Fitch Ratings scramble to revise rating criteria. Last week my Google news alerts started feeding me news stories about the crawfishing going on at Fitch Ratings as they scramble to redefine their rating criteria in a attempt to rescue their tattered reputation as a credit rating agency. The boys and girls at Fitch Ratings had gotten sloppy and much too cozy with the people they were rating. That’s why financially flimsy organizations like MJMEUC with no business experience, no reserves and no grown-up accounting system in a business that banks will not touch because they will soon be carbon-taxed out of existance, have gotten "A+" ratings based upon nothing more than some nice PR Kincheloe wrote up and mailed in.
Fitch also accepted at face value audits from an audit firm that couldn’t find its way to the CPA disciplinary committee with both hands. Williams Keepers, LLC, the audit firm MJMEUC hired to do their annual audits had said nothing to Fitch Ratings during the critical ratings review period about the “material weaknesses” and “significant deficiencies” in the consortium’s financial condition that they confessed this year were ongoing but which they had overlooked in all previous audits. Williams Keepers apparently only discovered this year, after Fitch Ratings had officially granted MJMEUC’s “A+” rating, that all Kincheloe’s investment organizations were using Quickbooks (for Dummies), that they had “lost” (as in: stolen, embezzled or fell behind the potted plant?) over $340,000, that their reserves were nearly non existent and that they had consistently omitted important information required by GAAP (the governmental accounting standards board) on Kincheloe’s $2 Billion in highly leveraged investments in coal-fired power plants. How convenient for MJMEUC.
Fitch to Revise Liquidity Assumptions for Covered Bond Ratings Fitch Ratings-London/Paris/Frankfurt-17 October 2008: Fitch Ratings is in the process of updating its qualitative and quantitative assessments of liquidity risks that covered bond investors are exposed to following an issuer default, in view of the ongoing liquidity crisis. It will publish its conclusions in a report during the fourth quarter of 2008.
Liquidity concerns affect covered bond ratings in two ways: on one hand, it may lead to a cap on the rating which the covered bonds may reach relative to the Issuer Default Rating (IDR), a relationship expressed through the Fitch Discontinuity Factor (D-Factor); and it impacts the level of over-collateralisation consistent with a certain rating scenario.
Fitch is conducting an intensive review of liquidity gap scores that form part of the D-Factor assigned to rated programmes. "We are re-assessing solutions used to overcome liquidity gaps that could arise after an issuer default," says Suzanne Albers, a Senior Director in Fitch Covered Bonds team in London. "The expected worse D-Factor will ultimately translate into a tighter relationship between the IDR of a financial institution and its covered bond rating."
At the same time, the agency is revising upwards its assumed refinancing costs and fire sale discounts, which are used to model the proceeds of asset sales should they be needed to repay covered bonds. "As a result, Fitch anticipates increased over-collateralisation being necessary to be in line with a given covered bond rating. The mismatches between a programme's asset and liability cash flows will determine the scale of the impact", says Dr. Holger Horn, a Senior Director in Fitch Covered Bonds team in Frankfurt.
Fitch Ratings confess in the standard disclaimer which can be seen on their site that (emphasis ed), “Ratings are based upon information obtained directly from issuers, other obligors, underwriters, their experts, and other sources Fitch Ratings believes to be reliable. Fitch Ratings does not audit or verify the truth or accuracy of such information, and has undertaken no obligation to so audit or verify such information or to perform any other kind of investigative diligence into the accuracy or completeness of such information. If any such information should turn out to contain misrepresentations or to be otherwise misleading, the rating associated with that information may not be appropriate and Fitch Ratings assumes no responsibility for this risk. The assignment of a rating to any issuer or any security should not be viewed as a guarantee of the accuracy, completeness, or timeliness of the information relied on in connection with the rating or the results obtained from the use of such information.”
Auditors have similar weasely disclaimers so between the two of them it is fair to conclude that financial ratings and hired audits are just so much expensive toilet paper. As some financial pundit recently put it, the whole structure of ratings, investing and financing that just collapsed was, “A financial mass delusion based on fictitious value of imaginary assets. It’s like finding out that Santa Claus is real because you caught him robbing your house.”
“We are re-assessing….gaps that could arise after an issuer default,” means, “We can’t afford to get caught with our panties down around our ankles as more companies we gave “A” ratings to go into the toilet." Fitch Ratings, Moody’s and Standard and Poor’s are all belatedly trying to repair the vast damage they’ve done in misleading investors into buying issues they rated with a generous rubber-stamp. The following articles about the Western Municipal Water District and M-S-R Public Power Agency's (M-S-R) $126.615 million, San Juan Project are the beginning of what will become a flood of similar refundings of bond issues to buy back the ARS – auction-rate securities - and other toxic derivatives that public entities and other gullible or greedy people have only recently realized they own. When you are forced to refund your bond issues, the same people who sold you the toxic waste (that you’re trying to buy back before your ARS counterparty interest rates kill you) will charge you the same outrageous rates and fees to repair the problem as they did when they conned you into this “good as cash” derivative scheme in the beginning. However their refunding fees come down dramatically if they’re threatened with a lawsuit for the fraud they committed during the initial funding. Notice that at least 60% the M-S-R "variable rate demand bonds "are being refunded with fixed rate bonds. (emph. ed)
Fitch Rates M-S-R Public Power Agency's (California) $127MM San Juan Proj Sub Lien...Tue Jun 17, 2008 6:26pm EDT Fitch Rates M-S-R Public Power Agency's (California) $127MM San Juan Proj Sub Lien Revs 'A+' SAN FRANCISCO--(Business Wire)—
Fitch Ratings has assigned a long-term 'A+' rating to M-S-R Public Power Agency's (M-S-R) $126.615 million, San Juan Project subordinate lien revenue bonds, series 2008L. In addition, Fitch has assigned an underlying 'A+' rating to M-S-R's $62.5 million Series 2008M, and$18.3 million Series 2008N bonds. The Series 2008M and 2008N bonds are variable rate demand bonds that are secured by a direct-pay letter of credit. The bonds are expected to receive structured ratings nearer to closing. The series 2008L bonds are fixed rate bonds. With the exception of approximately $10 million, the entire proceeds of the three series of bonds will be used to refund existing variable rate debt. All three series of bonds are secured by a net revenue pledge of the agency, subordinate to M-S-R's senior project revenue bonds. The Series 2008L bonds are scheduled to price on July 8th. The Series 2008M and 2008N bonds are scheduled to price on July 23rd.
Fitch also affirms the underlying 'A+' rating on the outstanding $73.65 million in senior lien San Juan project revenue bonds and the 'A+' rating on the outstanding $138.33 million of parity subordinate lien San Juan project revenue bonds. The Rating Outlook is Stable.
The ratings reflects the underlying credit quality of M-S-R's three members: The Modesto Irrigation District (rated 'A+' with a Stable Rating Outlook by Fitch), the City of Santa Clara dba Silicon Valley Power ('A'/Stable), and the City of Redding (rated 'A+'/Stable). Bondholders are supported by absolute and unconditional take-or-pay purchase power commitments with each of the members that extend for the life of the debt with a 25% step-up provision in the event of a member default. Payments by the members are made as an operating expense of their respective electric systems, ahead of each member's own direct debt payments. (more…)
Notice also the similarities to MJMEUC's collateral pledges in their investments in the M-S-R structure of unconditional “take-or-pay” contracts and “step-up” agreements. This is another “joint-agency” operation like MJMEUC but apparently without a MoPEP rat-trap contract. The coal power boys encouraged people like Kincheloe to organize these quasi-governmental entities to provide them with back-door financing when it became obvious the big banks were shutting the door on funding more of their dirty smokestack power. When high-dollar businesses like giant shopping malls and coal-fired power plants are too high-risk for big banks to finance, the practice now seems to be to find some greedy politicians to help you sucker the ignorant public into floating TIF bonds or "joint commission" revenue bonds so the unsuspecting public can become your high-risk bankers.
The problem with saving yourself from the frying pan by issuing another set of bonds to buy back your dirty auction-rate bonds is that many public entities that used the Missouri Development Finance Board (MDFB) to issue their bonds did so under the mistaken assumption that the financing costs and underwriter’s fees would be cheaper from a state agency. No one has ever proven that to be true. When desperate municipal refunders have to pay the same fees a second time to get their “rescue” bonds to cover the same money from their auction-rate derivative mistake, it sure as hell ain’t cheaper.
