SB 394-AIDEA BONDS FOR LYNN CANAL PORT    The committee took up SB 394. MR. ZACK WARWICK, staff to Senator Therriault, presented the bill and testified that SB 394 authorizes Alaska Industrial Development and Export Authority (AIDEA) to issue tax-exempt bonds to finance port and port related projects on Lynn Canal in Southeast Alaska, specifically for the Kensington Mine Project. He noted that committee members have an overview of the project's re-design that would include a port from Cascade Point to Slate Creek Cove, and would use existing road systems that would be upgraded to get to Kensington Mine. This is required under statute for any project over $10 million. At this point, these are estimated numbers, but authorization was requested so that if cost exceeds $10 million, tax-exempt bonds would be issued to finance this program. This doesn't guarantee funding would go forward, it just provides authorization to look at the project. The project would still have to meet the four criteria set out in statute. MR. JIM McMILLAN, Deputy Director of Credit and Business Development, AIDEA, testified that the bill pertains to two dock facilities supporting the Kensington Gold Project, proposed to be financed under this legislation. There are two basic requirements under IRS code addressing financing with tax-exempt proceeds: the docks must be owned by a government entity, and dock facilities must be available for the likelihood of public use. That determination has not been made yet. Because of the location of these two facilities, especially the one on the northern end of the Berners Bay - Slate Creek - AIDEA's bond counsel will be seeking an IRS letter ruling for the determination of public use to ensure either one or both projects qualify for tax-exempt financing. That process may take up to six months; however, Coeur is hoping to start construction later this summer or early fall. The reason for the timing of this legislation is to receive authorization if due diligence falls in place so that the bonds can be issued. MR. TIM ARNOLD, V.P. and General Manager of Coeur Alaska Inc., representing Coeur d'Alene Mines Corporation, said he was available to answer questions about the Kensington Gold Mine Project. CO-CHAIR COWDERY noted there were no further questions and asked for the will of the committee. SENATOR GEORGIANNA LINCOLN commented she had received SB 394 about 10 minutes prior to the meeting, that the bill had just been introduced on the 22nd of April, and she was hoping to have more of an opportunity to review the information. She said the proposed Juneau access project has considered developing an Alaska Marine Highway ferry terminal in Berners Bay, and asked if this project would be available for bonding through AIDEA. MR. McMILLAN responded that with tax-exempt proceeds, AIDEA can finance an exempt facility such as a dock if it meets the two requirements of government ownership and the likelihood of public use. He said because he wasn't familiar with the project she was referring to, he was hesitant to answer directly other than to outline those two criteria. SENATOR LINCOLN referred to the fiscal note, "The bill provides $20 million in bonding authorization" and asked if the $20 million bond would prevent other applicants with large projects from applying. MR. McMILLAN said if this legislation passed, AIDEA is authorized to issue up to $20 million in bonds for a port development project on Lynn Canal. Assuming that a sum less than $20 million was needed for the two dock projects related to Kensington, then this authorization would allow AIDEA to utilize the difference for another port development project on Lynn Canal. SENATOR DONNY OLSON asked about other reasons for developing a port other than Kensington. MR. McMILLAN responded, "We're not saying that there is or is not another reason for developing it. We are looking at these two projects, both the Cascade Point and the Slate Creek, for supporting the Kensington Mine, but to do it by the issuance of tax exempt bonds, it has to be owned by the government, and it also has to be available for public use." SENATOR OLSON asked if the parent company would be charged for the use of this port, after it's been built. MR. McMILLAN replied this was correct. If the legislation passes and bonds are issued, there will be some type of user fee that will re-pay the bond proceeds and generate a reasonable return to AIDEA. SENATOR OLSON asked if a private person or tourist would pay a fee to use the port. MR. McMILLAN said there has been discussion of assessing a fee for individual use. SENATOR OLSON said he was hoping for more of a yes or no answer regarding whether there would be a charge for private as opposed to commercial use. MR. McMILLAN replied that he didn't have a specific answer right now, but his perception is a fee won't be charged to individual boaters tying up to the dock. SENATOR OLSON reflected on current global unrest and the high price of gold and said, "Let's say that the price of gold drops after the presidential election or after a semblance of peace comes in the Middle East. How do we make sure that this port facility, or these two port facilities that are involved don't turn into another seafood-plant-type project that's there in Anchorage, or Point Mackenzie farm situation, or even the Delta Junction farm debacles that we've seen happen in the past?" MR. McMILLAN acknowledged that any project involves risk and attempts are made to mitigate that risk. There will be extensive due diligence, Coeur's underwriters will find a