CHAPTER 19 INFRASTRUCTURE ISSUES: POWER, WATER, TRANSPORTATION AND WORK FORCE SERVICES - WHAT TO KNOW AND WHERE TO FOCUS IN LARGE SCALE MINING TRANSACTIONS

• Jurisdiction: United States

Due Diligence in Mining and Oil & Gas Transactions
(Apr 2010)
CHAPTER 19
INFRASTRUCTURE ISSUES: POWER, WATER, TRANSPORTATION AND WORK FORCE SERVICES - WHAT TO KNOW AND WHERE TO FOCUS IN LARGE SCALE MINING TRANSACTIONS
Rich D. Haddock
Barrick Gold Corporation
Salt Lake City, Utah
Wells S. Parker
Dorsey & Whitney LLP
Salt Lake City
Vicki Baldwin
Parsons Behle & Latimer
Salt Lake City

RICH D. HADDOCK is Vice President and General Counsel, North America, Barrick Gold Corporation, Salt Lake City, Utah. He joined Barrick in 1997. He served as Vice President, Environment for Barrick from 2005 through 2008. Prior to that, he was Regional Counsel, North America for Barrick. From 1992 to 1997, he was Assistant General Counsel for Santa Fe Pacific Gold Corporation. From 1985 to 1992 he practiced with Holme Roberts & Owen. Rich has been involved in numerous due diligence reviews and acquisitions over the years. He has also been involved in all of the legal aspects of mine development and operation. Also, notably relevant to this topic, Rich has experience in utility regulation, open access and power plant development. Rich received a B.S. in Geology from Brigham Young University in 1982. He received his Juris Doctor from the University of Utah in 1985. He is admitted to practice in Utah and Nevada.

WELLS S. PARKER is an associate in Dorsey & Whitney LLP's Salt Lake City office where he practices in the firm's Energy Practice Group. His practice focuses on natural resources develop-ment, energy and environmental law, including domestic and international mining transactions, mineral acquisition, permitting, environmental compliance, joint venture development and finance for coal, hard minerals and oil and gas projects. Wells is an active member of the Rocky Mountain Mineral Law Foundation and the Energy, Natural Resources and Environmental Law Section of the Utah State Bar. He earned his J.D. from Brigham Young University and a B.A. from the University of Utah.

VICKI M. BALDWIN is a shareholder in Parsons Behle & Latimer's Salt Lake City office where she practices in the firm's Litigation and Environmental, Energy, and Natural Resources departments. She concentrates her practice on energy and climate law as well as commercial litigation. Vicki has experience in utility regulation, open access, power plant development, and renewable portfolio standard compliance. In 1986, Vicki earned a bachelor of science degree in electrical engineering, magna cum laude. She received her Juris Doctorate from the University of Utah in 1999.

I. INTRODUCTION

This paper aims to provide an overview of some of the issues that should be investigated when conducting due diligence on the infrastructure involved in a Mining Project. Power, Water, Transportation and Work Force Services, are just a few of the items that must be examined. Mining projects are generally very energy intensive and the availability and cost of electrical power is always a significant consideration. Similarly, water is of critical importance. The identification, acquisition and construction of the necessary water supply and water control systems will be a major consideration in any Mining Project.

In addition to power and water issues, this paper briefly addresses some of the due diligence issues related to transportation and work force services. The ability to move product from a Mining Project to the market or to a purchaser is a critical aspect to any mining operation. Mines require workers and workers require accommodations. Where will workers live and what impacts will they have on the local communities?

This paper focuses on infrastructure issues related to mining projects. Therefore, throughout the paper we use the term "Mining Project", which generically refers to any mine or processing facility, whether for gold, coal, uranium or any other mineral substance. While this paper focuses on mining, many of the due diligence issues highlighted herein are applicable to almost any large scale commercial operation, whether it be mining, manufacturing, agriculture or construction.

II. POWER

A. Introduction and Definitions. In the U.S. there are several possible means by which electricity is provided to a load. Many mines are large electric loads. This paper will outline the different kinds of due diligence issues that arise when electricity for a Mining Project is supplied by a utility, by market purchases, by remote self generation or by "behind the meter self generation." As used herein, the term "Mining Project" refers to the mine or processing facility that uses the electricity. "Facility" or "Generator" refers to the source of the electricity.

