Settlement Revenues Hotel Taxes Gaming and Racing Tolls Existing Highways and Bridges HOV/HOT Lanes Support from Toll Agencies Tax Increment Financings Beverage Container Fees Tax Liens Telephone Surcharge Parking/Meter Receipts GARVEEs / Federal Transportation Revenue Corp. Income/Franchise Taxes Taxi Surcharge Severance Taxes Employer Assessments Unemployment Compensation Workers Comp / Second Injury Car Rental Surcharge Documentary Stamp Taxes / Mortgage Recording Taxes / Stock Transfer Tax Tribal Gaming Compact Appropriation Bonds (Notch below G.O.) Note: These strategies consider a diverse array of assets and revenue streams and therefore vary greatly in value and financial efficiency (rating, structure, cost of funds, etc.) 2 State Toolkit: Sources of Revenue Bond Security Revenue Source Assessment of Revenue Source Sales Tax / Gross Receipts Strong - Stable The most commonly used pledge by states, regions, cities, and transportation agencies 1.25x COFINA, California Economic Recovery Bonds, BART Massachusetts School Building Authority Personal Income Tax Strong - Stable Broad based pledge of second largest tax source for states 1.25x - 2.00x New York State Personal Income Tax Bonds, District of Columbia Payroll Tax Strong - Stable Strong security due to tax's wage-based nature excluding more volatile capital gains component 1.50x - 4.00x Tri-County Metropolitan Transportation Dist., Proposed for NY Metropolitan Transportation Author GARVEE / Federal GANs Strong - Stable Payable from federal highway trust fund or transit funds, subject to periodic reauthorization risk 1.50x - 3.00x GARVEEs used in 27 states Lottery Receipts Strong - Stable Limited history of use 7.00x / 4.00x Florida, Oregon, West Virginia and Arizona Utility Surcharge Strong - Stable Overcollateralization of a stranded cost surcharge on utilities 1.005x Connecticut used surcharge in 2004 for deficit financing Motor Fuel Taxes * Stable Gasoline and diesel fuel taxes used by most transportation revenue bond issuers nationwide 1.50x MTA DTF, Dedicated Highway and Bridge Trust Fund Bonds ("DHBTF") in New York State Petroleum Business Tax/ Oil Import Tax * Stable Typically used in a basket of pledged revenues 1.75x MTA DTF, Thruway DHBTF, Puerto Rico Transportation and Highway Authority (Crudita) Vehicle Registration / License / Tag Receipts * Stable Future receipt trends depend on population and vehicle use 1.75x Wisconsin Transportation Revenue Bonds Contributions from Toll Agencies Stable Subordinate pledge of tolls from authorities after paying debt service on toll revenue bonds N/A MTA, NJ Transportation Trust Fund Bonds Tolls / HOV Toll Lanes Stable Highway, bridge and mass transit systems 1.35x - 1.75x Bay Area Toll Authority, Triborough Bridge and Tunnel Authority, North Texas Tollway Authority Unemployment Compensation Stable Employer assessments 1.20x - 1.50x Texas, Illinois and Connecticut Unemployment Revenue Bonds Workers Compensation Stable Similar to unemployment compensation paid from employer assessments 1.20x - 1.50x West Virginia and Montana Beverage Container Fees Stable Dependent on consumer use Proposed 1.50x - 1.60x Securitization of a fee, not a tax, in California; rejected by A.G. * Combined with other taxes or security provisions N/A = not applicable 3 Comment ABT / Debt Service Coverage Selected Financing Examples State Toolkit: Sources of Revenue Bond Security Revenue Source Assessment of Revenue Source Vehicle Weight Tax * Stable - Narrow Paid by commercial truck traffic (but subject to resistance/litigation) 3.00x Maryland, Montana, and New Mexico bundled with other taxes Second Injury Fund Stable - Narrow Employer assessment paid by insurers, self insurers and state insurance funds Proposal stage Proposed in NY through Dormitory Authority Corporate Income / Franchise TaxVolatile Typically included in a basket of pledged revenues; requires additional security 10.00x MTA DTF (with other revenues), Maryland Dept. of Transportation (with other revenues) Severance Tax Volatile Short maturities and closed flow of funds mitigates inherent volatility of revenues derived from severing oil, natural gas, and coal 2.00x States of New Mexico and Montana Documentary Stamp Tax * Volatile Mainly real estate and other documentary transfers 1.50x Used extensively in Florida as security for Everglade Restoration Bonds and Florida Forever Bonds Mortgage Recording Tax * Volatile Used in regions with high property values; requires additional security 5.00x Triborough Bridge and Tunnel Authority (defeased) Stock Transfer Tax * Volatile Considered to be both volatile and substantial, with a certain degree of predictability; would require additional security 5.00x NY Municipal Assistance Corporation (defeased) Violation Receipts * Volatile Used as a replacement revenue source on existing bonds 2.00x Miami-Dade and Hillsborough Counties (FL), State of Minnesota, State of New Jersey Motor Vehicle Surcharge Bonds Court Fines and Fees in Criminal Cases * Volatile Combined with debt service and supplemental reserves and a state moral obligation 5.50x Iowa Special Obligation Prison Infrastructure Bonds Tax Liens Narrow Securitization of unpaid taxes; lax controls and record keeping are problems Lien-to-value and expected loss Philadelphia, City of New York, Puerto Rico Tobacco Settlement Revenues Narrow Tobacco company payments; declining consumption, litigation and other risks Revising assumptions Significant use by many states in last recession and criteria Enhanced TSR in States of NY and California Cigarette Tax Narrow Declining consumption mitigated by high debt service coverage and bond structures 1.75x and higher New Jersey, Tampa (FL), Alabama, University of Nebraska Alcoholic Beverage Taxes Narrow Rum excise taxes have been used as a revenue source in cases with a long and established history of revenues 1.50x - 2.50x Puerto Rico Infrastructure Finance Authority, Virgin Islands Public Finance Authority * Combined with other taxes or security provisions N/A = not applicable 4 Comment ABT / Debt Service Coverage Selected Financing Examples State Toolkit: Sources of Revenue Bond Security Revenue Source Assessment of Revenue Source Comment ABT / Debt Service Coverage Selected Financing Examples Liquor Enterprise Revenues Narrow Profits from State-run liquor monopoly 2.00x State of Ohio Revitalization Project Bonds Parking / Meter Receipts Narrow Combined parking facility and on-street parking 1.25x - 1.50x New Haven, Miami, Chicago, Union Station (DC) Taxi Surcharge * Narrow Used for convention center bonds, bundled with other pledged revenues N/A Component of Trust Aid revenues that may be combined with payroll taxes for the NY MTA, Metropolitan Pier and Exposition Authority, coupled with Illinois state sales tax Car Rental Surcharge * Narrow Used for convention center bonds, bundled with other pledged revenues 2.00x Used by Hawaii DOT along with statewide transportation pledge Component of Trust Aid revenues that may be combined with Payroll tax for NY MTA Tax Increment Revenues Narrow Highway improvements linked to higher property values used by Virginia 2.00x Commonwealth Transportation Board Route 28 also subject to state appropriation Hotel / Accommodations Tax * Narrow Used for convention center bonds, bundled with other pledged revenues 2.00x Metropolitan Pier and Exposition Authority, coupled with Illinois state sales tax Virginia Public School Authority Unclaimed Property * Narrow Used as school bond bank, bundled with GO pledge of local borrowers N/A Indian Compact Securitization Narrow Pledge of revenues from Indian Gaming Compacts related to Indian casinos in states. N/A Proposed in Connecticut and California Telephone Surcharge Narrow Technological risks, such as elimination of land lines due to voice-over-internet providers and federal legislative risks 3.20x State of Minnesota 911 telephone surcharge revenue bonds * Combined with other taxes or security provisions N/A = not applicable 5 State of Louisiana Economic Recovery Deficit Funding Loan Deficit borrowing has been used by some states to bridge the gap.  The following parameters would likely meet rating agency acceptance: – Bond term under 10 years would clearly be acceptable - other highly rated states have bonded deficits for 20 years or more (example: New York State – 2003) – Deficit borrowing could produce up-front proceeds to the State depending on the ultimate structure of the debt issuance  Two year principal deferral and interest could be capitalized depending on ultimate goals  Will produce additional debt service requirements over the life of the deficit financing  A portion of the offering could be sold with staggered short calls or as variable rate debt to enhance early redemption flexibility National Precedents  State of Connecticut Economic Recovery Notes (“ERN”) – Series 2002 & 2004  2009 Connecticut ERN offering ($1 billion)  Citi was Book-runner on 2009 CT offering – Sized to fund $947.5 million FY2009 budget deficit – Maturing 2012 through 2016 – General Obligation credit – Interest capitalized through and including 2011 – Statute requires pre-payment from future surpluses – Citi utilized innovative short call structure 6  Commonwealth of Massachusetts – 1989-1990 Fiscal Recovery Loan Act of 1990 – Pledge of incremental income taxes with bonds amortized over 7 years Overview of Working Capital Tax Analysis Tax-exempt bonds are permitted to be issued to fund working capital requirements in the general or other funds.  