Most of MAMU clients still don’t know that their "lease-purchase" contracts for local utility projects that MAMU pimped to the MDFB were bonds converted to derivatives. The people who sucked them into this scam (that’s Kincheloe and MAMU) aren’t going to tell them how screwed they are now and risk bringing down on their heads a lawsuit for securities fraud. By the time everyone figures out they should have avoided MAMU and their unnecessary 1.5% middleman admin fee for 20 – 30 years and gone straight to MDFB to get plain old vanilla bonds, there will be such a rush to the exit that the refunding bond market will be glutted. A ‘buyers market’ means the seller pays dearly for his gullibility and bad market timing. Buyers of refunding bonds will also be able to cherry-pick the refunding offerings – that’s not to the seller’s advantage.
Has anybody seen our $18,000,000? This summer the non-reading “see-no-evil, hear-no-evil” members of the Rolla City Council handed over the authority to sign all the loan papers “after the blanks were filled in” to their appointed utility board for what they are still convinced (or prefer to believe) was a plain $18,000,000 “lease-purchase” contract with MAMU. It wasn’t of course, it was more of the same trash that had already glutted the ARS market and caused it to collapse in February. The Rolla Utility Board immediately started pouring concrete for their big project. We don’t know exactly what their project is really all about because they claimed the Patriot Act and National Security prevents them from disclosing the details of this massive public debt to the ratepayers. Their little engineering report might give aid and comfort to the terrorists they’re convinced are lurking behind the Quick Mart. Unfortunately, the pile of papers that constitute their signed and sealed $18,000,000 MAMU-MDFB utility bond lease-purchase derivative auction-rate securities loan is still sitting unfunded on the desk of some MDFB employee because the auction-rate securities market shut down in February, their Wachovia underwriters have gone belly-up and the entire credit market collapsed this month. Could more things have gone wrong with one project?
Their check is not exactly in the mail but RMU has started the project using their reserves anyway. Their $18M signed credit card – the equivalent of Bearer Bonds - is sitting on someone’s desk in Jefferson City for anyone to use and they’re not a bit concerned.
The M-S-R San Juan article mentioned that “The delivered cost of the project to members was higher than usual at $80 per megawatt hour (MWh) due to the outages and the relatively high proportion of fixed costs (50% or $42 per MWh). The delivered cost to members is projected to range between $60-70 MWh in the next few years.” One of Kincheloe’s tactics is to always quote the $42 or $45 cost of power as produced by the new plants instead of the “delivered cost.” Delivered costs are the cost the customer pays for getting the Powder River coal delivered to the plant, the cost of producing the power and the cost of delivery of the electricity. Coal is relatively cheap…or it was until recently…but the cost of transporting it by rail to the plant is prohibitive. The costs in the M-S-R rating story are closer to the truth than Kincheloe’s vague “stable prices.” They will be stable at a much higher price than his MoPEP members think.
In the full M-S-R refunding article, Fitch Ratings for the first time admits “… long-term concerns exist related to the state's greenhouse gas legislation that may make it less advantageous to own carbon producing resources, such as San Juan.”
A shattering possibility… While it is well-documented that MAMU pool loans done for various small town utility projects were abused by converting safe and secure low-rate, long-term, revenue bonds into short-term, high-risk, variable-rate auction-rate derivatives, it wasn’t until reading about the M-S-R project and their similarities to MJMEUC that this horrible possibility came up. Did MJMEUC-MoPEP also use the $2 Billion in revenue bonds that they issued to invest in the seven power plants as derivative gambling instruments in the market that has just crashed and burned? In the case of M-S-R they obviously were doing exactly that.
The M-S-R rating review disclosed that, “The debt restructuring being implemented through the three bond series will leave M-S-R with only 18% of its debt portfolio in synthetic fixed-rate mode. (A “synthetic fixed-rate mode” is the initial fixed-rate that after only a short time coverts to a variable interest rate which is established by a 7-49 day auction.) The result of the restructuring will be a more traditional debt portfolio, with reduced counterparty risk.” The mention of “counterparty risk” is the tip off that this was an ARS because there is no “counterparty” and no “risk” in a regular revenue bond issue. We fear that Kincheloe also used his MJMEUC revenue bonds as derivatives in the now defunct auction-rate gambling market. If he did, the MoPEP sharecroppers are in a lot more trouble than even they know.
Another refunding because of auction-rate securities. (emph. ed)
Fitch Rates Western Municipal Water District (California) BANs 'F1+' Thursday October 16, 7:02 pm ET SAN FRANCISCO--(BUSINESS WIRE)--Fitch rates the Western Municipal Water District of Riverside County, California's 2008 Refunding Bond Anticipation Notes (BANs) 'F1+'. The note proceeds will refund the Series 2002 Adjustable Rate revenue bonds, currently outstanding as auction rate securities. The notes are secured by a net revenue pledge of the district's water and wastewater systems. The notes are expected to have a maturity date of less than one year. The notes are scheduled to price the week of October 27th, depending on market conditions.
The 'F1+' rating reflects the district's strong credit fundamentals, healthy unrestricted cash levels as compared to Fitch medians, and Fitch's expectation that the district will be able to access the bond market to refinance the bonds with long-term debt at maturity. (more…)
This water district probably doesn’t use Quicken for Dummies either. Refunding is full of expensive traps. If your community is smart enough to recognize their mistake in using any of MAMU and MDFB’s loan products, better get out now…the rest, like Rolla, will live in denial and get trampled in the stampede for the Exit when someone finally yells “Fire!”
Monday, October 20, 2008
Friday, October 17, 2008
Are Palmyra and Shelbina looking for the door?
As clients became restless this summer, Kincheloe had to send out fire teams to stamp out the brush fires of rebellion:
Special Meeting Held Tuesday Morning about Shelbina’s Electrical Rate
By Thad Requet 8-6-08
In a meeting that drew considerable interest and discussion, several Shelbina City leaders met with representatives of the Missouri Public Utility Alliance. The Shelbina City Council, along with Mayor John Smith, City Administrator Chris VanHouten, Shelby County Economic Developer Robert Harrington and several employees and former employees of the Shelbina Electric Department met with John Grotzinger, Executive Director of Engineering and Operations for the Missouri Public Utility Alliance and Dr. Eve Lissik, Director of Energy Services and Assistant to the General Manager of the Missouri Public Utility Alliance.
• A Brief History The purpose of the meeting was to get an overview of the City’s current energy contracts and to find out more about how the process currently works. The Missouri Public Utility Alliance is an umbrella over three different entities. They are the Missouri Association of Municipal Utilities, the Municipal Gas Commission of Missouri and the Missouri Joint Municipal Electric Utility Commission (MJMEUC). The Missouri Public Electric Pool (MoPEP) falls under MJMEUC. MoPEP started with an original group of 19 cities that formed the pool on Jan. 1, 2000. It currently has 32 cities in the energy pool. Cities that are involved with MoPEP have signed 40 year contracts to work through the group. The 40 year deal was signed in 2003, according to Grotzinger. If a city wants out of the agreement it would have to give a five year termination notice and would be responsible for any shortfall that might occur because of the City’s absence. Grotzinger said most likely no short fall would occur but in case there was one due to the City leaving the pool, it would be that city’s responsibility to cover that cost. The bulk of that cost would be in the debt service and financing in the next 30 to 40 years. For the full story, see this week’s issue of the Shelbina Weekly.
BOARD OF PUBLIC WORKS SPECIAL CALLED JOINT WITH CITY COUNCIL
AUGUST 14, 2008
The Palmyra Board of Public Works met in a joint meeting with the city council on the above date in City Hall at 7:00 p.m. with Mayor Loren Graham presiding. The following council members answered roll call: Jeff Merkel, Jim Bross, Gary Coleman and Carolyn Andresen. Councilman Emmett Garner entered the meeting at 8:10 p.m. Board members answering roll call were Ernie Boulware, Jim Church, Bill Huffman and Gary Stuhlman. Also present were Ewell Lawson, Eve Lissik and Duncan Kincheloe from MoPep, Brent Abell, Mark Cheffey.
