HOUSE BILL NO. 556 An Act relating to a port development project at Lynn Canal, providing legislative approval for the Alaska Industrial Development and Export Authority to issue bonds or otherwise provide financing for the project; and providing for an effective date. TERRY HARVEY, STAFF TO REPRESENTATIVE WEYHRAUCH, explained that HB 556 is a revenue bond bill for the Kensington Mine project located about 50 miles northwest of Juneau. He stated that the Kensington Mine is nearing completion of its permitting process and construction could begin next year. The Alaska Industrial Development & Export Authority (AIDEA) has helped to draft the bill. The revenue bonds are for the port infrastructure at Cascade Point and Lower Slate Cove to help transport mine supplies and workers. Co-Chair Harris asked the amount that AIDEA has the authority to bond without legislative approval. Mr. Harvey said about $10 million, and clarified that the bill gives AIDEA authorization. JIM MCMILLAN, DEPUTY DIRECTOR OF CREDIT AND BUSINESS DEVELOPMENT, ALASKA INDUSTRIAL DEVELOPMENT & EXPORT AUTHORITY, VIA TELECONFERENCE, ANCHORAGE, expressed that AIDEA supports the bill. He noted that AS 44.88 gives AIDEA the authority to issue bonds, and the bonds would be in excess of $10 million. The current project status includes conceptual costs and designs. Mr. McMillan stressed two points. The preliminary costs of $7 million are "very soft," and AIDEA is concerned that costs could exceed $10 million. The IRS code with tax exempt financing of a dock facility allows for financing of related upland improvements, which will be part of the due diligence process. He said that it is uncertain whether any uplands development will be included, but the financing could reach well above $10 million. Mr. McMillan explained that HB 556 is simply an authorization allowing the project to proceed to the due diligence process. The financing approval by AIDEA's board of directors depends on several statutory requirements including a feasibility analysis, a financial plan, and a finding of the economic, social and environmental effects. He noted that this is the beginning of a long process. Authorization is required only when the project is to be financed under AIDEA's development finance program, known as "the own and operate." AIDEA would own the docks because the IRS code requires government ownership to qualify for tax- exempt financing. Tax exempt financing also requires the likelihood of public use of the dock facilities. The AIDEA would seek a determination from the IRS that the two facilities qualify for public use. Mr. McMillan said that AIDEA estimates 250-300 construction jobs, and 110-250 permanent jobs at Kensington Mine. The tax-exempt financing would assist the developer, Coeur Alaska, through the issuance of tax-exempt bonds and lower cost financing, which could save up to 2% on the financing cost. The AIDEA proposes to issue conduit tax-exempt revenue bonds, which means its credit and assets would not be at risk. The bondholders who supply the money in an AIDEA pass-through will only look at the project revenues from the Kensington project, and any credit enhancements that the underwriters may require in order to sell the bonds. He emphasized the due diligence process and that this authorization and neither a commitment on the part of AIDEA to provide the financing nor a commitment by Coeur Alaska to accept it. Representative Hawker questioned the $7 million preliminary figure while the bill reflects a $20 million bonding authority. He asked if there would be other projects on Lynn Canal that would qualify. Mr. McMillan replied that AIDEA is not considering any other projects at this time. Representative Hawker asked if AIDEA might end up with excess bonding capacity if this bill were passed. Mr. McMillan said that it is possible to finance other port development projects in Lynn Canal with the excess bonding. However, AIDEA would meet with the Legislature before considering any other projects. Representative Hawker asked if AIDEA would object to tightening up the definition to make it clear that the bonding authorization applies only to the specific project involving the Kensington Mine. Mr. McMillan replied that AIDEA would not object. Representative Chenault questioned if it is intended that the money go to other [upland] projects. He asked who would pay for maintenance and repair of the facility, and if public access would happen during the mine's operation or in later years. Mr. McMillan replied that there has not been any related upland improvement identified, but AIDEA would make a determination in the near future. An upland fuel storage facility would qualify, but it is uncertain if it would be required. Coeur has requested additional financial assistance for a tailings disposal facility but AIDEA wouldn't own it. The AIDEA can issue extra tax-exempt conduit revenue bonds for solid waste disposal. Regarding maintenance, Mr. McMillan explained that AIDEA could enter into a use agreement with Coeur Alaska, who would be totally responsible for dock maintenance and operation. Public access is a requirement under IRS code and it cannot be precluded, although the Kensington Mine would have preferential use. If both dock facilities are financed and owned by AIDEA, these would be