Tax-exempt bonds can be issued for working capital purposes, subject to two special restrictions – Proof of deficit $4.7  State must determine its “available amounts” under the tax code, including any funds available to pay operating expenses without legislative or judicial action required  State is permitted to maintain a reasonable working capital reserve of up to 5% of expenditures without counting it as available funds for the deficit test – Replacement proceeds  Tax code provides a safe harbor for working capital bonds with a final maturity of two years or less  Bonds with a final maturity beyond two years are considered “long-term working capital” financings, raising concerns from the IRS which seeks to limit the time bonds are outstanding to no longer than “reasonably necessary” 19.4  Private letter ruling interprets this to mean if bonds are outstanding longer than two years, any future surpluses over the permitted 5% working capital reserve are characterized as “replacement proceeds,” and State would be required to 1) restrict the yield on the excess funds to the yield on the bonds or 2) use the excess proceeds to redeem bonds  Identifying the fund is important – if it is determined that operating payments are General Fund related rather than related to a special fund, the State may have a portion of future General Fund surpluses yield restricted  State would not need proof of a deficit if it can be determined that the use of proceeds are for Qualified Grants  State should seek specific and detailed legal advice if it decides to pursue a working capital financing 7 7.9 3. Debt Refinancings General Obligation Refunding Opportunity  The State currently has approximately $185 million of GO bonds producing at least 3% present value individual savings – Over $85 million exceed 50% Escrow Efficiency  Citi notes the State is currently pursuing this opportunity in hopes of providing long-term debt service savings as interest rates have trended below those seen in the last GO Refunding transaction Series Name 2010A 2011A 2009A 2011A 2010A 2009A 2013A 2012A 2011A 2011A 2012A 2012A 2014A 2013C 2012A 2012A 2013A 2010A 2013A 2014A 2014A 2013C 2013C Maturity 11/15/2022 9/1/2028 5/1/2028 9/1/2029 11/15/2021 5/1/2029 5/15/2026 8/1/2025 9/1/2030 9/1/2026 8/1/2026 8/1/2024 2/1/2026 7/15/2025 8/1/2023 8/1/2027 5/15/2025 11/15/2020 5/15/2024 2/1/2025 2/1/2027 7/15/2024 7/15/2026 ($ in 000’s). Preliminary – Subject to Change. 8 Refunded Par Amt. $2,465 20,415 14,150 21,460 4,870 14,860 1,025 21,565 22,560 18,470 22,115 21,050 25,150 14,040 20,565 22,690 100 8,220 100 10,540 26,155 13,440 14,665 PV Savings$ $155 1,115 701 1,018 220 656 44 921 954 654 668 632 514 266 351 369 2 108 1 91 169 83 89 PV Savings% 6.3% 5.5% 5.0% 4.7% 4.5% 4.4% 4.3% 4.3% 4.2% 3.5% 3.0% 3.0% 2.0% 1.9% 1.7% 1.6% 1.6% 1.3% 1.2% 0.9% 0.6% 0.6% 0.6% Escrow Efficiency 86% 51% 52% 46% 100% 47% 62% 61% 42% 48% 45% 63% 47% 43% 73% 26% 51% 100% 83% 41% 16% 29% 15% Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 MMD- 2014C Sale MMD - Today (Nov. 13, 2014) (January 26, 2015) 0.14% 0.38% 0.62% 0.88% 1.15% 1.46% 1.74% 1.94% 2.07% 2.17% 2.28% 2.38% 2.45% 2.50% 2.55% 2.60% 2.65% 2.70% 2.75% 2.80% 2.85% 2.89% 2.92% 2.95% 2.98% 3.01% 3.03% 3.05% 3.06% 3.07% 0.14% 0.42% 0.62% 0.81% 1.00% 1.22% 1.40% 1.57% 1.71% 1.81% 1.91% 2.01% 2.10% 2.17% 2.22% 2.27% 2.32% 2.36% 2.40% 2.44% 2.46% 2.48% 2.50% 2.52% 2.54% 2.55% 2.56% 2.57% 2.58% 2.59% Difference 0.00% 0.04% 0.00% -0.07% -0.15% -0.24% -0.34% -0.37% -0.36% -0.36% -0.37% -0.37% -0.35% -0.33% -0.33% -0.33% -0.33% -0.34% -0.35% -0.36% -0.39% -0.41% -0.42% -0.43% -0.44% -0.46% -0.47% -0.48% -0.48% -0.48% Debt Optimization for Budget Relief With nearly $230 million in principal amortizing during FY2016, the State has the opportunity to strategically reoptimize a portion of these existing bonds for budget relief  The State’s General Obligation debt structure is generally front-loaded and enjoys a relatively short average life – The current municipal market yield curve is steep with ‘AAA’ MMD yields remaining below 3% through 2035 – Current market continues to show solid retail demand in the first 10 years of the yield curve for high quality paper  These market dynamics present a unique opportunity for the State to refinance near-term debt obligations at very low rates to provide for cash flow relief in FY2016, while only marginally increasing the prior bonds’ average lives General Obligation Bonds Maturing by Fiscal Year State of Louisiana General Obligation Bonds Outstanding Debt Service1  $229 million in outstanding principal amortizes in FY2016 $400,000,000  $148 million in outstanding principal amortizes in FY2017 $350,000,000 $300,000,000 National Precedents $250,000,000  Commonwealth of Massachusetts, 2010 and 1991 $200,000,000  State of Wisconsin, numerous years $150,000,000 $100,000,000  New Jersey, numerous years $50,000,000 1. 9 Aggregate Debt Service profile includes G.O. Bonds Series 2006-B, 2013-C and Taxable Series 2012-D Principal Interest 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017  Hawaii, 2010 $0 2016  New York, numerous years FY2016 Optimization: Debt Profile Impact Refunding nearly $85.16 million of the State’s tax-exempt, advance refundable bonds in FY2016 creates $84.78 million in cash flow benefit, while the average life of the State’s GO debt portfolio is lengthened by only two months Current State of LA G.O. Debt Service 1. 2. 10 3. Existing Debt Service Restructuring Debt Service Summary Statistics: Summary Statistics: • Average Life: 8.16 Years • Average Life: 8.30 Years • FY2016 Debt Service: $350,682,806 • FY2016 Debt Service: $265,894,256 • FY2016 Budget Relief: $84,788,550 FY2016 Cash Flow Relief Preliminary/Subject to Change. Delivery Date as of March 1, 2015 Assumes Series 2006-B Bonds are advance refundable; subject to bond counsel review. Assumes the Series 2010-A are partially advance refundable (13%); subject to bond counsel review. Assumes Series 2013-C Bonds are advance refundable; subject to bond counsel review. Restructuring does not include the Series 2005-A Bonds (2015 maturity) which are refundable on a current basis as early as May 2015. Aggregate Debt Service profile includes G.O. Bonds Series 2006-B, 2013-C and Taxable Series 2012-D 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2016 2035 2034 2033 $- 2032 $2031 $50,000 2030 $50,000 2029 $100,000 2028 $100,000 2027 $150,000 2026 $150,000 2025 $200,000 2024 $200,000 2023 $250,000 2022 $250,000 2021 $300,000 2020 $300,000 2019 $350,000 2018 $350,000 2017 $400,000 2016 $400,000 2017 $84.789 million in FY2016 cash flow relief FY 2016: Restructuring for Near-Term Budget Relief Targeting the State’s GO tax-exempt and advance refundable FY 2016 maturities can provide the State provide significant cash flow savings over the next year  Refunding $85.16 million of tax-exempt, advance refundable bonds using tax-exempt proceeds in FY2016 creates $84.8 million in cash flow relief  While the State could generate significantly more near-term relief, Citi’s base case analyses targets a lesser amount so as not to overburden the GO debt profile in future years  The State could use its future Series 2015-A Refunding savings to offset negative savings produced by a potential restructuring of the State’s General Obligation debt Projected Restructuring Results $85.160 M Amortization of Refunded Bonds (FY): 2021-2026 FY 2016 Budgetary Relief $84.789 M Average Life of Refunding Bonds Average Life of Refunded Bonds 7.860 years 0.721 years Current MADs, FY2016 -FY2035 $350,683 M MADs after Restructuring $307.794 M 1.73% Total Cash Flow Savings / (Cost): ($10.981) M $400,000 PV of Cash Flow Savings / (Cost) ($1,312) M $350,000 Negative Arbitrage $250,000 $200,000 $150,000 $100,000 $50,000 Existing Debt Service Restructuring Debt Service FY2016 Cash Flow Relief 2035 2034 2033 2032 2031 2030 2029 2028 2027 2026 2025 2024 2023 2022 2021 2020 2019 2018 2017 2016 $- 11 3. $71.790 M Par Amount of Refunded Bonds All-In TIC $300,000 1. 2. Summary of Refunding Results Par Amount of Refunding Bonds Pro-Forma Cash Flow Results Fiscal Current Debt Restructured Debt Service Service Year 2016 $350,683 $265,894 2017 $261,486 $265,075 2018 $286,251 $289,841 2019 $299,051 $302,640 2020 $304,205 $307,794 2021 $286,453 $302,216 2022 $272,293 $287,276 2023 $256,503 $270,615 2024 $241,212 $254,487 2025 $233,030 $245,855 2026 $207,141 $218,539 2027-2035 $928,894 $928,894 $0.953 M Debt Service Savings $84,789 ($3,590) ($3,590) ($3,590) ($3,590) ($15,762) ($14,982) ($14,112) ($13,275) ($12,825) ($11,398) $0 Preliminary/Subject to Change. Delivery Date as of March 1, 2015 Assumes Series 2006-B Bonds are advance refundable; subject to bond counsel review. Assumes the Series 2010-A are partially advance refundable (13%); subject to bond counsel review. Assumes Series 2013-C Bonds are advance refundable; subject to bond counsel review. Restructuring does not include the Series 2005-A Bonds (2015 maturity) which are refundable on a current basis as early as May 2015. Aggregate Debt Service profile includes G.O. Bonds Series 2006-B, 2013-C and Taxable Series 2012-D 4. Tobacco Securitization Market Update Tobacco Securitization Market – $60.1 billion Since the beginning of the financial crisis, secondary market trading in tobacco bonds has been characterized by a bifurcation based on structure and leverage. More recently, the issuance of refunding bonds has dominated the tobacco bond market.  