Mr. Kincheloe presented handouts that showed MoPep information. He explained the MoPep operation, the prospect for the future of MoPep and the options available to the city. According to Mr. Kincheloe, if the city gives a five year notice to leave the pool, they would still be obligated financially for the life of each power plant that is being built. Another option is to find a city that is interested in joining the pool and assign our debt and obligation to them.
Fredericktown is in this process with St. James. Discussion and questions followed. A motion to adjourn was made at 8:50 p.m.
Special Meeting Held Tuesday Morning about Shelbina’s Electrical Rate
By Thad Requet 8-6-08
In a meeting that drew considerable interest and discussion, several Shelbina City leaders met with representatives of the Missouri Public Utility Alliance. The Shelbina City Council, along with Mayor John Smith, City Administrator Chris VanHouten, Shelby County Economic Developer Robert Harrington and several employees and former employees of the Shelbina Electric Department met with John Grotzinger, Executive Director of Engineering and Operations for the Missouri Public Utility Alliance and Dr. Eve Lissik, Director of Energy Services and Assistant to the General Manager of the Missouri Public Utility Alliance.
• A Brief History The purpose of the meeting was to get an overview of the City’s current energy contracts and to find out more about how the process currently works. The Missouri Public Utility Alliance is an umbrella over three different entities. They are the Missouri Association of Municipal Utilities, the Municipal Gas Commission of Missouri and the Missouri Joint Municipal Electric Utility Commission (MJMEUC). The Missouri Public Electric Pool (MoPEP) falls under MJMEUC. MoPEP started with an original group of 19 cities that formed the pool on Jan. 1, 2000. It currently has 32 cities in the energy pool. Cities that are involved with MoPEP have signed 40 year contracts to work through the group. The 40 year deal was signed in 2003, according to Grotzinger. If a city wants out of the agreement it would have to give a five year termination notice and would be responsible for any shortfall that might occur because of the City’s absence. Grotzinger said most likely no short fall would occur but in case there was one due to the City leaving the pool, it would be that city’s responsibility to cover that cost. The bulk of that cost would be in the debt service and financing in the next 30 to 40 years. For the full story, see this week’s issue of the Shelbina Weekly.
BOARD OF PUBLIC WORKS SPECIAL CALLED JOINT WITH CITY COUNCIL
AUGUST 14, 2008
The Palmyra Board of Public Works met in a joint meeting with the city council on the above date in City Hall at 7:00 p.m. with Mayor Loren Graham presiding. The following council members answered roll call: Jeff Merkel, Jim Bross, Gary Coleman and Carolyn Andresen. Councilman Emmett Garner entered the meeting at 8:10 p.m. Board members answering roll call were Ernie Boulware, Jim Church, Bill Huffman and Gary Stuhlman. Also present were Ewell Lawson, Eve Lissik and Duncan Kincheloe from MoPep, Brent Abell, Mark Cheffey.
Mr. Kincheloe presented handouts that showed MoPep information. He explained the MoPep operation, the prospect for the future of MoPep and the options available to the city. According to Mr. Kincheloe, if the city gives a five year notice to leave the pool, they would still be obligated financially for the life of each power plant that is being built. Another option is to find a city that is interested in joining the pool and assign our debt and obligation to them.
Fredericktown is in this process with St. James. Discussion and questions followed. A motion to adjourn was made at 8:50 p.m.
Saturday, October 11, 2008
Where’s the Exit? Update on who's trying to get in and out of MoPEP
From the Daily Journal Online come three stories about Fredericktown Missouri’s efforts to get out of MoPEP. At the end of the last meeting after the Aldermen voted to leave MoPEP and sell their utility to BREC, the Black River Electric Co-op, “The open meeting ended with a round of applause from the audience.” However, Fredericktown’s exit without waiting for five years depends on getting the City of St. James suckered into taking their place. This substitution idea is an ad hoc amendment called the “MoPEP Policy and Procedure Regarding Assignments” but it’s not really an amendment to the original “Amended and Restated MoPEP Agreement” because it was not voted on in the manner required by the contract for legitimate contract amendments. Their Gilmore & Bell attorney, Randy Irey, admitted it was not a binding document. To be a binding document it would have to be voted on by all 32 cities with at least 85% approval. In other words, it only works if Duncan Kincheloe wants it to work. It was invented to pacify restless MoPEP members who didn’t understand why Kincheloe was being so grumpy about letting Owensville and Fredericktown leave MoPEP. Because most MoPEP members still haven’t read their MoPEP or UPPA contracts and haven’t been filled in on the financial details of all the high finance Kincheloe has gotten them into, they don’t understand that they’re his collateral cows. Kincheloe can’t afford to let any of them walk out even under the arduous 5-year termination conditions of the contract because their electric revenues are the collateral promise he made to the rating agencies so MJMEUC would qualify for $2 billion worth of loans and revenue bonds to make his investments in a dying coal-fired industry. The only reason there is this very unusual and financially punishing five-year notice provision is because if someone did bolt out of the barn Kincheloe has 5 years to muscle one or two more cities into MoPEP to replace his lost collateral. The way his recruiting has been going lately it would take him five years to come up with a new city to join.
The only way Kincheloe got an “A-” credit rating for MJMEUC for the first investment in Plum Point, Arkansas is because he told Fitch Ratings that his MoPEP cities had a nearly unlimited ability to raise local utility rates to pay for all his debts because MJMEUC was not regulated by the PSC and because his MoPEP contract had the MoPEP cities so hog-tied that they are obligated by contract to pay all MJMEUC’s debts and all their investment obligations “without limitation.”* Fitch Ratings concluded, based upon what Kincheloe told them: “Since its inception in 2000, the cost of power to MoPEP #1 participants has increased in-line with market rates. It will likely continue to do so until the power plants under construction, such as Prairie State, are operational.” -Fitch Ratings on the Prairie State plant Aug. 2007 MoPEP cities that are wondering why they’re paying double-digit rates will not agree their rates are “in-line with market rates.”
(*The “direct costs” clause (Art. I, Definitions pg. 3) allows MJMEUC/MoPEP to pass through to MoPEP cities all MJMEUC’s direct costs and debts and bonds “without limitation.” The contract says they will bill members for the power they use and for “direct costs” which are defined as, “Direct Costs: "Including without limitation all payments MJMEUC is required to make (including reserves and debt service coverages MJMEUC is required to maintain pursuant to any bond indenture, financing lease or loan agreement)."
That same statement was made in the rating documents of all other MJMEUC bond ratings of MJMEUC’s investments which show how little the Fitch Ratings people know about politics in small town America. Unlimited rate increases from a commercial company may be hard to fight in the big city but not in small towns where power politics are more personal. Neither Kincheloe nor the Fitch Ratings people have ever lived in a small town where elected or appointed officials who raise utility rates beyond what their friends, neighbors and even their relatives will tolerate, quickly find out that the ability to raise utility rates does have a practical limit. Political retribution for perceived excess can be swift and not very subtle. When your paint job has been “key-d” during church or your tires get slashed in Kroger’s parking lot, that’s when you know you’ve market-tested the price-elasticity of local utility rates.
(New development: As a result of the banking collapse, insurance companies like AMBAC that insured these coal-fired plants and similar investments are getting their own ratings knocked down. Fallout is also hitting the rating agencies like Fitch Ratings, Moody’s and Standard & Poor’s who have obviously been much too lax in their reviews of investors like MJMEUC. If MJMEUC’s “A-” rating gets downgraded to a “B” or worse MUMEUC is in junk bond territory and the interest they pay will go up. When Fitch Ratings sees the 2007 management letter they will likely downgrade their rating it’s just a question of how much.)