placement for the purchase of those bonds - either a private or public offering - and underwriters in the market will determine the structure and the required credit enhancements to mitigate the risk. AIDEA's agreement for operation or repayment of a fee is supposed to be with Coeur Alaska Inc., which is a fully owned subsidiary of Coeur d'Alene Mines Corporation. An available credit enhancement would be the guarantee of the parent corporation. Through due diligence, if financial standing is deemed un-satisfactory, purchasers of the bond and AIDEA would look to other potential credit enhancements to assure the project is successful. SENATOR OLSON asked where Coeur d'Alene Mining Corporation's parent offices were located. MR. ARNOLD responded that Coeur d'Alene Mines Corporation was located in Coeur D'Alene, Idaho. Coeur Alaska Inc. is located in Juneau. SENATOR GENE THERRIAULT asked if public use of the Coeur facility would be immediate. MR. McMILLAN responded that this requirement would need to be satisfied at the outset. His understanding is that it wouldn't be necessary that the public use occur simultaneously with the completion of the facility, but there would need to be assurance that there is the likelihood of public use during the life of the project. SENATOR THERRIAULT asked if the two port facilities fit under the $20 million, or if surplus authorization might be used for some Coeur facility on the Lynn Canal; he asked for an estimated cost of the two mine-associated dock facilities. MR. McMILLAN replied that as a conceptual design, according to preliminary discussions with the engineer, the projected cost budget is approximately $10 million. This is a very preliminary cost estimate, and probably additional geotechnical work is necessary which could drive up the cost, and also the IRS code allows for financing improvements that are ancillary and related to the primary project. "It is too soon to indicate if there are some other improvements that could be thrown in this package. If that is the case, we may get much closer to the $20 million," he said. SENATOR OLSON asked if this was a hard rock mine. MR. ARNOLD said yes, it is underground hard rock. SENATOR OLSON asked how to ensure that difficulties with environmental concerns or objections that have been pointed out within the past week at Kensington will not be encountered MR. ARNOLD said he wasn't sure what Senator Olson was referring to, but noted that the EIS has been addressed, and currently, a supplemental EIS; the comment period ended April 7. Coeur is currently going through the permitting phase. SENATOR OLSON said he was referring to a major mine project that had all of the permits in order, but is now shut down because of difficulties. MR. ARNOLD said there is always the opportunity for issues to come up. Mining permits take years to get, so he honestly couldn't predict what would happen. SENATOR THERRIAULT asked if the port facility's infrastructure would be needed only if the mine was permitted; would this infrastructure be built if the mine were not permitted? MR. ARNOLD said the facilities would not be built unless there was a go-ahead on the permitting processes. SENATOR THERRIAULT asked Mr. McMillan if there would be restrictions that no infrastructure be built until the mine had secured all necessary permits. MR. McMILLAN replied that because of the timing of the issues and the desire to start construction this year, due diligence will need to begin immediately; this means an expenditure of some funds. At the next board meeting on May 7, a cost reimbursement agreement will be presented to the board to be executed with Coeur d'Alene Mines Corporation. If the project goes forward, this allows advance funds for due diligence to be part of the financing package. If it does not go forward, a reimbursement agreement, a promissory note, will be repaid. Also, the bonds will not be issued and financing will not take place from AIDEA until the feasibility study is seen and permits are issued, that is, until the project is ready to go. SENATOR LINCOLN asked if, without SB 394, Coeur would continue with the mining. MR. ARNOLD said yes. SENATOR LINCOLN asked how this would be done without the port. MR. ARNOLD questioned, "Without the port facility or without the financing?" SENATOR LINCOLN replied, "Without the port facility." MR. ARNOLD said he misspoke. Coeur would need some sort of port facility. SENATOR LINCOLN asked, "Why don't you just do that?" MR. ARNOLD said that with the permits for the Kensington Mine in the supplemental EIS, there are two options. The option of using AIDEA to create the facility offers the advantage of the bonding issue and the tax-exempt financing. "This is a win-win situation for both Coeur d'Alene Mines and the state of Alaska, in our opinion. It helps us in one way. But at the end of the day you end up with a port facility and it belongs to the state of Alaska." If Coeur d'Alene Mines creates the port without using AIDEA financing, Alaska will not own the port and when mining is finished, the port facility would be taken away. SENATOR LINCOLN asked how the requirement for public use of the port is envisioned. MR. ARNOLD said it wasn't envisioned yet. That is something that AIDEA and Coeur d'Alene Mines need to discuss. He noted that the timing is unfortunate because the current level of detail is not the final detail, and the [legislative] session will end in a matter of weeks. The details will be available at the end of May. SENATOR LINCOLN said this bill had been introduced the 22nd of this month, and