The market for non-recourse tobacco bonds has been volatile, with times when non-recourse tobacco securitizations were not possible  In recent years secondary market trading has been bifurcated with more conservatively structured transactions trading at significantly lower yields than higher leveraged “turbo” structures  The most recent non-recourse tobacco securitization issuance has been for refundings with the largest nonrecourse transactions completed by the State of Louisiana and the State of Washington in 2013 Tobacco Transactions over the Past Three Years Sale Date Par ($MM) Issuer Series Issue Description Purpose 03/08/12 92.81 Alabama 21st Century Authority Series 2012 A Tobacco Settlement Revenue Bonds Refunding 03/29/12 38.38 Suffolk Tobacco Asset Sec Corp Series 2012 A&B Tobacco Settlement Ass-Bck Bonds New Money 02/28/13 169.65 South Dakota Ed Enhance Fund Corp Series 2013 A&B Tobacco Settlement Rev Bonds Refunding 04/02/13 375.11 Golden State Tobacco Sec Corp Series 2013 A Enhanced Tobacco Settlement Bonds Refunding 07/02/13 659.75 LA Tobacco Settlement Fin Corp Series 2013 A Tobacco Asset-Backed Ref Bonds Refunding 10/02/13 334.70 Washington Tobacco Settlement Auth Series 2013 Tobacco Settlement Rev Ref Bonds Refunding 12/05/13 1,225.75 NY Tobacco Settlement Fin Corp Series 2013 A&B Asset-Backed Revenue Bonds Refunding 09/09/14 44.30 Niagara Tobacco Asset Sec Corp Series 2014 Tobacco Settlement Bonds Refunding 10/22/14 95.86 California Co Tobacco Sec Agency (Kern) Series 2014 Tobacco Settle Asset Backed Bonds Refunding 10/29/14 34.77 Chautauqua Tobacco Asset Sec Corp Series 2014 Tobacco Settlement Bonds Refunding Note: Transactions highlighted in blue are appropriation supported Secondary Market Trading Data since January 2013 Buckeye 2047 Golden 2047 7.16% 6.58% Louisiana 2035 Railsplitter 2028 30-Year MMD 12 Source: J.J. Kenny Drake. Secondary market data as of January 28, 2015. For illustration purposes only. 3.55% 2.76% 2.57% Completed Tobacco Securitizations NYC 11/99 Nassau 11/99 Westchester 12/99 Monroe 7/00 Chautauqua 9/00 Erie 9/00 Niagara 10/00 New York Counties I11/00 Ulster 1/01 New York Counties II7/01 New York: Rockland 12/01 6/03 $2.3b 11/03 $2.4b 03/08 $441mm Rensselaer 12/01 7/11 $959mm 12/13 $1.2b NYC 7/02 New York Counties III 12/03 100% of State TSRs Westchester (ref) 6/05 New York Counties IV 7/05 Erie (ref) 8/05 Rockland (ref) 10/05 2 Minnesota New York Counties V11/05 Erie 12/05 11/11 MA 3 Wisconsin Michigan Monroe 1/06 $787mm CT 5/02 2/06 5/06 $490mm New YorkNYC $1.6b 8/08 Suffolk 8/07 $522mm 100% 3/12 Iowa Suffolk 6/08 $202mm 10/01 $644mm 9/14 Niagara Pennsylvania 11/05 $831mm (ref) 10/14 Chautauqua Ohio Illinois 78% 10/07 31 TOTAL NYS DEALS $5.5b West Virginia 12/10 $1.5bn Indiana Virginia 100% 7/07 100% 138 completed financings to date (approximately $60.1 billion aggregate par amount). Washington WA: 10/02 $518mm 10/13 $334.7mm 29.2% North Dakota 6 3/00 $32mm 3/05 $22 mm (ref) 5/05 $62 mm Montana Oregon Idaho California1 1/03 $3.0b 9/03 $2.6b 7/05 $3.1b (ref) Nevada 3/07 $4.4b (ref) 4/13 $375mm (ref) 100% of State TSRs California Counties/Cities Tulare County Sacramento County San Diego County Stanislaus County Sonoma County Merced County Kern County Placer County Marin County CSAC Pool (2002) Fresno County Alameda County Merced County Sonoma County Sacramento County Alameda County Los Angeles County Stanislaus County Fresno County CSAC Pool (2006) San Diego County Placer County San Diego City Santa Clara County Marin County Riverside County Kern County 31 Total CA Deals Date 12/99 8/01 12/01 3/02 4/02 3/02 5/02 6/02 6/02 7/02 7/02 10/02 10/05 10/05 12/05 2/06 2/06 3/06 4/06 4/06 5/06 5/06 6/06 1/07 6/07 8/07 10/14 Size ($ mm) $ 45 199 466 67 67 31 105 42 34 197 93 220 39 83 255 68 320 42 39 62 584 59 105 102 50 294 96 $16,864 Wyoming South Dakota 8/02 $278mm 2/13 $169mm 100% Nebraska Utah Colorado Kansas Missouri Kentucky Tennessee Arizona Oklahoma New Mexico Arkansas 5 9/01 $60mm 6/06 $36mm Texas2 Louisiana Mississippi 10/01 $1.2b 60% 7/13 $659mm Alabama 4 Georgia South Carolina 3/01: $934mm 100% 4/08:$300mm 100% Florida2 AL: 9/00 $50mm 12/01 $103mm 3/12 $92mm Alaska 1. California allocated 50% of its TSRs to the State; the counties and certain cities receive the remaining 50% 2. State is not a party to the MSA 3. New York allocated 48.824% of its Initial and Annual Payment s to the counties of the State of New York and the City of New York. State receives the remaining 51.176% and 100% of Strategic Payments 4. Alabama has pledged an annual $13.16mm TSRs out of total annual projected TSRs of $82 - 143mm (projections for 2003 - 2020) 5. Arkansas has pledged the first $5mm of its TSR receipts annually, projected final payment in 2046 6. 45% of TSRs allocated towards payment of Bonds and other water development needs 13 8/06 $248 mm 100% S. Carolina 2 10/00 $116mm 40% 8/01 $126mm 40% 8/06 $411mm 80% (ref) $911mm 5/05 $428mm MD DE 100% 4/07 $1,149mm 50% DC: North Carolina 3/01 $521mm Financings Completed Guam: 6/01 $25mm 12/07 $37mm 100% Virgin Islands: 11/01 $22mm 4/06 $7mm 100% Residual Financings (Includes states and transactions highlighted in blue) $709 $294 $103 $163 $30 $246 $47 $227 $28 $215 $48 $35 $500 $80 $216 $415 $318 $25 $199 $18 $15 $1,300 $233 $38 $44 $35 $12,731 RI: 6/02 $685mm 6/07 $197mm 100% NJ: 8/02 $1.8 b 2/03 $1.7 b 1/07 $3.6 b (ref) 100% of State TSRs Puerto Rico: 10/00 $397mm 50% 10/02 $1.1b 100% 8/05 $108mm 100% 4/08 $196mm 100% Tax-exempt High Yield Fund Assets High yield tax-exempt bond funds experienced net outflows of over $9.9 billion in 2013. The sector has mostly recovered during 2014 with inflows totaling $8.4 billion. High Yield Tax-exempt Bond Weekly Fund Flows and 30-Year MMD 6 5.5 0.5 5 4.5 0.0 4 (0.5) 3.5 3 (1.0) 2.5 (1.5) Feb-08 2 Oct-08 Apr-09 Nov-09 Jun-10 Jan-11 Fund Flows Aug-11 Mar-12 Oct-12 May-13 Dec-13 Jul-14 30 Year MMD High Yield Tax-exempt Bond Fund Assets High yield fund assets lost approximately 20% in value last summer (due to both changes in fund flows and changes in mark-to-market) 70 AUM ($ Billions) 65 Significant recovery in 2014 60 55 50 45 40 Jan-13 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Jan-14 Mar-14 Source: AMG fund flows as of January 21, 2015. 14 May-14 Jul-14 Sep-14 Nov-14 Dec-14 MMD Yield (%) Municipal Bond Fund Flows ($ billions) 1.0 Domestic Cigarette Shipments According to the most recent IHS Global Insight forecast, domestic shipment declines are expected to trend toward a long-run average of approximately 3%.  The IHS Global Inc. (“IHS”) base case cigarette consumption report for October 2014 estimates a decline in domestic cigarette consumption of 2.9% for sales year 2014 compared to sales year 2013  The MSA OPMs which represent approximately 85% of the domestic cigarette market have reported industrywide domestic shipment declines of between 3.5% and 4.0% for the first nine months of 2014 compared to the same time frame for 2013 1981 (domestic peak) – 2014 CAGR: -2.63% 1999 (post-MSA) – 2014 CAGR: -3.34% -9.09% -6.36% -2.76% -1.97% -4.86% 640.00 441.69 435.95 429.36 417.86 404.07 404.44 390.25 391.26 371.83 357.74 325.23 304.55 296.13 290.31 276.21 265.16 -4.00% 1981 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* * Based on PM USA 3Q 10-Q estimate of industry-wide shipments Source: NAAG and Alcohol and Tobacco Tax and Trade Bureau (RYO calculated at 0.0325 ounces per cigarette) http://www.ttb.gov/statistics/14tobstats.shtml; IHS Global Inc. 2014 Projections 15 Factors Influencing Cigarette Consumption IHS has considered the following set of variables relevant to building a model of cigarette demand. Smoking Bans Changes in Disposable Income Increases in Taxes  Studies have found disposable income is directly linked to consumption resulting in a decrease of smoking during periods of economic downturn  Increases in federal and state excise taxes have decreased consumption Youth Consumption  Smokers in the 12-17 age group has steadily declined (with exception of a peak in the 1990s) since the early 1970s Price Elasticity  Long-term price elasticity of consumption is -0.33 (e.g. 1% increase in real cigarette prices reduces cigarette consumption by 0.33%) Electronic Cigarettes  The increasing availability and variety of smokeless tobacco products Health Warnings 16  Indoor and outdoor smoking bans have spread rapidly throughout the country  Mandatory warnings on packaging have affected the public’s view of smoking FDA Regulation and Menthol  On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (“FSPTCA”) was signed by President Obama granting the Food and Drug Administration (“FDA”) broad authority over the manufacture, sale, marketing and packaging of tobacco products. The legislation among other powers provides for the following: – Establishes a Tobacco Products Scientific Advisory Committee (“TPSAC”) to, among other things, evaluate the issues surrounding the use of menthol as a flavoring or ingredient in cigarettes within one year of the committee’s establishment – Grants the FDA the regulatory authority to consider and impose broad additional restrictions through a rule making process, including a ban on the use of menthol in cigarettes – Requires larger and more severe health warnings on cigarette packs and cartons – Bans the use of descriptors on tobacco products, such as “low tar” and “light” (effective in 2010) – Requires pre-market approval by the FDA for claims made with respect to reduced risk or reduced exposure products – Allows the FDA to require the reduction of nicotine or any other compound in cigarettes – Allows the FDA to place more severe restrictions on the advertising, marketing and sales of cigarettes including preempting state cigarette advertising laws – Permits inconsistent state regulation of cigarette advertising and eliminates the existing federal preemption of such regulation  In particular, the legislation permits the FDA to ban menthol upon a finding that such a prohibition would be appropriate for the public health. According to Lorillard, mentholated cigarettes are reported to comprise 31% of the U.S. domestic market  On March 18, 2011 the TPSAC presented its report and recommendations on menthol. TPSAC's overall recommendation to the FDA was that "[r]emoval of menthol cigarettes from the marketplace would benefit public health in the United States." On July 21, 2011, the TPSAC considered revisions to its report, and the voting members unanimously approved submission of the final report to the FDA with no change in the recommendations  On July 23, 2013, the FDA made available for public comment, the Preliminary Scientific Evaluation and also provided an Advanced Notice of Proposed Rulemaking for public comment for 60 days  On July 21, 2014, a federal judge ruled in favor of Lorillard and Reynolds American’s challenge of the 2011 TPSAC report, finding three of the panel’s members had conflicts of interests. The US District Court ordered the FDA reconstitute the committee and barred the use of the panel’s findings  A ban or material restriction on the use of menthol or the negative impact of any of the foregoing possible FDA actions could reduce consumption of cigarettes in the U.S. 17 E-Cigarettes and Traditional Cigarette Consumption Cigarette manufacturers have developed alternative tobacco products, most notably electronic cigarettes, which do not currently result in payments under the MSA and could impact demand for traditional cigarettes.  