Curious costs of the exit. To get out even in a swap with St. James, Fredericktown it seems will still have to pay MoPEP’s huge exit bill. The estimated costs for Fredericktown to get out of MoPEP are highly questionable in light of the revelations in the 2007 audit management letter which confessed that MJMEUC-MoPEP and MAMU’s financial records have never reflected the $2 billion in debt for the power plants and there have been other “serious deficiencies” and “material weaknesses” in their financial statements and recordkeeping for years. The original idea by the members of being able to “swap out” if another town joined was that the swap would be even, no five-year wait and no big cash penalty only the net difference between the two would be paid by the exiting town. If all other things were generally equal the new member would just take the place of the old member, but that was before Kincheloe started trying to amass a reserve fund of millions, something any experienced businessman would have known from the beginning was a necessary cash-flow cushion. Now Kincheloe has tacked on a new $140,000 “entry fee” for St. James to join to take Fredericktown’s place in addition to what he’s going to claim Fredericktown will have to pay him. Why is Kincheloe claiming Fredericktown has to pay all the same exit costs as if they were getting out after the five-year contract requirement when he’s going to have St. James take over their obligations and can milk them at his leisure in Fredericktown’s place? Here’s the latest from towns trying to find the MoPEP exit sign. (Emphasis in articles by blog editor)
August 14, ’08: Fredericktown Aldermen Continue on with Electric Utility Sale
By Robert Vanderbrugen/Democrat News
Aug 20, 2008 - 15:09:11 CDT
The City of Fredericktown held a special meeting Thursday evening, August 14 to hear an update on the meeting City Attorney Kim Moore attended in Jefferson City with the Missouri Public Energy Pool (MoPEP) and to hear presentations by the Electrical Ad-Hoc committee and public comments. The meeting in Jeff City was arranged to go over numerous contract issues the City is facing on its efforts to remove Fredericktown from the MoPEP pool. MoPEP is a group of 32 cities who joined together with the intent to bring lower electrical costs to their communities.
The local meeting was called to order by Mayor Danny Kemp. The Council called the special meeting with such short notice because of time constraints. The public must have an opportunity to vote on the sale issue, which means it must be on the November, 2008 ballot; which means the question must be placed with the Madison County Clerk by August 26 to be on the ballot. The City is asking the City of St. James, Missouri to consider joining MoPEP by accepting the assignments of Fredericktown, which would then provide an opportunity for Fredericktown to leave the MoPEP pool. St. James is planning on joining MoPEP in any case according to the aldermen.All the aldermen were present at the start of the meeting, however Ward I Alderman Brandon Hale did leave, citing a previously scheduled engagement, after he posed several questions to the committee.
Ad-Hoc committee member Ken Pierce, CPA gave a slide show presentation on rates between the City Vs Black River Electric Co-op (BREC). The slide presentation showed why he recommends the sale of the city’s electric utility department to Black River Electric Co-op. Pierce showed comparison graphs of the electric rates the City of Fredericktown charges compared to the rates BREC charges. In all but the most basic rate chart, the city’s rates were higher. The presentation showed commercial rates are staggering and are expected to continue to rise.
In a general synopsis, the alderman are facing the challenge of exiting the MoPEP pool and then selling the Fredericktown Electric utility to Black River Electric, or staying in the pool and seeing the electric rates climb beyond what some commercial businesses consider reasonable expectations. Cap America and Versa Tech stated they pay several thousand dollars a month now. In any case, electric rates will have to increase according to recommendations of the committee.
Aldermen are also keeping in mind the impact these electric rates have on the poor and the senior citizens in Fredericktown.
One calculation estimated the City is losing about $50,000 a month since the per kilowatt usage rate the City pays to obtain power had a significant increase in April, 2008. The historical costs for purchasing power were 6.6 cents per kilowatt hour (kwh) in September of 2007. The rate in April of 2008 hit 7.772 cents per kWh according to the committee. That translates to at least a 13.04 percent increase in electric rates at this point in time, or the city will continue on the financial downward spiral according to the Fredericktown Ad-Hoc committee.
If the City chooses to stay in the pool (or fails to exit the MoPEP pool successfully), the rates will rise. The commercial rates appear to have the greatest potential for huge increases according to committee projections. One reason the rates are so expensive is the debt service the City of Fredericktown entered into with MoPEP to build a power plant. The City would share costs in the building and operating costs of the plant (with no cap on expenses seen at this point according to the committee). The projected cost is about $600,000,000. The City of Fredericktown would have about a two percent cost share in the project which is about $12,000,000 currently.
A presentation by Madison Inn Lodge owner Abu Chowdhury showed a huge cost in electrical rates over the long haul which included the City’s cost of the project. He calculated amortization rates: at 6% over 50 years, 7% over 50 years and more. Although no interest rate was included in the actual figures for the power plant costs, Chowdhury included some potential interest rates. The costs to the City for the power plant operations over time were estimated to be in the millions. The costs are included in the purchase power agreements the City has already accepted as a member of the pool. If St. James accepts membership in MoPEP as an assignee, they would then take on that debt service as well according to the committee.If the negotiations fail at any given point, then Fredericktown would have to stay in the pool.
Pierce talked to the audience and the aldermen about several factors including the risk the City takes staying in MoPEP;The volatility of the electric market. The reliability of Fredericktown’s electric system. Liability of injuries.Increases in regulatory issues and related costs. What happens to the system in the event of a disaster.The suppression of economic development. Pierce said the sale of the utility would allow more favorable rates, especially to commercial entities.The elimination of risks of ownership of the electric utility. More favorable financial impact to Fredericktown. (more…)
September 17, ’08: Public Meeting
Wednesday, September 17, 2008
The CEO of MoPEP has scheduled a public meeting which begins at 6:00 P.M. on Monday, September 22, 2008 at the Fredericktown High School cafeteria. Residents are encouraged to attend the meeting and ask questions.
Kincheloe was a no show at the meeting he asked for but he sent his troops to try to put out the forest fire. Kincheloe’s lawyer, Douglas L. Healey, tried to get the city to hire one of their ringers, “The Hometown Connection,” to do an “objective” rate study for them. The Hometown Connection is a consultant for APPA the American Public Power Association. Guess who the only Missouri affiliate member of The Hometown Connection is? It’s the Missouri Public Utility Alliance, which is the parent of MJMEUC-MoPEP, MAMU and MGCM. MAMU is managed by Ewell Lawson the same guy who helped your town get revenue bond issues through MAMU for your diesel generator loan that have the now infamous toxic auction-rate securities with floating interest rates. It’s a regular snake’s nest of interlocking conflict of interest isn’t it? Self-serving as always they’ve palmed off The Hometown Connection as an “independent auditor” to other gullible MoPEP members in the past without disclosing their ‘connection’ to the Hometown Connection but the Fredericktown people weren’t so gullible this time.
Then Ewell Lawson pitched them on taking on some more debt to get in on the Great MoPEP Diesel Generator Scam. He said would provide a “hedge” he said for the MoPEP Pool. They’d be better off buying Washington Mutual stocks after it collapsed. If you don’t mind producing electricity that costs $4.00 a kilowatt and selling it to MoPEP for pennies per kWh so they can sell it back to you at a markup. It’s a great ‘hedge’ all right but not for Fredericktown.
The last ditch pitch of the Kincheloe Team at this meeting was the same as it always is that energy prices will go up (they’ve been doing that since before Edison invented the light bulb) but because of the Billions in investments in a dying industry someday MoPEP’s prices will “stabilize.” Careless listeners translate that as “cheaper” rates but they never say “cheaper.” They mean they will “stabilize” at a much, much higher rate than the commercial, PSC regulated companies are charging. “MoPEP said they are planning on other plants coming on line in the next few years which would then help control costs as well. Although rates are expected to go up, rates may not go up as high as some cities that purchase their power from the open market on their own.” Did you ever see so many loopholes and weasel words in one sentence?
September 22, ’08: City of Fredericktown holds two meetings regarding electric utility
By Robert Vanderbrugen/Democrat News
Wednesday, September 24, 2008
The City of Fredericktown held two informational meetings Monday evening regarding the Missouri Public Energy Pool (MoPEP) and the Fredericktown electric utility.
Both meetings had Douglas L. Healy, General Counsel and Director of Member Relations from MoPEP and John Grotzinger, Director of Engineering and Operations speaking about the role MoPEP plays in the distribution of electricity to Fredericktown. The first meeting was called as a special meeting.
Ward III Alderman Mark Tripp stated at the beginning of the special meeting he wanted to go on the record as being against the special meeting. Tripp said the meeting scheduled at 6 PM at the high school should have been enough. The mayor and four aldermen were in attendance. The second meeting was held at 6 PM at the high School cafeteria. The mayor and all the aldermen were present at the high school except for Ward III Alderman Karen Wright due to a medical procedure she was having according to the aldermen.