available for public use. Representative Fate remarked that if the life of the mine does not extend the life of the port, the amount of usage would stop shortly after the mine closes and he asked if there would be problems meeting operations and maintenance costs. Mr. McMillan replied that the projected mine life is 10 or 12 years, a relatively short term to finance a project of this nature. Coeur Alaska expects other minerals [silver and copper] and that the mine will be there longer than 10 years. At the end of the mine life agreement, AIDEA would either lease or sell the dock facility to Coeur Alaska at fair market value. The southern port facility at Cascade Point would be on land owned by Goldbelt, with the potential to transfer the facility to the Corporation. He said that these issues would be addressed during the due diligence process. Representative Joule asked if there are other models in place similar to this financing. Mr. McMillan described it as "hybrid" financing, a combination of two programs. These are a development finance program of own-and-operate, wherein AIDEA owns the asset, and the issuance of not-at- risk conduit bonds. He likened it to the Snettisham Project that AIDEA sold to AEL&P through conduit financing so that AIDEA is not at risk. TIM ARNOLD, VICE PRESIDENT AND GENERAL MANAGER, COEUR ALASKA, stated that the Kensington Mine project has been planned for some time, and Coeur Alaska will be able to proceed with development by mid-summer. He referred to "Project Summary and Overview of Partnership Opportunities, April 2004,"(copy on file) and explained that Coeur Alaska could do the financing itself and it has two options. It could build the facility and under the current supplemental environmental impact statement (SEIS), could own and operate it, leaving a "small footprint" by removing the dock at the end of project. The other option would involve AIDEA getting Coeur Alaska tax-exempt financing during the repayment period, with State ownership after the mine closes. Vice-Chair Meyer expressed support for the project. In response to a question by Vice-Chair Meyer, Mr. Arnold said that Coeur Alaska is full owner of the project. The operation would involve 250 jobs, with additional jobs during the construction phase. Vice-Chair Meyer asked if the permitting process is working well. Mr. Arnold answered that the project is halfway through the NEPA process (the supplemental environmental impact statement) because of design changes. In response to a question by Representative Joule, Mr. Arnold reiterated that there would be about 250 jobs when the mine is in operation, with up to 300 jobs during construction. He said their goal would be as much local hire as possible, and secondarily Alaska hires, and then Outside hires. The company would provide a good local training program for operation of the mine. Mr. Arnold discussed the rotation schedule with Representative Joule, and described the Kensington as a community mine involving a beautiful commute, with the possibility of a different schedule to work around employees' needs. Representative Joule asked the annual payroll. Mr. Arnold thought it would be about $19 million, and said he would provide the figure. Representative Joule asked if he anticipated problems related to the marine life and fishing in Lynn Canal. Mr. Arnold replied that he did not, and it was addressed in the supplemental EIS. Representative Hawker asked if the tunnel connecting the two mine sites would be a vehicle or rail tunnel. Mr. Arnold explained that it would be a vehicle tunnel for running a 40-ton truck from Kensington Mine to Jualin Mine. In response to a question by Representative Hawker, Mr. Arnold said that he hoped to lower the $5 million cost estimate for 1-1/2 miles. Representative Croft asked the steady price of gold needed for the mine to be economical. Mr. Arnold said the break- even cost would be $200 per ounce. He noted that gold has been hovering between $400 and $425, and has now dipped below $400. In response to a question by Vice-Chair Meyer, Mr. Arnold said that he expected the mine to produce some silver and copper, but the payable metal would be gold. It is primarily a gold mine. Representative Hawker MOVED to ADOPT Amendment #1. Co-Chair Williams OBJECTED for purposes of discussion. Amendment #1 reads: Page 1, line 9 Insert: "at Slate Creek Cove and Cascade Point" To read: (a) The Alaska Industrial Development and Export Authority may issue bonds to finance the acquisition, development, improvement, and construction of port and related facilities located at Slate Creek Cove and Cascade Point on Lynn Canal in Southeast Alaska. Representative Hawker explained that Amendment #1 addresses the issue of over-authorization of bonding and makes it a site-specific project. Co-Chair Williams removed his objection. Amendment #1 was adopted. Representative Foster MOVED to report CSHB 556(FIN) out of Committee with individual recommendations and the accompanying fiscal note. There being NO OBJECTION, it was so ordered. Co-Chair Williams pointed out a conflict of interest because he is a shareholder in Cape Fox Corporation which is negotiating a land trade in the area. CSHB 556(FIN) was REPORTED out of Committee with a "do pass" recommendation and with one previously published fiscal impact note.