Numerous cigarette manufacturers are developing and marketing electronic cigarettes or “e-cigarettes”. E-cigarettes contain nicotine derived from tobacco plants and are battery powered devices that vaporize liquid nicotine, which is then inhaled. There are currently more than 250 e-cigarette brands on the market  E-cigarettes are not currently treated as "cigarettes" under the MSA  The parent companies of all three OPMs have launched e-cigarette brands and are aggressively pursuing the e-cigarette market by expanding distribution as well as product and technology acquisition. Reynolds American and Philip Morris (“PM”) also market “heat not burn” cigarettes that are “cigarettes” under the MSA  Sales of e-cigarettes in 2012 were estimated to be $300 million, double the amount during the prior two years, and are projected to reach more than $2 billion in 2014. Certain reports predict that e-cigarettes could outpace traditional cigarette sales before 2050 with some reports predicting e-cigarettes overtaking traditional cigarettes in the next decade  In October 2013, Altria (PM USA’s parent) sent a letter to the FDA Commissioner supporting the regulation of all currently unregulated tobacco products including e-cigarettes  On February 12th, Democratic leaders sent a letter to select Attorneys General (“AGs”) urging them to classify e-cigarettes as cigarettes under the MSA definition. The AGs cannot unilaterally add e-cigarettes to the definition of cigarettes under the MSA. Such an addition would likely be a negotiation with the Participating Manufacturers and subject to different conversion methodology  On April 24, 2014, the FDA released proposed rules that would extend its regulatory authority to e-cigarettes and certain other tobacco products under the Family Smoking Prevention and Tobacco Control Act. The proposed rules would require, among other things, that e-cigarette manufacturers register with the FDA, report ingredients, only make direct and implied claims after FDA confirms, implement age restrictions to prevent sales to minors and include health warnings. The proposed rules do not restrict flavored products, online sales or advertising. The proposed regulation is subject to a 75-day public comment period  In December 2014, the University of Michigan Monitoring the Future study released its report which indicates that in 2014 more teens used e-cigarettes than traditional, tobacco cigarettes or any other tobacco product. This represents the first time a U.S. study has shown that teen use of e-cigarettes surpasses use of tobacco cigarettes 18 5. Oil Gas Royalty Securitization (GOMESA) Executive Summary The Gulf of Mexico Security Act of 2006 provides sizeable future revenue sharing opportunities for Gulf Producing States, including Louisiana  The State has the essential pieces in place to take advantage of what is estimated to be a robust future revenue stream  Citi recommends the State, through the CPRA and CPRFC, develop the full menu of financing alternatives by investing in the development of a credible revenue forecast by a third party expert  Given the long history of production in the Gulf, Citi anticipates the future revenue stream past 2016 will prove forecastable  Bringing forward this future revenue stream today would serve to facilitate essential coastal projects while also mitigating inflation risk associated with projects of this nature  Recent events have made some otherwise unlikely events reality, therefore the issuance of any asset-backed securitization bonds will need to take into account such risks  Up-front moneys could potentially be utilized for projects that otherwise may have received State capital outlay moneys  Citi would welcome the opportunity to work with the State, the CPRA and its partners to implement this process and develop the credit structure through the Louisiana Coastal Protection & Restoration Financing Corporation 19 CPRA Master Plan - Projected Funding The CPRA’s most recent Annual Spending Plan envisions roughly $1.7 billion in Program Revenues and Expenditures through FY 2017 from a variety of sources  To date, funding of the CPRA Master Plan has included funds from a variety of sources, buoyed by funds related to the BP Oil Spill, the Coastal Impact Assistance Program and revenues related to on land oil and gas production  By bringing forward future GOMESA OCS Royalty Revenues, the State could benefit from the ability to quickly fund additional projects while mitigating future risks Projected CPRA Three-Year Revenues (FY 2015 - FY 2017) Revenue Sources CPR Trust Fund Annual Revenue CPR Trust Fund Carried Forward GOMESA DOTD Interagency Transfer CIAP Surplus '07, '08, '09 Community Development Block Grants NRDA Early Restoration NFWF Other Oil Spill Related Revenues FEMA Reimbursement Project Generated - Adaptive Management Project Billing Capital Outlay Request Other Total Projected Revenue $ $ FY 2015 33,131,175 $ 15,320,000 80,775 4,000,000 78,616,250 291,732,872 13,520,558 78,555,920 113,161,715 43,115,935 5,264,655 18,719,241 18,500,000 11,760,924 725,480,020 $ Source: w w w .cpra.gov. Annual Spending Plan; Section 1: Executive Summary 20 FY 2016 33,100,000 $ 80,775 4,000,000 30,755,349 53,178,060 3,565,520 115,368,331 81,953,872 38,221,005 17,754,220 18,500,000 73,277,135 336,102 470,090,369 $ Program Total FY 2017 (FY2015 - FY2017) 33,100,000 $ 99,331,175 15,320,000 TBD 161,550 4,000,000 12,000,000 16,691,884 126,063,483 120,000 345,030,932 17,086,078 34,497,051 228,421,302 115,094,000 310,209,587 118,030,070 199,367,010 5,264,655 20,071,584 56,545,045 18,500,000 55,500,000 73,277,135 146,554,270 81,719 12,178,745 433,463,443 $ 1,629,033,832 Gulf of Mexico Energy Security Act of 2006 The Gulf of Mexico Security Act of 2006 (GOMESA) significantly enhances OCS oil and gas leasing activities and revenue sharing in the Gulf of Mexico  The Act created revenue sharing provisions for the four Gulf oil and gas producing States of Alabama, Louisiana, Mississippi and Texas, and their coastal political subdivisions (CPS’s)  Provided revenues generated by new leases in defined areas of the Gulf are to be distributed between: – Federal government – Land and Water Conservation Fund (LWCF) – Gulf Producing States, including Louisiana   Qualified OCS Revenues – Rentals – Royalties – Bonus Bids OCS Revenue Application LWCF 12.5% Federal Treasury 50.0% Gulf States 37.5% OCS Revenues received by the Gulf Producing States must be used for coastal conservation, restoration and hurricane protection Washington Montana North Dakota West Virginia NH MA Wisconsin Idaho South Dakota New York Wyoming Michigan Nebraska Nevada Utah Maine VT Minnesota Oregon RI Iowa NJ Indiana Ohio DE Colorado California Kansas Missouri Virginia Kentucky Arizona Oklahoma New Mexico CT Pennsylvania Illinois MD DC ) North Carolina Tennessee Arkansas S. Carolina Mississippi Alabama Georgia Texas Louisiana Alaska Puerto Rico Florida Hawaii 21 Allocated a % of OCS Royalties Gulf of Mexico Energy Security Act of 2006 22  Qualified Revenues between through 2016 include those lease revenues for leases entered into after the enactment of the 2006 Act that are within: – 181 Area – Eastern Planning Area – 181 South Area  Qualified Revenues on or after October 1, 2016 include those lease revenues for leases entered into after the enactment of the 2006 Act that are within: – 181 Area – 181 South Area – 2002-2007 Planning Area  Allocation of revenues - inversely proportional to the respective distances between the point on the coastline of each Gulf Producing State that is closest to the geographic center of the applicable leased tract – Minimum allocation to each state of 10% – $500 Million per year cap on leases in the 2002-2007 Planning Area, through 2055 – No cap on Qualified Revenues in 181 Areas  While MMS provided rules in 2008 related to the revenue sharing program through 2016, no guidance was provided for revenues generated between 2017 and 2055 – Governors from each Gulf Producing State, including Governor Jindal, requested further guidance in May 2009 – A subsequent Phase II rule was proposed on March 31, 2014, and has yet to be deemed final Gulf of Mexico Energy Security Act of 2006 OCS Royalty Revenues Special Treasury Acct. 50.0% U.S. Treasury 50.0% Gulf Producing States 75.0% 26% 47% State Protection & Conservation Projects 80.0% 23 14% Coastal Political Subdivisions 20.0% LWCF 25.0% 13% Louisiana SB 53 Signed by Governor Blanco July 6, 2007, SB 53 created the “Louisiana Coastal Protection and Restoration Financing Corporation” to securitize revenues for coastal purposes  The State’s Enabling Legislation includes strong provisions for realizing the maximum benefits of securitizing the proposed revenue stream – Created a Single Purpose Corporation for purposes of securitizing OCS rents and royalty revenues – Authorized the State to sell all or a portion of its royalty revenues to the Corporation and authorized the Corporation to purchase said revenues – Authorized the Corporation to issue asset-backed bonds secured solely by these revenues for purposes of paying the purchase price on those revenues – Granted the State the residual interest on revenues not pledged to securitization – Deemed the sale of these revenues a “true sale” and absolute transfer to the Corporation – Provided other bondholder protections typical in securitization transactions 24 Louisiana Purchase Residual Price for % of Payments Revenue Rights Sale of Rights to Future Revenues Louisiana Coastal Protection & Restoration FC Securities Proceeds Securities Investors Securitization - Overview  Securitization is the structuring of a stream of cash flows into a liquid security for sale to investors  Securitization offers the benefits of: – Non-recourse financing (no pledge of State credit) Louisiana – Isolation of security – Upfront proceeds to the State – Reduced State exposure to oil & gas royalty risks  With securitization, the bondholders bear the downside risk of revenues coming in lower than forecasted with the State keeping the upside revenues in excess of debt service  Securitization constitutes and is treated as a “true sale” and absolute transfer of the State’s right to receive its royalty revenues 25 – Oil & Gas revenue rights sold to a La CPRFC – Securities issued by the entity are backed solely by these revenues and any other pledged assets – Counsel will issue an opinion that securities are nonrecourse to