During the first meeting, Healy said he wanted to discuss three points.
1-Having an independent auditor come in and analyze Fredericktown’s electric system. Healy suggested using Home Town Connection as the auditor. http://www.hometownconnections.com/
(Hometown Connections is a utility services subsidiary of the American Public Power Association (APPA). APPA is the service organization for the nation's more than 2,000 community - and state-owned electric utilities that serve more than 45 million Americans.)
Healy said he has seen the company work in other cities. The company is knowledgeable in the field and can offer some good utility management ideas for “streamlining” and saving money.Tripp said the City has been in discussions with Electrical Engineer Ray Blakely regarding an audit of the City’s electric utility infrastructure. However, Interim City Administrator Jim Dismuke said no contract has been signed yet.
2-The City should take a look at their rate structure Healy said. Take a look at the cost of service to all customers to see if the cost structure is distributed fairly. A review of the rate structure may prove helpful according to the MoPEP representatives.Ward I Alderman Brandon Hale and Ward III Alderman Mark Tripp agreed the rate structure needs redoing. Equalization could benefit some and cost others more, Hale said, and he wants to be fair to all parties involved
3- Grotzinger said the City is in a unique situation in which a gas fired generator could be placed near the Business Park. (Most generators are coal fired according to Grotzinger). The generator would be used during peak power demands and possibly provide some return on electricity when a certain megawatt load is surpassed. (The size of the generator was to be determined later). The generator would be used as a back up generator and have the capability to get power back up in as little as 30 minutes after a storm according to Grotzinger. He said the power would be returned to the system within possibly 30 minutes or, at least, to critical functions. The functions could also be controlled remotely as long as someone is on-site to be sure nothing is endangering the re-start; such as a fuel leak. The City has a natural gas line near the Business Park, which is an unusual situation according to Grotzinger. He said if the gas line is high pressure and the generator is connected, it would be a “plus” when companies are considering moving to the Business Park.
The cost of generator could be funded either by the City taking on additional debt or by asking the pool (by motion and vote) to have ownership in the generator. There would still be associated costs the City would have to pay such as connection costs, training and maintenance according to the aldermen. Grotzinger said the generator could possibly lower transmission costs, after initial expenses, by providing a ‘hedge’ for the MoPEP pool.During the work session a few weeks ago, Blakley also pointed out the need for a back-up system for Fredericktown.
At the public meeting at the high school cafeteria;City Attorney Kim Moore opened the meeting.Healy and Grotzinger then took the floor and described what the Missouri Joint Utility Commission is. Details can be found at their website. http://www.mpua.org/About/MJMEUC.asp
Healy and Grotzinger addressed the functions of the pool and how the pool maintains lower prices for their members. In one cost saving measure, the pool buys stores of coal has group purchase power when it comes to electric prices.
Using a Powerpoint presentation, Healy pointed out power demands are increasing and the cost of buying power is subject to market volatility. When coal, oil and gas prices spike, it affects electricity costs as well he said. Grotzinger said, currently the pool has purchased sufficient coal reserves for the next 30 to 40 years in order to avoid the spikes in costs of coal.
Healy’s presentation pointed out the costs for purchasing power through the open market (at any given point in time). In one example, the costs of electricity from the open market was $59.40 and the self-generating costs were $31.00. These prices will rise, but once a coal fired plant in North Dakota comes on line in 2009, prices are expected to stabilize to some degree Healy said. Grotzinger said market fluctuations can still play a significant role in changing the prices for electricity, even with cost controls already in place such as the coal purchase. He pointed out the price of a barrel of oil spiked up by $25 in just one day.
Healy pointed out that MoPEP does not run the plants that produce the electricity, they only own a percentage of the electricity in them. In other words, the pool owns 12 percent of the power produced by one generating plant which would be about 50 megawatts of power according to the presentation. The total overall power in all the percentages the pool owns is close to 200 megawatts according to the MoPEP reps.’ This power is distributed among all the cities in the pool, not just Fredericktown.On average, the City of Fredericktown is paying about $68.50 per megawatt.
According to information gathered by Phil Page, the costs of that power are higher by nearly $10. Healy said after true-ups are included, the costs may be higher for a shorter period of time (2-3 months), but the over all costs are an average. Some months will show an even lower costs that the $68.50.
True-ups are the costs the City has to pay which were not readily available or calculated during any given month. In other words, the final cost of the price of coal might not have been fully calculated until several weeks later. The price between what was charged for in that particular month for the coal purchase, and what the actual cost ended up being is called the true-up.
MoPEP said they are planning on other plants coming on line in the next few years which would then help control costs as well. Although rates are expected to go up, rates may not go up as high as some cities that purchase their power from the open market on their own.
Residents were then provided an opportunity to ask questions about MoPEP. Tripp asked when the next meeting of the MoPEP pool was being called. Oct 3 he was told. The City is still pursuing their efforts to exit the MoPEP pool and sell the electric utility to Black River Electric according to Hale. He and Ward II Alderman Sie Merriman Sr. said they will continue to pursue the efforts to sell to BREC as long as the residents want them to.
Although MoPEP has an exit plan in their contracts with the cities, the plan calls for a five year notice and still holds cities responsible for long term contracts in which obligations they’ve agreed to must still be paid. According to the aldermen, that is why Fredericktown has decided to exit MoPEP by having another city take on the obligations of Fredericktown-if they can find one. St. James had not made a decision as of this meeting and time is running out. The Council asked if MoPEP will allow Fredericktown to continue in their efforts to exit the pool, even after time runs out for St. James to accept or reject Fredericktown’s exit plan. Healy said he believes the member cities of MoPEP have “gone out of their way” to help Fredericktown in their exit plan. If the final decisions were to be in favor of Fredericktown exiting the pool by having St. James take over Fredericktown’s obligations, the issue would still have to go before the Public Service Commission according to the aldermen.
Phil Page challenged the Council and Mayor Danny Kemp with questions about their opinions on the management of the electric utility. He asked if they agree that the system has had years and years of mismanagement and if this council thinks they can do better. Hale said, “Yes, we are doing a much better job managing the utility. From this point forward, yes, it could be properly managed.”
Tripp pointed out that although the MoPEP contract is often referred to as a forever contract because of the difficulty leaving the pool, selling to Black River Electric is also a “forever contract” because once the utility is sold, they can’t go back. He said in his opinion, “the system has been seriously mismanaged.” He said the issue has now become one of infrastructure, rather than rates. Tripp said he is in full support of the sale to BREC. He sees millions of dollars of debt facing the City for electric utility infrastructure repair. We will need more staff, more engineers, and lines, etc., and quite frankly the City can’t afford it. Merriman said he wants to see an evaluation of the system, as far as he knows, it has never been done.
St. James trying to find the MoPEP entrance
At the MJMEUC-MoPEP annual meeting on October 3, 2008, the announcement was made that St. James will be joining MoPEP but it is uncertain whether or not Fredericktown will be able to swap out with St. James. More on this later.
The only way Kincheloe got an “A-” credit rating for MJMEUC for the first investment in Plum Point, Arkansas is because he told Fitch Ratings that his MoPEP cities had a nearly unlimited ability to raise local utility rates to pay for all his debts because MJMEUC was not regulated by the PSC and because his MoPEP contract had the MoPEP cities so hog-tied that they are obligated by contract to pay all MJMEUC’s debts and all their investment obligations “without limitation.”* Fitch Ratings concluded, based upon what Kincheloe told them: “Since its inception in 2000, the cost of power to MoPEP #1 participants has increased in-line with market rates. It will likely continue to do so until the power plants under construction, such as Prairie State, are operational.” -Fitch Ratings on the Prairie State plant Aug. 2007 MoPEP cities that are wondering why they’re paying double-digit rates will not agree their rates are “in-line with market rates.”
(*The “direct costs” clause (Art. I, Definitions pg. 3) allows MJMEUC/MoPEP to pass through to MoPEP cities all MJMEUC’s direct costs and debts and bonds “without limitation.” The contract says they will bill members for the power they use and for “direct costs” which are defined as, “Direct Costs: "Including without limitation all payments MJMEUC is required to make (including reserves and debt service coverages MJMEUC is required to maintain pursuant to any bond indenture, financing lease or loan agreement)."