Due diligence questions for the electrical supply infrastructure of a Project will be determined by the business objective of the proposed transaction. For example, if the due diligence is being done for acquisition of an existing operating Mining Project and there is no intention to expand or optimize the Mining Project, many questions become irrelevant or the answers become readily apparent. On the other hand, if the Mining Project is not yet developed or if the value in the transaction will be delivered by expanding the project or otherwise increasing throughput capacity, the number and complexity of due diligence questions increases.

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As a word of warning, electrical infrastructure due diligence requires close coordination between the technical experts and the legal experts. Indeed, the legal and technical questions are often intertwined and often difficult to separate. Moreover, an understanding of both the legal and technical aspects often requires knowledge and experience specific to the electric systems involved. If electric supply is a material issue in the proposed transaction, care should be taken to add the proper local expertise to the due diligence team.

B. Utility Service. Under state utility laws the utility has a "duty to serve." The utility, however, usually has significant protections, designed to ensure that it has the opportunity to earn an authorized rate of return on investment and recovers its prudently incurred costs.¹ These protections may significantly affect the quantity, quality or cost of service to a Mining Project.

1. Generating or Transmission Import Capacity. In some utilities, especially smaller ones, the physical capacity of the utility to generate sufficient electricity or import sufficient electricity to the service area must be considered. Take for example a utility that has a total peak load of 1,000 megawatts ("MW"), plus a ten percent (10%) capacity reserve requirement imposed on it by regulation. If that utility has only 500 MW of generating capacity and 650 MW of import capacity, for a total of 1150 MW of capacity, any new Facility or Mining Project expansion that adds more than 50 MW of load will require the utility to expand its existing generating or import capacity. Due diligence will need to consider whether under applicable law those capacity additions will be charged to the Mining Project or somehow spread across all of the rate payers.² This typically requires a fairly thorough knowledge of the applicable law, the applicable public utility commission and the engineering design and operation of the system. Such information is available in part in the statutes and regulations of the jurisdiction, as well as the tariffs of the utility, but often it will require a review of the voluminous dockets in recent rate cases and electric integrated resource plan proceedings before the state commission.

2. Rate Volatility. Electricity tends to be a very large cost component of many Mining Projects. The feasibility of a Mining Project is often heavily dependent on the price of electricity. The economic model behind a proposed transaction will make assumptions about the forward price of energy for the utility. Often price volatility can present an unacceptable risk to a Mining Project.

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Fuel and purchased power costs are typically a pass-through cost for utilities.³ Utilities are usually not allowed to profit from their fuel purchases, but on the flipside, they are also typically protected from losses.⁴ Typically there is a true-up mechanism for the utility if it has under-recovered or over-recovered for its actual fuel and purchased power costs during a given ratemaking period.⁵ These true-up mechanisms can cause power rates to vary dramatically. For example, in the western power crisis of 2001, total utility rates in Nevada jumped from about 4.5¢/kWhr for large industrial customers to nearly 10¢/kWhr.⁶

If the Mining Project on which due diligence is being conducted is sensitive to power prices, it is particularly important to examine the utility rate history, the underlying purchase practices, and its forward hedging practices. The utility's credit worthiness can be an important aspect of the analysis because it gives a clue to the utility's ability to stabilize rates by forward purchases. Such information is usually found in the voluminous dockets of the utility's base tariff energy rate hearings or deferred energy accounting adjustment hearings.

3. Distribution and Facilities Charges. Due diligence should also consider legally and physically how the Mining Project is or will be attached to the grid. Utilities have differing rules related to facilities charges, for example concerning distribution lines, capacitors, substations, meters and other equipment.⁷ If the Mining Project is going to require new distribution and connection facilities, the Mining Project itself might be required to pay the entire cost of facilities or it might be required to enter a contract giving the utility a guaranteed revenue means, similar to a take-or-pay contract.⁸ In the case of an existing Mining Project, it might have already paid for the facilities that serve it. The controlling utility rules or facilities agreement should be reviewed to...