the State – No State liability in the event revenues are not sufficient to pay debt service Purchase Residual Price for % of Payments Revenue Rights Sale of Rights to Future Revenues Louisiana Coastal Protection & Restoration FC Securities Proceeds Investors Investors Securities Rationale for Securitization Immediate Funds Diversification / Risk Transfer Public Policy • Capital projects and State programs • Insurance policy against nonpayment or reduced revenues • • Endowment Fund for priority programs • Diversify State’s assets by reducing exposure to one particular industry Provide show of commitment to rebuilding the State’s wetlands • Eliminate uncertainty and unpredictability of revenue stream • Limit visible dependence on oil & gas industry • Working capital • • Transfer production risk • Transfer litigation risk • Transfer interruption / moratorium risk Non-recourse to the State • 26 Rating agencies do not count securitization bonds on states’ credits GOMESA Securitization Capacity While revenue estimates differ, there exists significant potential for securitizing all or a portion of the estimated revenues to the State as needed over time  ONRR has estimated that royalty revenues to the Gulf Producing States and their CPS’s will exceed the $375 million cap beginning in 2017  If revenues exceed the cap, Louisiana’s share (estimated at 47%) would likely amount to over $175 million annually  Citi would recommend the State borrow only for those projects it can reasonably and prudently complete under the CPRA’s Master Plan  The ultimate capacity of the program will depend largely on GOMESA Phase II Revenue Estimates State/CPS Est. % Est. $ Louisiana 47% 176,250,000 Alabama 13% 48,750,000 Mississippi 14% 52,500,000 Texas 26% 97,500,000 Louisiana Phase II Revenue Breakdown State 80% 141,000,000 CPS 20% 35,250,000 (1) the results of a Feasibility Study, (2) market conditions at pricing, (3) the timing of the phased in financing program and (4) the ultimate percentage of the pledged revenues the State feels comfortable securitizing  Certain legislative and structural enhancements could further maximize capacity 27  Revenues available for State and CPRA Master Plan total $141 million annually based on application of the annual cap  There may be potential to combine these revenues with those applicable to the CPS’s, or create a separate funding program available to those Parish’s GOMESA Securitization Capacity for Louisiana Depending on the percentage of future revenues to be securitized, Citi estimates the capacity of the program in Louisiana could be substantial Key Structuring Elements  Any CPRFC Securitization would likely incorporate: – Fixed rate structure locking in cost of borrowing – Debt Service Reserve Fund – Acceptable coverage requirements – Structuring flexibility for accelerated redemption Coverage Par Amount Project Fund DSRF Average Life TIC Avg. Annual DS Summary of Financing Results 1.25x 1.50x 2.00x $1,733,985,000 $1,444,970,000 $1,083,720,000 $1,860,222,578 $1,550,166,099 $1,162,616,235 $112,800,000 $93,999,750 $70,499,750 19.03 19.03 19.03 3.91% 3.91% 3.91% $112,797,573 $93,997,217 $70,497,658 Assumes rates as of 01/28/15, fully funded DSRF at lesser of three pronged test, all-in issuance costs of 1%. Preliminary and subject to change, for illustrative purposes only. Illustrative Capacity Analysis  Capacity for the Program is determined by the percentage of revenues utilized for securitization – The same coverage requirements also largely drive the rating process, along with other elements  Citi anticipates that coverage between 1.25x and 2.00x, in conjunction with required reserves, will be necessary to achieve investment grade ratings 160 Debt Service ($ millions) – Coverage requirements and percentage of pledged revenues largely drives capacity 1.50x Coverage Scenario 140 120 100 80 60 40 20 0 2017 2020 2023 2026 2029 2032 2035 2038 2041 2044 Principal Interest LA Revenue Share Louisiana revenue share based on estimate provided by the Office of Natural Resources Revenue. 28 6. Transportation Financing Citi’s Senior Managed Surface Transportation Clients TBTA Pennsylvania Turnpike Commission Buffalo Fort Erie Peace Bridge Auth Port Authority of Allegheny County Ohio Turnpike Chicago Transit Auth Tri-Met of Oregon State of Wisconsin Michigan DOT San Mateo County Transit Dt Santa Clara County Transportation Foothills Eastern TCA Riverside County Transportation San Bernardino County Transportation San Diego County Transportation Clark Co, NV Las Vegas Monorail Alabama Highway Dept Dallas Area Rapid Transit City of Laredo, Int’l Toll Bridge System P.R. Highway and Transportation Authority 29 Case Study: State of Louisiana, Gasoline and Fuels Tax In January 2015, the State of Louisiana issued $625 million of refunding bonds to realize debt service savings, totaling $70 million on a present value basis through 2041 • Citi swiftly prepared the 2015 Series A and B Gasoline and Fuels Tax Revenue and Refunding Bonds (“2015 Bonds”) to price on January 22, 2015, within six (6) weeks of being hired, to take advantage of historically low interest rates and generate substantial debt service savings for the State • The finance team was able to affirm the Gasoline and Fuels Tax program’s strong First Lien ratings of Aa1/AA and Second Lien ratings of Aa2/AA from Moody’s and S&P, respectively • Citi worked closely with the State and its financial advisor to develop a refunding screening methodology that allowed the State to select to refund those candidates that produced present value savings above certain threshold levels, leaving certain other maturities unrefunded where present value savings could be substantially higher in the future • In the three (3) weeks leading up to pricing, the combination of increased municipal supply, continued weak U.S. economic news, and the European Central Bank’s plans for Quantitative Easing caused the municipal market to experience significant volatility • As a result, Citi refreshed its refunding screen daily with updated borrowing and reinvestment rates to keep the State apprised of how interest rate changes impacted the economics of the refunding • Citi’s focused marketing strategy included pre-marketing to targeted buyers of the 2015 Bonds, a pre-recorded internet roadshow that was viewed by 22 potential investors, and 10 one-on-one calls with potential institutional investors to educate them on the strengths of the Gasoline and Fuels Tax credit and refunding structure • The final pricing structure resulted in $649 million of bonds refunded and reduced total debt service by more than $109 million ($70 million on a present value basis or 10.78% of bonds refunded) 30 Transportation Financing and Funding Tools Available States are undertaking a comprehensive review of a wide variety of transportation funding sources, across both the public and private spectrum. Federal  Highway Trust Fund  GARVEE / GANs – Direct / Indirect  Section 129 Loans  TIFIA – Direct Loan, Line of Credit, Loan Guarantee Highway Trust Fund 31 State  34 states issue highway revenue bonds  Dedicated Highway Trust Fund (Leveraged and Pay-Go) – Motor Fuel / Sales Tax – Sales Tax on Motor Vehicles – Use Tax on Motor Vehicles – Licensing Fees  Tolls and Toll Credits  State Infrastructure Bank – Loans, Guarantees, Interest Rate Buydowns  Obtain Design/Build Contract  Private Activity Bonds – MAP-21 Alternative Funding  Provide Shadow Tolls  Grants/Capital Contributions  Back-up Appropriations for Toll Roads, Highways – O&M, CapEx, DSRF Guarantee Local  Right of Way  Tolls  Capital Investment  Special Tax Districts  Transportation Corporations  Local Option Taxes  Sales Taxes Private  Toll Concession – Debt – Equity  Leverage Availability Payments, including Shadow Tolls  Provide Design/Build Contract – Subordinate loan/up-front equity as consideration for contract Future Federal Highway Transportation Funding is Uncertain With Congress focused on reducing the Federal budget deficit and significantly reduce discretionary spending, transportation funding faces significant near-term challenges  No revenue/tax increases and rising construction costs have depleted States capacity to fund new construction and ongoing maintenance of existing transportation infrastructure  There has not been an increase in the federal motor fuel excise tax since 1994 – The 18.4 cpg federal gas tax and 24.8 federal diesel tax – Revenue split roughly 80% for Highways / 20% for Transit  Significant loss in buying power of Federal Gas Tax revenues – Since 2003, highway construction costs have increased by nearly 200% while revenue receipts have stagnated  To maintain current spending levels, the U.S. Treasury has “bailed out” the Federal Highway Trust Fund multiple times totaling $54 billion over the last six fiscal years  The current House majority has publically committed to eliminating any future U.S. General Fund transfers without offsetting spending reductions  Without additional U.S. General Fund transfers or other revenue injections, the Federal Highway Trust Fund continues to be insolvent With seemingly little political support to raise the Federal Gas Tax and more fuel efficient vehicles on the road resulting in minimal growth in both federal and state gas tax collection, new revenue streams must be identified to fund transportation. 