That same statement was made in the rating documents of all other MJMEUC bond ratings of MJMEUC’s investments which show how little the Fitch Ratings people know about politics in small town America. Unlimited rate increases from a commercial company may be hard to fight in the big city but not in small towns where power politics are more personal. Neither Kincheloe nor the Fitch Ratings people have ever lived in a small town where elected or appointed officials who raise utility rates beyond what their friends, neighbors and even their relatives will tolerate, quickly find out that the ability to raise utility rates does have a practical limit. Political retribution for perceived excess can be swift and not very subtle. When your paint job has been “key-d” during church or your tires get slashed in Kroger’s parking lot, that’s when you know you’ve market-tested the price-elasticity of local utility rates.
(New development: As a result of the banking collapse, insurance companies like AMBAC that insured these coal-fired plants and similar investments are getting their own ratings knocked down. Fallout is also hitting the rating agencies like Fitch Ratings, Moody’s and Standard & Poor’s who have obviously been much too lax in their reviews of investors like MJMEUC. If MJMEUC’s “A-” rating gets downgraded to a “B” or worse MUMEUC is in junk bond territory and the interest they pay will go up. When Fitch Ratings sees the 2007 management letter they will likely downgrade their rating it’s just a question of how much.)
Curious costs of the exit. To get out even in a swap with St. James, Fredericktown it seems will still have to pay MoPEP’s huge exit bill. The estimated costs for Fredericktown to get out of MoPEP are highly questionable in light of the revelations in the 2007 audit management letter which confessed that MJMEUC-MoPEP and MAMU’s financial records have never reflected the $2 billion in debt for the power plants and there have been other “serious deficiencies” and “material weaknesses” in their financial statements and recordkeeping for years. The original idea by the members of being able to “swap out” if another town joined was that the swap would be even, no five-year wait and no big cash penalty only the net difference between the two would be paid by the exiting town. If all other things were generally equal the new member would just take the place of the old member, but that was before Kincheloe started trying to amass a reserve fund of millions, something any experienced businessman would have known from the beginning was a necessary cash-flow cushion. Now Kincheloe has tacked on a new $140,000 “entry fee” for St. James to join to take Fredericktown’s place in addition to what he’s going to claim Fredericktown will have to pay him. Why is Kincheloe claiming Fredericktown has to pay all the same exit costs as if they were getting out after the five-year contract requirement when he’s going to have St. James take over their obligations and can milk them at his leisure in Fredericktown’s place? Here’s the latest from towns trying to find the MoPEP exit sign. (Emphasis in articles by blog editor)
August 14, ’08: Fredericktown Aldermen Continue on with Electric Utility Sale
By Robert Vanderbrugen/Democrat News
Aug 20, 2008 - 15:09:11 CDT
The City of Fredericktown held a special meeting Thursday evening, August 14 to hear an update on the meeting City Attorney Kim Moore attended in Jefferson City with the Missouri Public Energy Pool (MoPEP) and to hear presentations by the Electrical Ad-Hoc committee and public comments. The meeting in Jeff City was arranged to go over numerous contract issues the City is facing on its efforts to remove Fredericktown from the MoPEP pool. MoPEP is a group of 32 cities who joined together with the intent to bring lower electrical costs to their communities.
The local meeting was called to order by Mayor Danny Kemp. The Council called the special meeting with such short notice because of time constraints. The public must have an opportunity to vote on the sale issue, which means it must be on the November, 2008 ballot; which means the question must be placed with the Madison County Clerk by August 26 to be on the ballot. The City is asking the City of St. James, Missouri to consider joining MoPEP by accepting the assignments of Fredericktown, which would then provide an opportunity for Fredericktown to leave the MoPEP pool. St. James is planning on joining MoPEP in any case according to the aldermen.All the aldermen were present at the start of the meeting, however Ward I Alderman Brandon Hale did leave, citing a previously scheduled engagement, after he posed several questions to the committee.
Ad-Hoc committee member Ken Pierce, CPA gave a slide show presentation on rates between the City Vs Black River Electric Co-op (BREC). The slide presentation showed why he recommends the sale of the city’s electric utility department to Black River Electric Co-op. Pierce showed comparison graphs of the electric rates the City of Fredericktown charges compared to the rates BREC charges. In all but the most basic rate chart, the city’s rates were higher. The presentation showed commercial rates are staggering and are expected to continue to rise.
In a general synopsis, the alderman are facing the challenge of exiting the MoPEP pool and then selling the Fredericktown Electric utility to Black River Electric, or staying in the pool and seeing the electric rates climb beyond what some commercial businesses consider reasonable expectations. Cap America and Versa Tech stated they pay several thousand dollars a month now. In any case, electric rates will have to increase according to recommendations of the committee.
Aldermen are also keeping in mind the impact these electric rates have on the poor and the senior citizens in Fredericktown.
One calculation estimated the City is losing about $50,000 a month since the per kilowatt usage rate the City pays to obtain power had a significant increase in April, 2008. The historical costs for purchasing power were 6.6 cents per kilowatt hour (kwh) in September of 2007. The rate in April of 2008 hit 7.772 cents per kWh according to the committee. That translates to at least a 13.04 percent increase in electric rates at this point in time, or the city will continue on the financial downward spiral according to the Fredericktown Ad-Hoc committee.
If the City chooses to stay in the pool (or fails to exit the MoPEP pool successfully), the rates will rise. The commercial rates appear to have the greatest potential for huge increases according to committee projections. One reason the rates are so expensive is the debt service the City of Fredericktown entered into with MoPEP to build a power plant. The City would share costs in the building and operating costs of the plant (with no cap on expenses seen at this point according to the committee). The projected cost is about $600,000,000. The City of Fredericktown would have about a two percent cost share in the project which is about $12,000,000 currently.
A presentation by Madison Inn Lodge owner Abu Chowdhury showed a huge cost in electrical rates over the long haul which included the City’s cost of the project. He calculated amortization rates: at 6% over 50 years, 7% over 50 years and more. Although no interest rate was included in the actual figures for the power plant costs, Chowdhury included some potential interest rates. The costs to the City for the power plant operations over time were estimated to be in the millions. The costs are included in the purchase power agreements the City has already accepted as a member of the pool. If St. James accepts membership in MoPEP as an assignee, they would then take on that debt service as well according to the committee.If the negotiations fail at any given point, then Fredericktown would have to stay in the pool.
Pierce talked to the audience and the aldermen about several factors including the risk the City takes staying in MoPEP;The volatility of the electric market. The reliability of Fredericktown’s electric system. Liability of injuries.Increases in regulatory issues and related costs. What happens to the system in the event of a disaster.The suppression of economic development. Pierce said the sale of the utility would allow more favorable rates, especially to commercial entities.The elimination of risks of ownership of the electric utility. More favorable financial impact to Fredericktown. (more…)
September 17, ’08: Public Meeting
Wednesday, September 17, 2008
The CEO of MoPEP has scheduled a public meeting which begins at 6:00 P.M. on Monday, September 22, 2008 at the Fredericktown High School cafeteria. Residents are encouraged to attend the meeting and ask questions.
Kincheloe was a no show at the meeting he asked for but he sent his troops to try to put out the forest fire. Kincheloe’s lawyer, Douglas L. Healey, tried to get the city to hire one of their ringers, “The Hometown Connection,” to do an “objective” rate study for them. The Hometown Connection is a consultant for APPA the American Public Power Association. Guess who the only Missouri affiliate member of The Hometown Connection is? It’s the Missouri Public Utility Alliance, which is the parent of MJMEUC-MoPEP, MAMU and MGCM. MAMU is managed by Ewell Lawson the same guy who helped your town get revenue bond issues through MAMU for your diesel generator loan that have the now infamous toxic auction-rate securities with floating interest rates. It’s a regular snake’s nest of interlocking conflict of interest isn’t it? Self-serving as always they’ve palmed off The Hometown Connection as an “independent auditor” to other gullible MoPEP members in the past without disclosing their ‘connection’ to the Hometown Connection but the Fredericktown people weren’t so gullible this time.