she assumed Coeur approached the Legislature to introduce this. MR. ARNOLD responded he wasn't sure whether Coeur or AIDEA approached the Legislature. SENATOR THERRIAULT told members that AIDEA representatives had contacted him and other legislators about the port infrastructure possibly going over the current statutory $10 million, and the need for increased authorization. SENATOR LINCOLN said the project has been in the works for a while and asked why on April 22nd it was determined that the project might go over $10 million. SENATOR THERRIAULT said this could be answered by Coeur or AIDEA, but thought it had become clearer as numbers were firmed up. MR. McMILLAN offered that while the project has been on the drawing boards for quite a while, the most recent discussions with Coeur regarding AIDEA's providing financial assistance has only occurred during the past month and a half. "Coeur came to us and said they were ready. We laid out potentials for them, and these two projects being potentials under development financing." He acknowledged the timing as unfortunate, but to move forward under development finance, authorization from the Legislature is required. SENATOR LINCOLN said the US Forest Service owns the land on which most of the mine will be situated, and their EIS won't be completed until September at the earliest. She asked if AIDEA begins evaluating the project before the project is actually permitted to proceed. MR. McMILLAN said yes. The project begins immediately after the May 7th board meeting, assuming the board authorizes entering into a cost reimbursement agreement. Regarding Cascade Point, some if not all of the property on the south side of Berners Bay was owned by Goldbelt Corporation. A lease will need to be negotiated for the use of that property. He said he thought Senator Lincoln was correct regarding the northern side. He said he understood the EIS to be rendered in June unless it is extended. SENATOR LINCOLN asked Mr. Arnold if this loan would be going to Coeur Alaska, Inc. MR. ARNOLD deferred the question regarding the workings of finances to AIDEA. SENATOR LINCOLN asked about a guarantee by the parent company, and whom the loan would be going to. MR. McMILLAN said it is proposed that the parent company, Coeur d'Alene Mines Corporation, will issue a guarantee that there may be additional mitigates of risk, or credit enhancements. CO-CHAIR WAGONER asked for an expansion of the guarantee from the parent company, wondering if this was a letter of credit, or what type of guarantee would need to be provided to AIDEA if this project moves forward. MR. McMILLAN said AIDEA normally goes into it knowing it will be an unsecured guarantee, meaning they will be standing behind the payment by Coeur, of the user fee, with all of the assets of Coeur d'Alene Mines Corporation. SENATOR LINCOLN questioned if this was the normal legislative procedure, without going into the timing or the guarantee. SENATOR THERRIAULT responded that Mr. McMillan could say for certain. MR. McMILLAN said that is correct. He said there are similarities with previous authorizations for other development finance projects. There isn't more detail because statute merely requires authorization from the Legislature if bonds are in excess of $10 million, and also because the statute sets forth very specific requirements before the financing can take place. CO-CHAIR WAGONER asked what Coeur d'Alene Mines Corporation's total assets were. MR. ARNOLD said he didn't know but could find out. SENATOR LINCOLN asked if $12 million was an estimate for this project, why was "not to exceed $20 million" specified? MR. McMILLAN explained the project's budget is not firm at this point and also the code allows financing for related improvements. Although the conceptual cost estimate of the two dock facilities is within the $10 million range it will likely be higher with the final design. If the $20 million authorization passes, AIDEA will only issue bonds up to the required amount to finance portions of the project that qualify. The remaining amount could be used for other qualifying Coeur development projects in Lynn Canal. SENATOR LINCOLN reviewed that Coeur was asking for $2.9 million for the Cascade Point dock, $4.4 million for the Slate Creek dock, which total $7.3 million; that leaves $12.7 million for the uplands. She asked if these figures were correct. MR. ARNOLD said yes those were the preliminary numbers. SENATOR LINCOLN asked if the balance would be tied to this project or if it could be used in another part of the state. MR. McMILLAN said the authorized amount left over could potentially be used for the [indisc.] rural development project, meeting the IRS requirements, that is, "a port development project on Lynn Canal" so if there was a feasible project and issued bonds could be repaid, AIDEA would look at the project and its location to see if it meets the intent of the original authorization. He said, "It's a hard question to answer specifically at this point. It wouldn't necessarily have to be related to this mine project." SENATOR LINCOLN asked if it was AIDEA's language to allow for development of other areas in Lynn Canal. MR. McMILLAN reported that once the determination was made that Coeur wanted to move forward and legislation was required, AIDEA provided sample language to Coeur. This is the result of discussions between Coeur and AIDEA, attorneys at Legislative Legal and AIDEA's assistant to the attorney general. CO-CHAIR COWDERY announced that Representative Weyhrauch was at the meeting and wanted