32 Short-Term Funding of the Highway Trust Fund On August 8, 2014, President Obama signed a $10.8 billion measure called the Highway and Transportation Funding Act of 2014 to fund the Highway Trust Fund through May 31, 2015. Key Elements of the Bill  The Act continues existing federal highway programs authorized under MAP-21 as well as existing programs that are funded by the Highway Trust Fund, which include the highway safety, transit and motor carrier safety programs  The spending authority of the Highway Trust Fund will be reauthorized to fund all existing programs through May 31, 2015 on a pro rata basis based on 2014 levels  Based on TIFIA’s budget of $1 billion in 2014, the prorated appropriation for the TIFIA program would be approximately $665.8 million  The funding of the legislation will come from the following transfers and budgetary offsets  Transfer from the General Fund of the US Treasury - $9.8 billion  Transfer from the Leaking Underground Storage Tank Trust Fund $1 billion  Change in the Internal Revenue Code to allow single-employer defined benefit pension plans to use higher interest rates when calculating their future liabilities and a one-year extension of the US Treasury’s capability to collect certain custom user fees Source: http://www.mondaq.com/unitedstates/x/333536/Project+Finance+PPP+PFI/Federal+Surface+Transportation+Reauthorization+A+Temporary+Detour 33 State Highway Revenue Bond Programs Overview Highway Revenue Bond programs are widely used by states to accelerate transportation funding and better connect user fees to public benefits  27 states, plus Puerto Rico, have unsupported Highway Revenue Bond (“HRB”) programs with four states (Louisiana, Michigan, Pennsylvania and Wisconsin) having two separate programs  26 of the 32 programs leverage state motor fuel taxes – Louisiana, Rhode Island, Vermont and Wisconsin are the only states that issue HRBs backed only by state motor fuel taxes – In addition to motor fuel taxes, many states pledge a combination of:  Vehicle registration fees  Drivers License fees  Miscellaneous taxes and other fees  In addition to the 32 revenue programs, 10 states pledge their full faith and credit towards repayment of transportation bonds 34 KEY: Highway Revenue Bonds State Appropriations Bonds Multiple Programs – Appropriation and Highway Revenue Bonds Multiple Programs – GO and Highway Revenue Bonds GO Bonds Paid by Transportation Revenues Comparison of State Motor Fuel Taxes Provided below is a comparison of state motor fuel tax rates from January 2014 to January 2015 January 2014 Gasoline Diesel Alabama 20.95 21.92 Alaska 12.40 12.70 Arizona 19.00 27.00 Arkansas 21.80 22.80 California 52.47 51.06 Colorado 22.00 20.50 Connecticut 49.30 54.90 Delaware 23.00 22.00 District of Columbia 23.50 23.50 Florida 36.03 32.37 Georgia 28.45 31.97 Hawaii 49.11 52.47 Idaho 25.00 25.00 Illinois 39.10 44.10 Indiana 38.69 39.81 Iowa 22.00 23.50 Kansas 25.00 27.00 Kentucky 38.80 27.80 Louisiana 20.00 20.00 Maine 30.01 31.21 Maryland 27.00 27.75 Massachusetts 26.50 26.50 Michigan 39.10 38.47 Minnesota 28.60 28.60 Mississippi 18.78 18.40 Missouri 17.30 17.30 January 2015 Gasoline Diesel 20.87 21.85 11.30 11.80 19.00 27.00 21.80 22.80 45.39 40.60 22.00 20.50 43.22 54.50 23.00 22.00 23.50 23.50 36.42 33.67 26.53 30.10 45.00 42.38 25.00 25.00 30.72 39.49 29.85 44.26 22.00 23.50 24.03 26.03 27.60 24.60 20.00 20.00 30.01 31.21 30.30 31.05 26.54 26.54 30.26 33.98 28.60 28.60 18.78 18.40 17.30 17.30 Difference Gasoline Diesel (0.08) (0.07) (1.10) (0.90) (7.08) (10.46) (6.08) (0.40) 0.39 1.30 (1.92) (1.87) (4.11) (10.09) (8.38) (4.61) (8.84) 4.45 (0.97) (0.97) (11.20) (3.20) 3.30 3.30 0.04 0.04 (8.84) (4.49) - Source: American Petroleum Institute Total State Taxes include Sales Tax Component Component of State Taxes indexed to wholesale price of gasoline Gasoline tax is linked to inflation Voters have repealed automatic indexing of the state's gasoline tax 35 Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia Wisconsin Wyoming Average January 2014 Gasoline Diesel 27.75 28.50 27.30 26.70 33.15 28.56 19.63 19.63 14.50 17.50 18.88 22.88 49.57 49.57 36.75 36.75 23.00 23.00 28.00 28.00 17.00 14.00 31.07 30.34 41.80 52.10 33.00 33.00 16.75 16.75 22.00 24.00 21.40 18.40 20.00 20.00 24.50 24.50 31.97 31.00 17.28 26.06 37.50 37.50 35.70 35.70 32.90 32.90 24.00 24.00 28.22 28.82 January 2015 Gasoline Diesel 27.75 28.50 26.50 25.98 33.15 28.56 23.83 23.83 14.50 17.50 18.88 22.88 45.09 46.28 37.75 37.75 23.00 23.00 28.00 28.00 17.00 14.00 31.07 30.34 50.50 64.20 33.00 33.00 16.75 16.75 22.00 24.00 21.40 18.40 20.00 20.00 24.50 24.50 31.97 32.00 22.38 26.08 37.50 37.50 34.60 34.60 32.90 32.90 24.00 24.00 27.39 28.53 Difference Gasoline Diesel (0.80) (0.72) 4.20 4.20 (4.48) (3.29) 1.00 1.00 8.70 12.10 1.00 5.10 0.02 (1.10) (1.10) (0.83) (0.29) Gasoline Price vs. Louisiana Gas and Motor Fuels Tax Revenues Since 1991 U.S. and Gulf Coast gasoline prices have increased by 5.6 and 5.9%, respectively, while Louisiana’s gas and fuels tax revenues have increased by 1.7%, on average 3.00 500 Gasoline Price ($/gallon) 2.50 400 2.00 300 1.50 200 1.00 0.50 Average YoY Growth Minimum YoY Growth Maximum YoY Growth Louisiana Gasoline and U.S. Gulf Coast Gasoline Price Gasoline Price Motor Fuels Taxes 5.56% 5.93% 1.69% -19.05% -19.34% -5.35% 32.31% 33.53% 11.19% Total Gasoline and Motor Fuels Taxes ($ million) 600 3.50 100 0 0.00 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Fiscal Year U.S. Regular Conventional Retail Gasoline Price Gulf Coast Regular Conventional Retail Gasoline Price Total Louisiana Gasoline and Motor Fuels Taxes Sources: U.S. Energy Information Administration; Louisiana Gas and Fuels Tax Revenue Refunding Bonds Series 2015 A and B Official Statement 36 Rating Agency Criteria for Transportation Revenue Bonds  Diversity and stability of the pledged revenue stream – State’s economy – Qualitative and quantitative characteristics of the pledged revenues  Legal and practical restrictions to additional debt issuance – Additional bonds test should ensure that coverage will not be diluted to threshold level  Coverage of debt service – Vulnerability to declines in revenue – Historic coverage sufficient to meet dips  Governmental support – Importance of highways and roads in overall spectrum of infrastructure needs  Program management  Quality of planning, construction management, maintenance and inspection  Fuel efficiency / hybrid vehicles 37 Revenues for Financing Transportation Improvements Type of Revenue Gasoline and Diesel Taxes Adequacy Stability Potential for Evasion Equity Gasoline taxes can be Inflation erodes the collected fairly high up value of fixed rate per Periodic revisions in Does not achieve the distribution chain, Evasion rate of diesel gallon fuel taxes; response to inflation; equity by vehicle class fuel (10%) taxes on refiners or major increasing fuel changes in fuel and must be exceeds that of distributors; diesel fuel augmented by other efficiency reduces the efficiency will decrease taxes are collected gasoline taxes fees revenue per mile of stability from distributors and travel users Vehicle Registration Fees Could provide a very Could be set at any stable revenue base, level, limited only by as well as one that political feasibility; grew with the vehicle rates should be fleet; responsive to graduated for the inflation if based on various vehicle classes value Taxes on New Vehicles and Parts Sales Tax Evasion at Highly responsive to Levied at the retail manufacturer's level Tax at either the manufacturer's price or inflation; will fluctuate level or manufacturers' should be a relative at the retail price could substantially in level; would directly minor issue; however, response to economic apply to buyers of new at the retail level could yield substantial vehicles present a major revenue cycles problem Taxes on Alternative Fuels (Ethanol, Periodic revisions in Methanol, Blends, Tax rates could be set response to inflation; to yield revenue Liquefied Petroleum changes in fuel Gas, Compressed equivalent to gasoline efficiency will decrease and diesel taxes Natural Gas (CNG), stability and Electric Batteries) 38 Point of Taxation Collected from all vehicle owners Similar to that for gasoline or diesel fuels- as far up the distribution chain as feasible Evasion relatively modest Evasion is a serious problem for all alternative fuels, particularly electricity and CNG; rates similar to those of diesel fuel taxes Ease of Implementation Easy to implement compared with major changes in the revenue structures of the state Might not be equitable Present registration among vehicle classes fees could easily be depending on how it is adjusted, but it may be difficult to tie closely to implemented; not sensitive to amount of benefits or objectives of the program use of the vehicle Tax could be set at different levels for vehicle classes to reflect cost responsibility Relatively easy to implement at the manufacturers' level; however at the retail level, it may entail some problems due to the large number of selling entities Can be indexed by vehicle class to Taxes on fuels achieve greater equity delivered through among vehicle classes stations may be easy than fuel taxes alone; to implement; other, vehicle sales taxes will such as CNG or electricity, may be be less equitable by difficult vehicle class than fuel taxes Revenues for Financing Transportation Improvements (Cont’d) Type of Revenue Damage Fees and Weight-Distance Taxes Emission Fees Vehicle Miles of Travel (VMT) Fees 39 Adequacy Stability Point of Taxation Potential for Evasion Equity Ease of Implementation Likely to be highly Rates could be set at stable; relatively easy Will be incident upon any level; could be to adjust because not trucks, at the level of based on registered many taxpayers are the vehicle or fleet weight and distance or involved; unless owner or operator axle weights indexed not responsive to inflation Highly equitable source of revenue; in Evasion is highly Neither are likely to be addition, pavement dependent on easy to implement fees may contribute to enforcement activities politically more productive use of pavement resources Rates could be chosen Not responsive to along a broad inflation; emissions continuum, and fees have been declining as could yield very high a result of continued revenues at the higher tightening of standards rates Currently no state Emission fees would Dependent on the be higher for those emission fees in place; would require geographic breadth owning higher-emitting of application, and on (older) vehicles, likely centralized inspection level of the highest to include lower and testing of income groups emissions at least fees annually disproportionately Could yield almost any desired level of revenue; should be based on the relative cost responsibility of vehicle classes Not responsive to inflation, so they may need to be indexed or adjusted periodically in response to changes in revenue requirements Collected from all vehicle owners Highly equitable VMT fees could be set among vehicle classes; Evasion is a major could be graduated on Collected from the No VMT currently concern because VMT the basis of cost individual vehicle or applying to all vehicles; fee is paid on an fleet owner and would responsibility, vehicle states would need to individual basis and size and weight, be incident upon expand existing more complex recordequivalent single-axis registration procedures vehicle use keeping is required loads, value, emissions, or other characteristics 7. Lottery Gaming Revenue Bonds Lottery Revenue Bond Programs – Overview Citi believes the State has Lottery monetization alternatives that could be pursued to raise proceeds for a variety of programs while complying with any U.S. federal law constraints that may be applicable.  