Then Ewell Lawson pitched them on taking on some more debt to get in on the Great MoPEP Diesel Generator Scam. He said would provide a “hedge” he said for the MoPEP Pool. They’d be better off buying Washington Mutual stocks after it collapsed. If you don’t mind producing electricity that costs $4.00 a kilowatt and selling it to MoPEP for pennies per kWh so they can sell it back to you at a markup. It’s a great ‘hedge’ all right but not for Fredericktown.
The last ditch pitch of the Kincheloe Team at this meeting was the same as it always is that energy prices will go up (they’ve been doing that since before Edison invented the light bulb) but because of the Billions in investments in a dying industry someday MoPEP’s prices will “stabilize.” Careless listeners translate that as “cheaper” rates but they never say “cheaper.” They mean they will “stabilize” at a much, much higher rate than the commercial, PSC regulated companies are charging. “MoPEP said they are planning on other plants coming on line in the next few years which would then help control costs as well. Although rates are expected to go up, rates may not go up as high as some cities that purchase their power from the open market on their own.” Did you ever see so many loopholes and weasel words in one sentence?
September 22, ’08: City of Fredericktown holds two meetings regarding electric utility
By Robert Vanderbrugen/Democrat News
Wednesday, September 24, 2008
The City of Fredericktown held two informational meetings Monday evening regarding the Missouri Public Energy Pool (MoPEP) and the Fredericktown electric utility.
Both meetings had Douglas L. Healy, General Counsel and Director of Member Relations from MoPEP and John Grotzinger, Director of Engineering and Operations speaking about the role MoPEP plays in the distribution of electricity to Fredericktown. The first meeting was called as a special meeting.
Ward III Alderman Mark Tripp stated at the beginning of the special meeting he wanted to go on the record as being against the special meeting. Tripp said the meeting scheduled at 6 PM at the high school should have been enough. The mayor and four aldermen were in attendance. The second meeting was held at 6 PM at the high School cafeteria. The mayor and all the aldermen were present at the high school except for Ward III Alderman Karen Wright due to a medical procedure she was having according to the aldermen.
During the first meeting, Healy said he wanted to discuss three points.
1-Having an independent auditor come in and analyze Fredericktown’s electric system. Healy suggested using Home Town Connection as the auditor. http://www.hometownconnections.com/
(Hometown Connections is a utility services subsidiary of the American Public Power Association (APPA). APPA is the service organization for the nation's more than 2,000 community - and state-owned electric utilities that serve more than 45 million Americans.)
Healy said he has seen the company work in other cities. The company is knowledgeable in the field and can offer some good utility management ideas for “streamlining” and saving money.Tripp said the City has been in discussions with Electrical Engineer Ray Blakely regarding an audit of the City’s electric utility infrastructure. However, Interim City Administrator Jim Dismuke said no contract has been signed yet.
2-The City should take a look at their rate structure Healy said. Take a look at the cost of service to all customers to see if the cost structure is distributed fairly. A review of the rate structure may prove helpful according to the MoPEP representatives.Ward I Alderman Brandon Hale and Ward III Alderman Mark Tripp agreed the rate structure needs redoing. Equalization could benefit some and cost others more, Hale said, and he wants to be fair to all parties involved
3- Grotzinger said the City is in a unique situation in which a gas fired generator could be placed near the Business Park. (Most generators are coal fired according to Grotzinger). The generator would be used during peak power demands and possibly provide some return on electricity when a certain megawatt load is surpassed. (The size of the generator was to be determined later). The generator would be used as a back up generator and have the capability to get power back up in as little as 30 minutes after a storm according to Grotzinger. He said the power would be returned to the system within possibly 30 minutes or, at least, to critical functions. The functions could also be controlled remotely as long as someone is on-site to be sure nothing is endangering the re-start; such as a fuel leak. The City has a natural gas line near the Business Park, which is an unusual situation according to Grotzinger. He said if the gas line is high pressure and the generator is connected, it would be a “plus” when companies are considering moving to the Business Park.
The cost of generator could be funded either by the City taking on additional debt or by asking the pool (by motion and vote) to have ownership in the generator. There would still be associated costs the City would have to pay such as connection costs, training and maintenance according to the aldermen. Grotzinger said the generator could possibly lower transmission costs, after initial expenses, by providing a ‘hedge’ for the MoPEP pool.During the work session a few weeks ago, Blakley also pointed out the need for a back-up system for Fredericktown.
At the public meeting at the high school cafeteria;City Attorney Kim Moore opened the meeting.Healy and Grotzinger then took the floor and described what the Missouri Joint Utility Commission is. Details can be found at their website. http://www.mpua.org/About/MJMEUC.asp
Healy and Grotzinger addressed the functions of the pool and how the pool maintains lower prices for their members. In one cost saving measure, the pool buys stores of coal has group purchase power when it comes to electric prices.
Using a Powerpoint presentation, Healy pointed out power demands are increasing and the cost of buying power is subject to market volatility. When coal, oil and gas prices spike, it affects electricity costs as well he said. Grotzinger said, currently the pool has purchased sufficient coal reserves for the next 30 to 40 years in order to avoid the spikes in costs of coal.
Healy’s presentation pointed out the costs for purchasing power through the open market (at any given point in time). In one example, the costs of electricity from the open market was $59.40 and the self-generating costs were $31.00. These prices will rise, but once a coal fired plant in North Dakota comes on line in 2009, prices are expected to stabilize to some degree Healy said. Grotzinger said market fluctuations can still play a significant role in changing the prices for electricity, even with cost controls already in place such as the coal purchase. He pointed out the price of a barrel of oil spiked up by $25 in just one day.
Healy pointed out that MoPEP does not run the plants that produce the electricity, they only own a percentage of the electricity in them. In other words, the pool owns 12 percent of the power produced by one generating plant which would be about 50 megawatts of power according to the presentation. The total overall power in all the percentages the pool owns is close to 200 megawatts according to the MoPEP reps.’ This power is distributed among all the cities in the pool, not just Fredericktown.On average, the City of Fredericktown is paying about $68.50 per megawatt.
According to information gathered by Phil Page, the costs of that power are higher by nearly $10. Healy said after true-ups are included, the costs may be higher for a shorter period of time (2-3 months), but the over all costs are an average. Some months will show an even lower costs that the $68.50.
True-ups are the costs the City has to pay which were not readily available or calculated during any given month. In other words, the final cost of the price of coal might not have been fully calculated until several weeks later. The price between what was charged for in that particular month for the coal purchase, and what the actual cost ended up being is called the true-up.
MoPEP said they are planning on other plants coming on line in the next few years which would then help control costs as well. Although rates are expected to go up, rates may not go up as high as some cities that purchase their power from the open market on their own.
Residents were then provided an opportunity to ask questions about MoPEP. Tripp asked when the next meeting of the MoPEP pool was being called. Oct 3 he was told. The City is still pursuing their efforts to exit the MoPEP pool and sell the electric utility to Black River Electric according to Hale. He and Ward II Alderman Sie Merriman Sr. said they will continue to pursue the efforts to sell to BREC as long as the residents want them to.
Although MoPEP has an exit plan in their contracts with the cities, the plan calls for a five year notice and still holds cities responsible for long term contracts in which obligations they’ve agreed to must still be paid. According to the aldermen, that is why Fredericktown has decided to exit MoPEP by having another city take on the obligations of Fredericktown-if they can find one. St. James had not made a decision as of this meeting and time is running out. The Council asked if MoPEP will allow Fredericktown to continue in their efforts to exit the pool, even after time runs out for St. James to accept or reject Fredericktown’s exit plan. Healy said he believes the member cities of MoPEP have “gone out of their way” to help Fredericktown in their exit plan. If the final decisions were to be in favor of Fredericktown exiting the pool by having St. James take over Fredericktown’s obligations, the issue would still have to go before the Public Service Commission according to the aldermen.
Phil Page challenged the Council and Mayor Danny Kemp with questions about their opinions on the management of the electric utility. He asked if they agree that the system has had years and years of mismanagement and if this council thinks they can do better. Hale said, “Yes, we are doing a much better job managing the utility. From this point forward, yes, it could be properly managed.”