to testify. REPRESENTATIVE BRUCE WEYHRAUCH testified that Goldbelt, Inc., the Native Corporation that Mr. McMillan referred to, is called such because there is gold throughout this area. The Kensington Mine has worked long and hard to develop that project, and it would provide tremendous employment and diversification opportunities for this locality. The city of Juneau has worked with Goldbelt, Inc. to develop lands and opportunities. This project seems to meet the exact statutory criteria in AS 44.88.095, as the project is economically advantageous to the state and the general public welfare and will contribute to the state's economic growth. REPRESENATIVE WEYHRAUCH continued that Senator Olson had mentioned potential impacts to the Pogo Mine and the drop in gold prices. The state has relied on mining opportunities to develop the economy. The project applicant is financially responsible, has developed huge mining operations throughout the world, and is the likely candidate to support AIDEA in issuing these bonds. Work has been done with the Southeast Alaska gillnet fleet to address water quality and fishing issues in the area. The other statutory requirement is to provide and retain employment related to the amount financed by the authority in consideration of the amount of investment per employee for comparable facilities and other related relevant factors. The Red Dog Mine Dock and the Federal Express terminal in Anchorage seem to fall within that criterion. REPRESENTATIVE WEYHRAUCH said this meets the employment, resource development, and public use need for this type of facility. It would be rare for boats to use this dock because there are dock facilities in Skagway and Haines just north of the facility and in Auke Bay just south of the facility. However, in most cases in Alaska, if a mariner needs a dock for emergency purposes, this would be readily available. In addition, beyond the life of this project, there will be access to public lands in that area for hunting, fishing, hiking, camping, and so forth. Beyond the intended purposes of the dock, this provides a valuable public resource for people, some of whom may be opposed to the mine. He expressed his support on behalf of a community that needs this resource development and opportunity for diversification. SENATOR THERRIAULT asked Mr. McMillan if there was currently statutory authority to put together projects of up to $10 million. MR. McMILLAN said if the project is financed under the development finance program, this would apply if the facility was owned. He clarified that the proposed financing structure of the two docks was a hybrid of two of the programs. TAPE 04-19, SIDE B  MR. McMILLAN continued that issuing general obligation bonds means AIDEA was at risk for repayment of those bonds if there was a default. That has been subsequently corrected in a future refunding. Another example of a similar project is the sale of Snettisham. AIDEA owned the facility but the type of financing was a conduit bond as indicated in the fiscal note. Under a conduit bond, the assets, credit [indisc.] or authority are not at risk, and that's what is being proposed here. AIDEA's ownership is [indisc.] classified as non-ownership in order to give lower-cost financing issuance of tax-exempt bonds. AIDEA will have title to the facility but will not be at risk for repayment of bonds that will be issued. That also speaks to Senator Olson's earlier concern about future risk. He thought due diligence would be more extensive on the part of people or entities who buy these bonds. SENATOR WAGONER said he's had inherent distrust of AIDEA. He then asked what facilities are being talked about in SB 394 other than the construction of ports. 2:30 p.m. MR. McMILLAN replied that no related facilities have yet been identified. Because of the timing and preliminary discussions, AIDEA wanted to allow for related facilities such as fuel storage, for example. SENATOR LINCOLN referred to the $12.7 million and asked if AIDEA could resolve an amount, up to the $20 million cap, that Coeur is willing to bond for regarding related facilities on Lynn Canal. MR. McMILLAN said this was probably correct but thinks it requires a separate bond issue which would double the issuance cost. If the project were clearly going to be under $10 million, then legislative authorization would not be required. They really don't know yet about the issues of preliminary costs and capital improvements, and would like to include it under one issuance to minimize issuance costs. SENATOR WAGONER said he would like to know the value of Coeur d'Alene's assets before voting on SB 394. He repeated that he has an inherent distrust of AIDEA, that he's seen the ASI building in Anchorage that will cost the state several million dollars, and he doesn't want the state to get into another similar situation with AIDEA. MR. ARNOLD told committee members he had just been informed that the parent company's assets are currently $258 million. SENATOR THERRIAULT moved to report SB 394 and the accompanying fiscal notes to the Senate Finance committee for review, with individual recommendations. SENATOR LINCOLN objected and spoke to her objection. She said even though she was able to ask questions during the meeting, she was uneasy about not knowing how all the pieces will fall together. Her questions were financial in nature and she would relate those question to members in Finance. With that, she withdrew her objection. CO-CHAIR COWDERY acknowledged there were no further objections and announced the bill was so moved.