Some states have leveraged their lottery programs by issuing lottery revenue bonds – Lottery revenue bonds are secured by future lottery revenues – Most lottery revenue bond transactions have used traditional dedicated revenue structures that provide strong debt service coverage with excess revenues continuing to be pledged for ongoing state programs  Citi has acted as Senior Managing Underwriter on four different Lottery Revenue Bond Programs on a total of 26 separate transactions  The States listed below have issued Bonds secured by lottery or gaming revenues: – West Virginia (Education/Economic Development) – Florida (Education) – Oregon (Capital Projects/Local Grants) – Oklahoma (Higher Education) – Arizona (Budget Relief)  Citi believes a revenue bond approach similar to those utilized in West Virginia, Florida and Oregon, could bring significant upfront value to the State – If desired, General Fund relief could be achieved through budget re-programming techniques 40 State Lottery Revenue Bond Credits - Overview Florida State GO Ratings (2) West Virginia SLF (3) AAA / Aa1 / AAA A+ / A1 / AAA AA+ / Aa1 / AA+ Aa2 / AAA AA+ / Aa1 / AA A1 / AAA / A+ Debt Service Coverage Additional Bonds Test 3.59x 3x 4x 4x 5x 2x Use of Proceeds Education Capital Proj. / Local Grants Education / Econ. Dev. Revenues Pledged First lien on revenues deposited in “Educational Enhancement Trust Fund,” which totals 38% of gross lottery revenues by statute First lien on all lottery revenues, net of revenues required for prizes, lottery operating expenses and certain other programs First $18 million of the State Lottery Fund (“SLF”) to the senior bonds; Second $10 million of the SLF to the subordinate bonds and $5 million to further subordinate bonds DSRF Requirement Max. Annual Debt Service Max. Annual Debt Service Max. Annual Debt Service Ann. Lottery Rev. Pledged $1.18 billion $567.9 million $177.4 million Addt’l Lottery Revs Pledged? Yes No No Term of Debt 20 years 20 years 30 years     41 Oregon State Lottery Ratings Other Security Features (1) Sources: (2) Sources: (3) Sources: Video Lottery (1) Non-impairment clause $2.5 bil bonding authorization 20-year max. maturity Other similar gaming revenues pledged first to these bonds   Moral obligation of the state to replenish the DSRF Covenant to continue to operate lottery while bonds are outstanding  Debt service statutorily limited to amount of pledged revenues S&P report dated August 18, 2011 and Official Statement dated August 31, 2011. S&P report dated March 23, 2012 and Official Statement dated April 10, 2012. Citi’s understanding of the credit, based on official statements. SLF = State Lottery Fund Program, including traditional games and a portion of Racetrack revenues. Louisiana Lottery Overview Established in 1990 for purposes of generating revenues without additional taxes, the Louisiana Lottery provides supplemental funding for public education in Louisiana.  The Lottery is required by statute to transfer 35.5% of its revenue to the State Treasury – A constitutional amendment in 2004 further provided that Lottery proceeds would be dedicated to the Minimum Foundation Program, which funds public education in Louisiana – Total Lottery sales have totaled over $7.0 billion since its inception in 1991 – $2.8 billion has been transferred to the State over time  The Lottery’s structure, which is set up like a quasi-public corporation owned by the state, is unique  The Lottery is run as a private business  The Lottery has expanded its game selection over the years  In FY 2014, the Lottery recorded sales of $450 million – Of this amount, more than $161 million was returned to the State – 13th consecutive year over $100 million transferred to the State  The Louisiana Lottery Corporation faces competition Statewide – Video Poker – Riverboat Casinos – Indian Casinos 42 Where the Money Goes Lottery Retailers 6% Lottery Operations 6% Price Winners 53% State Treasury 35% 8. Solutions Why Public Private Partnerships (P3)? Generally, governments look to P3s to capitalize on the private sectors’ expertise, capacity for innovation and bottom line orientation while also looking to transfer risk and responsibilities and enhance financial resources What’s the role of the governmental partner?  Design/Bid/Build: Total government control and responsibility  DBOFR: Outsource development and operating risk  Long Term Concession: Government entities grants rights and privileges while retaining oversight responsibilities and remedies  True Sale: No on-going role for governmental entity Value Creation Value Creation while Avoiding Value Destruction in PPPs How do governments benefit financially from P3s?  Upfront payment that may extinguish current debt and future liabilities  On-going payments from base lease payments and/or share in net operating or residual revenues [Note: Can share revenues as lessor or as participating partner] Most Public Control & Risk/Lower Cost of Capital Design/Bid/Build Procurement Private Contract Fee Services (QMA) 43 Price Regime CapEx Savings OpEx Savings Negative Arbitrage Value Destruction Why P3s?  Transfer risk and responsibilities associated with: – Setting rates and charges for services under market pricing regime – Providing and managing service delivery – Managing project development, construction, operations, financing and/or life-cycle delivery  Value monetization – Freeing trapped equity to re-cycle and fund new infrastructure – Relieve financial stress and deleverage  Expand financial resource and sources of capital Taxes Cost of Capital New American Infrastructure Model (“NAIM”) aims to capture the value creation aspects of P3s while avoiding the value destruction and governance concerns Most Private Control & Risk/Higher Cost of Capital Privatization via True Sale Private (Design/Build) Design/ Build/Operate/ Finance/Rebuild NAIM Private Concession (Revenue Risk) Extracting Efficiency P3s allow for reallocation of key risks. Possible Goals Construction Efficiency  Transfer of construction risks, including cost,  Compliance with state laws schedule and/or performance  Labor unions Operating Efficiency  Reduce operating expenses and/or improve service through: – Technology – Transfer of operating cost and performance risk to private sector  Federal Qualified Management Agreement requirements for private operation of State debt financed assets  Labor unions  Public/political opposition Revenue Efficiency  Enhance revenues through: – Technology – Improved collections – Increased rates – Implementing forward looking rate schedules – Taking rate setting schedule out of political arenas  Undertake transaction to generate upfront funds  Sale of certain assets requires defeasance of existing state debt  State law limitations on asset disposition Upfront Proceeds 44 Challenges P3 Projects Financing Leverages State Funds Public Financing ($millions) 91 Express Lanes, CA (TR) Dulles Greenway, VA So. Bay Express, CA (TR) I-495 Express, VA (TR) SH 130 seg. 5+6, TX (TR) I-595, FL (AP) Port of Miami Tunnel, FL (AP) No. Tarrant Express, TX (TR LBJ Expressway, TX (TR) Denver Eagle Rail, CO (TR) Jordan Bridge, VA (TR) Midtown Tunnel, VA (TR) Presidio Parkway, CA (AP) I-95 HOT Lanes, VA (TR) East End Bridge, IN (AP) No. Tarrant Exp. 3A/B, TX (TR) Goethals Bridge, NY (TR) US 36 Managed Lanes, CO (TR) I-69 Managed Lanes, IN (AP) I-4 Managed Lanes, FL (AP) Total State/Local* TIFIA** PABs Bank Sr. Debt Equity Total Closing 0 0 0 409 0 0 100 573 490 1,312! 0 731 0 83 392 0 456 76 80 861 $5,563 0 0 140 589 430 603 341 650 850 280 0 422 60+90^ 300 0 531 474 60 0 949 $6,769 0 0 0 589 0 0 0 400 615 396 0 675 0 253 677 274 457 20 244 0 $4,600 100 298 400 0 686 781 342 0 0 0 0 0 167 0 0 0 0 0 0 486 $3,260 30 80 160 350 210 208 80 426 672 54 120 272 45 280 82 430 113 41 40.4 104 $3,797 130 378 700 1,973 1,326 1,592 860 2,049 2,627 2,042 120 2,100 362 916 1,151 1,235 1,500 208 370 2,300 $23,989 7/93 9/93 5/03 7/08 3/08 2/09 10/09 12/09 6/11 8/10 1/12 4/12 6/12 12/12 3/13 9/13 11/13 2/14 7/14 2/14 (TR) Toll revenue risk financing (AP) Availability payment financing *excludes public development costs **excludes capitalized interest ! Federal grant (FTA FFGA), sales tax revenue, revenue bond proceeds ^$60m 30yr loan +$90m 3yr loan Source: Public Works Financing (9/14) 45 PPP Project Financing ($millions) Key Barriers to P3s in the U.S. Need a New American Infrastructure Model (“NAIM”) that addresses obstacles unique to the U.S. and provides strong incentives for: (1) public pensions to invest in U.S. infrastructure, and (2) preserves the favorable financing terms and lowest cost of capital provided by the tax-exempt debt market. Cost of Capital - U.S. Municipal Securities Market, nearly $4 Trillion in size, is extraordinarily diverse in terms of asset class, deal size and financing structures largely bolstered by the tax-exempt nature of most of the debt  Large and broad pool of capital available  Attractive interest rates – generally tax-exempt from Federal and in most case state and local taxes  Average rating of “A”, where a demonstrated ability to repay debt is required  Fixed rate, long tenured bonds (up to 40 years but not longer than average useful life of assets) with attractive call features (10-yr par call)  Ability to issue zero coupon debt to better match growing revenue streams Governance and Social Concerns  Infrastructure concessions are still new in the U.S. and have a mixed track record, and some of the distressed situations only add to the confusion  Labor resistance, xenophobic fears and parochialism are P3s obstacles  “Cost recovery” principals drive the pricing of infrastructure today where “market pricing” regimes are needed to transform government enterprise and generate new and recycled capital for infrastructure Challenges Sources Public Structural Deficits Pension Funds (“PPF) Muni Bonds Tax World’s Revolt Best Infra Market Obstacles PPF: Cautious, Recognize PPF’s as ProcessOriented & Market Tested Approaches Gap IntraFunds Strategics Taft Hartley SWF’s Distressed Bondholders Public Sector Comparators Platforms PPF Mutual Fund PPF COOP New Model Monetize Trophy Assets IFM Australian Super Fund New P2P Private Capital Infrastructure Catalyst Privatization & P3 Opposition Distressed Situations Federal Assets In-lieu-of Payment Rent-A-Platform Macquarie JPM Infra MS Infra GS Infra Market Concerns - Distressed situations can widen credit spreads, which can be compounded by fear of tapering  Difficult political climate with U.S. governments at all levels facing large unfunded obligations and high debt burdens  Like the GM & Chrysler workouts, new model needs to provide tools for restructuring infrastructure enterprises and the currency to negotiate with creditors, labor, and pensions Public Pension Fund (“PPFs”) Concerns  Need long life, stable return assets like infrastructure  Want to guard themselves from the politically motivated investments and look for investment partners to provide value added management solutions  Fiduciary responsibility expects professional managers with “skin in the game”  Currently, any equity ownership triggers negative financial consequences due to IRS Rules which would force (i) a taxable refinancing of all outstanding debt, (ii) the need for costly debt defeasance, and (iii) the requirement that all future borrowings be done on a taxable basis – in effect penalizing PPF investment 46 NAIM’s Value Proposition and Role of Equity Investors NAIM Strategy Develop a transformational infrastructure model that combines stakeholder friendly PPF equity with traditional municipal financing and engages highly qualified infrastructure managers with “skin in the game” PPFs have an estimated $150B of equity capital available for infrastructure Public Pension Funds Assuming tax change, PPFs are ideally suited to overcome the key obstacles to P3s in America  significantly increasing cost of capital  governance concerns (loss of public stewardship, xenophobia, labor issues, etc.) Typically, PPFs are not equipped to act as lead financial sponsors and participate by investing in infrastructure funds and/or co-investing Private Partners Other Equity Investors Private infrastructure funds like Oaktree, Macquarie, and IFM, and strategic investors like AECOM, Clark and Walsh bring experience, expertise, scale and financial resources to infrastructure investing  NAIM is most tax efficient without private partners but private participation is expected to be the norm for the near future  Private partners, as asset managers and investors, will select the infrastructure investments, develop the business strategy and oversee the portfolio       Stable returns supporting significant value & monetization Strong growth potential (top line / bottom line) High returns compared to similar risk profiles (10%+ ROE) Long life / long maturity matching with long liabilities Less vulnerable to competition, high barriers to entry Inflation hedge with inelastic demand  Low correlation to other asset classes  Provides a reliable pipeline where P3 assets are scarce Potential NAIM Partners PPFs, Infrastructure Funds & Advisors Taft-Hartley Plans, private and non-U.S. pension plans, sovereign wealth funds, and endowments are also investors in infrastructure. Primary focus will be on core infrastructure with strong cash flow and lower Investment risk, greenfield opportunities with strong financial support and distressed Focus situations where serving as “white knight” If NAIM is advanced via regulation, funds could be structured as a group of separately managed accounts, or if new legislation is pursued, a commingled fund regime could be constructed. Under NAIM, NAIM  PPFs are the lead investors, Structure  Taxable and T.E. debt proportional to equity ownership (PPF vs. and Capital Private) Stack  As instrumentalities, PPFs can serve to ease the burden of government  Ultimate beneficiaries from tax exempt financing are governmental sponsors and users of infrastructure assets and not NAIM investors 47 Fund Investment Characteristics Appendix A - State Rating Landscape State General Obligation Ratings Washington Aa1/AA+/AA+ Montana Aa1/AA/AA+ North Dakota (Aa1)/(AAA)/NR Oregon Aa1/AA+/AA+ Idaho (Aa1)/(AA+)/(AA+) Nevada Aa2/AA/AA+ Wyoming NR/(AAA)/NR South Dakota Aa2*/(AA+)/(AA+) Colorado (Aa1)/(AA)/NR Arizona (Aa3)/(AA-)/NR Minnesota Aa1/ AA+/AA+ Nebraska Aa2*/(AAA)/NR Utah Aaa/AAA/AAA California Aa3/A+/A NH Aa1/AA/AA+ Vermont Maine Aaa/AA+/AAA Aa2/ AA/AA Oklahoma Aa2/(AA+)/AA+ Texas Aaa/AAA/AAA West Virginia Aa1/AA/AA+ Michigan Aa2/ AA-/AA Iowa (Aaa)/(AAA)/(AAA) Kansas (Aa2)/(AA)/NR New Mexico Aaa/AA+/NR Wisconsin Aa2/AA/AA Ohio Aa1/ Illinois Indiana (Aaa)/ AA+/AA+ A3/A-/A(AAA)/ (AAA) Missouri Aaa/ Kentucky AAA/AAA (Aa2)/(AA-)/NR Arkansas Aa1/AA/NR Louisiana Aa2/AA/AA Alaska Aaa/AAA /AAA Tennessee Aaa/AA+/AAA Alabama Aa1/ AA/AA+ Hawaii Aa2/AA/AA Guam NR/BB-/NR Aaa/AAA Georgia Aaa/ AAA/AAA Florida Aa1/AAA/AAA One Aaa/AAA Aa/AA One Less than Aa3/AA- Order of Ratings: Moody’s/S&P/Fitch/Kroll as of November 20, 2014. *Lease revenue and/or Certificate of Participation (“COP”) rating NR: General Obligation Debt is Not Rated ( ) Indicates issuer credit rating which is equivalent to a General Obligation rating 48 Pennsylvania Aa3/AA-/AA- RI Aa2/AA/AA CT Aa3/AA/AA/AA NJ A1/A/A DE Aaa/AAA/AAA MD Aaa/AAA/AAA DC Aa2/AA-/AAVirginia Aaa/AAA/AAA North Carolina Aaa/AAA/AAA Mississippi Aa2/AA/AA+ This image cannot currently be display ed. New York Aa1/ AA+/AA+ MA Aa1/AA+/AA+ South Carolina Aaa/AA+/AAA Puerto Rico B2/BB/BB- State General Obligation Ratings and Outlooks State Alabama Alaska Arizona Arkansas California Colorado (2) Connecticut Delaware DC Florida Georgia Guam Hawaii Idaho Illinois Indiana Iowa Kansas Kentucky Louisiana Maine Maryland Massachusetts Michigan Minnesota Mississippi Missouri Moody's Aa1 Stable Aaa Stable (Aa3) Positive Aa1 Stable Aa3 Stable (Aa1) Stable Aa3 Stable Aaa Stable Aa2 Stable Aa1 Stable Aaa Stable * N/A Aa2 Stable (Aa1) Stable A3 Negative (Aaa) Stable (Aaa) Stable (Aa2) Stable (Aa2) Stable Aa2 Stable Aa2 Stable Aaa Stable Aa1 Stable Aa2 Positive Aa1 Stable Aa2 Stable Aaa Stable S&P AA Stable AAA Stable (AA-) Positive AA Stable A+ Stable (AA) Stable AA Stable AAA Stable AAStable AAA Stable AAA Stable BBStable AA Stable (AA+) Stable ANegative (AAA) Stable (AAA) Stable (AA) Negative (AA-) Negative AA Stable AA Stable AAA Stable AA+ Stable AAStable AA+ Stable AA Stable AAA Stable Fitch AA+ Stable AAA Stable * N/A * N/A A Stable * N/A AA Negative AAA Stable AAStable AAA Stable AAA Stable * N/A AA Stable (AA+) Stable ANegative (AAA) Stable (AAA) Stable * N/A * N/A AA Stable AA Stable AAA Stable AA+ Stable AA Stable AA+ Stable AA+ Negative AAA Stable State Montana Nebraska Nevada New Hampshire New Jersey New Mexico New York North Carolina North Dakota Ohio Oklahoma Oregon Pennsylvania Puerto Rico Rhode Island South Carolina South Dakota Tennessee Texas Utah Vermont Virginia Washington West Virginia (2) Wisconsin Wyoming Moody's S&P Aa1 Stable AA Stable (1) Stable (AAA) Stable Aa2 Aa2 Stable AA Stable Aa1 Stable AA Negative A1 Negative A Stable Aaa Stable AA+ Stable Aa1 Stable AA+ Stable Aaa Stable AAA Stable (Aa1) Stable (AAA) Stable Aa1 Stable AA+ Stable Aa2 Stable (AA+) Stable Aa1 Stable AA+ Stable Aa3 Stable AAStable B2 Negative BB Negative Aa2 Negative AA Stable Aaa Stable AA+ Stable (1) Stable (AA+) Positive Aa2 Aaa Stable AA+ Stable Aaa Stable (AAA) Stable Aaa Stable AAA Stable Aaa Stable AA+ Positive Aaa Stable AAA Stable Aa1 Stable AA+ Stable Aa1 Stable AA Stable Aa2 Positive AA Stable * N/A (AAA) Stable Ratings in parentheses are issuer credit ratings or implied General Obligation ratings. Note: Shading indicate changes since June 1, 2013. Green shaded box indicates upward rating action, Red shaded box indicates downward rating action. * No general obligation rating. (1) Lease revenue and/or Certificate of Participation (“COP”) rating. (2) Kroll Bond Rating Agency also assigns ratings to Connecticut (AA/stable) and Wisconsin (AA/stable). Sources: Moody’s Investors Service, Standard & Poor’s, Fitch Ratings, Kroll Bond Rating Agency; As of November 20, 2014. 49 Fitch AA+ Stable * N/A AA+ Stable AA+ Stable A Negative * N/A AA+ Stable AAA Stable * N/A AA+ Stable AA+ Stable AA+ Stable AAStable BB- Negative AA Stable AAA Stable (AA+) Stable AAA Stable AAA Stable AAA Stable AAA Stable AAA Stable AA+ Stable AA+ Stable AA Stable * N/A U.S. State Debt and UAAL Per Capita $ Thousands Many states and municipalities are confounded by difficult choices, e.g., reduced benefits, boost taxes or cut service to increase contributions, improve investment performance, sell pension bonds or monetize assets to bolster funding levels and improve debt burden statistics 25 % 14 12 20 10 15 8 6 10 4 5 2 AAA AA+ AA AA- A+ A A- Alaska Delaware Florida Georgia Indiana Iowa Maryland Missouri Nebraska North Carolina Texas Utah Virginia Wyoming North Dakota Tennessee Vermont Idaho Kansas Massachusetts Minnesota New Mexico Ohio Oklahoma Oregon South Carolina South Dakota Washington Hawaii New York Alabama Arkansas Colorado Connecticut Louisiana Maine Mississippi Montana Nevada Rhode Island West Virginia Wisconsin New Hampshire Pennsylvania Arizona Michigan Kentucky New Jersey California Illinois 0 Debt PC Debt + UAL / Gross State Product UAAL PC Debt + UAL / Gross State Product Median Debt PC + UAAL PC Median Source: “US State Pension Funding: Strong Investment Returns Could Lift Funded Ratios, But Longer Term Challenges Remain,” S&P Research released 6/24/2014 50 0 IRS Circular 230 Disclosure: Citigroup Inc. and its affiliates do not provide tax or legal advice. 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