Tripp pointed out that although the MoPEP contract is often referred to as a forever contract because of the difficulty leaving the pool, selling to Black River Electric is also a “forever contract” because once the utility is sold, they can’t go back. He said in his opinion, “the system has been seriously mismanaged.” He said the issue has now become one of infrastructure, rather than rates. Tripp said he is in full support of the sale to BREC. He sees millions of dollars of debt facing the City for electric utility infrastructure repair. We will need more staff, more engineers, and lines, etc., and quite frankly the City can’t afford it. Merriman said he wants to see an evaluation of the system, as far as he knows, it has never been done.
St. James trying to find the MoPEP entrance
At the MJMEUC-MoPEP annual meeting on October 3, 2008, the announcement was made that St. James will be joining MoPEP but it is uncertain whether or not Fredericktown will be able to swap out with St. James. More on this later.
Friday, October 10, 2008
How to calculate your town’s % share of MJMEUC-MoPEP debt
I’m repeating Donna’s blog response giving you the charts to calculate your MoPEP debt because this is very important to explain all those mysteriously fluctuating MoPEP wholesale rates you get from MoPEP. MJMEUC-MoPEP has dumped over $2 BILLION worth of debt in obsolete technology on 32 small towns as if it was nothing. These charts explain why your electric rates went up after you joined MoPEP and why they will keep going up as long as you are associated with this bunch of amateur businessmen who think they can beat the big power companies at a game the power companies invented.
So for all you MoPEP sharecroppers, here’s how you can figure out how much of Duncan Kincheloe’s little power empire you are directly responsible for paying off if anything goes wrong – and things are going wrong every day, he’s just not telling you about them.
As far as we know the Owensville auditors, Verkamp & Malone of Rolla, are the only auditors who have caught on that there’s a pot load of very heavy debt hiding out there in the MoPEP bushes that should have been reflected on the liabilities of each of the owner-member cities.
Step 1. Print out Exhibit M which will tell you what percentage your share of the debt is. Use the figures on the “Generation-Exhibit M” chart. Each column gives your share of that particular power plant. For instance the first column is NC2 which is Nebraska City 2 the second is Prairie State etc. Your total allocation (of debt) is in the third column “% Allocation.”
Step 2. Print out Chart B showing the MJMEUC-MOPEP total debt and the individual debt for the eight plants. Rolla’s share is 0.1384 or 13.84% as shown in column 3 of the Generation chart.
Step 3. Multiply your % share of the debt in Exhibit M times your share of each of debt for each plant as was done in the Rolla chart example or just multiply your allocation percentage times the total debt for all these plants which is $2,160,352,403.89. That’s how much of Kincheloe’s debt your town is responsible for paying off if anything happens and one or more of these plants fails to earn enough money to pay off all their debts and all their Carbon Taxes.
Step 4. After the EMT’s revive you, take the charts and the results of your calculations to your next city council meeting and ask why they haven’t told any of the citizens of your town about this huge debt. Then send the charts to the CPA’s who do your city audits so they can add this important information to your annual audits to accurately reflect the city’s total obligations. With this information available to them they should add a note to the "liabilities" section on your next city audit which explains that when your city council signed the MoPEP contract (Section 8.10 page 12-13) the city gave MJMEUC-MoPEP a superior or first lien on all your city electric revenues. That is the collateral MoPEP pledged so they could borrow the $2 Billion to buy into all these power plants. The fact that you don’t own your own electric revenues anymore is something your city is supposed to disclose to anyone who uses your audit to decide whether to loan you money on a short or long term basis. If it's found out that the city failed to disclose all its liabilities and obligations or concealed something like the MoPEP liability and the first lien on one of your major revenues, it can ruin your credit rating for a long time.
Your CPA's will also be very interested in seeing a copy of the MJMEUC Management letter that confesses none of their previous audits have been worth a damn because they left out all this debt. If you do all that maybe you will be able to get a straight answer out of one of those people in city government who rubber-stamped your MoPEP or UPPA contract without reading a single word of the contract.
You could also ask the Kinchloe fan that has been going to MoPEP meetings all these years and who obviously has been voting in favor of all this debt, why the hell they haven’t been reporting it to the folks at home?
The Carbon Tax Chart is for the pinheads who have invested in coal-fired plants - . The next awful news is that after the new president is elected (doesn’t matter which one) Congress is going to get serious about cutting our carbon emissions so this is what the owners of all the dirty coal-fired power plants can expect to start paying for the privilege of fouling the planet. These costs will naturally be passed right on to the consumer in higher rates. The Carbon Tax Chart is MIT’s best estimate of what it will cost them to keep blowing all those “Clean Coal” residues into the air. There are a lot of variables such as the softness or dirtiness of the coal used. The Illinois coal mine that Kincheloe invested in along with the Prairie State power plant that Kincheloe thinks is such a masterful business coup produces the worst kind of soft bituminous coal which eats up expensive-to-replace boilers in the power plant. Clever huh?
So for all you MoPEP sharecroppers, here’s how you can figure out how much of Duncan Kincheloe’s little power empire you are directly responsible for paying off if anything goes wrong – and things are going wrong every day, he’s just not telling you about them.
As far as we know the Owensville auditors, Verkamp & Malone of Rolla, are the only auditors who have caught on that there’s a pot load of very heavy debt hiding out there in the MoPEP bushes that should have been reflected on the liabilities of each of the owner-member cities.
Step 1. Print out Exhibit M which will tell you what percentage your share of the debt is. Use the figures on the “Generation-Exhibit M” chart. Each column gives your share of that particular power plant. For instance the first column is NC2 which is Nebraska City 2 the second is Prairie State etc. Your total allocation (of debt) is in the third column “% Allocation.”
Step 2. Print out Chart B showing the MJMEUC-MOPEP total debt and the individual debt for the eight plants. Rolla’s share is 0.1384 or 13.84% as shown in column 3 of the Generation chart.
Step 3. Multiply your % share of the debt in Exhibit M times your share of each of debt for each plant as was done in the Rolla chart example or just multiply your allocation percentage times the total debt for all these plants which is $2,160,352,403.89. That’s how much of Kincheloe’s debt your town is responsible for paying off if anything happens and one or more of these plants fails to earn enough money to pay off all their debts and all their Carbon Taxes.
Step 4. After the EMT’s revive you, take the charts and the results of your calculations to your next city council meeting and ask why they haven’t told any of the citizens of your town about this huge debt. Then send the charts to the CPA’s who do your city audits so they can add this important information to your annual audits to accurately reflect the city’s total obligations. With this information available to them they should add a note to the "liabilities" section on your next city audit which explains that when your city council signed the MoPEP contract (Section 8.10 page 12-13) the city gave MJMEUC-MoPEP a superior or first lien on all your city electric revenues. That is the collateral MoPEP pledged so they could borrow the $2 Billion to buy into all these power plants. The fact that you don’t own your own electric revenues anymore is something your city is supposed to disclose to anyone who uses your audit to decide whether to loan you money on a short or long term basis. If it's found out that the city failed to disclose all its liabilities and obligations or concealed something like the MoPEP liability and the first lien on one of your major revenues, it can ruin your credit rating for a long time.
Your CPA's will also be very interested in seeing a copy of the MJMEUC Management letter that confesses none of their previous audits have been worth a damn because they left out all this debt. If you do all that maybe you will be able to get a straight answer out of one of those people in city government who rubber-stamped your MoPEP or UPPA contract without reading a single word of the contract.
You could also ask the Kinchloe fan that has been going to MoPEP meetings all these years and who obviously has been voting in favor of all this debt, why the hell they haven’t been reporting it to the folks at home?
The Carbon Tax Chart is for the pinheads who have invested in coal-fired plants - . The next awful news is that after the new president is elected (doesn’t matter which one) Congress is going to get serious about cutting our carbon emissions so this is what the owners of all the dirty coal-fired power plants can expect to start paying for the privilege of fouling the planet. These costs will naturally be passed right on to the consumer in higher rates. The Carbon Tax Chart is MIT’s best estimate of what it will cost them to keep blowing all those “Clean Coal” residues into the air. There are a lot of variables such as the softness or dirtiness of the coal used. The Illinois coal mine that Kincheloe invested in along with the Prairie State power plant that Kincheloe thinks is such a masterful business coup produces the worst kind of soft bituminous coal which eats up expensive-to-replace boilers in the power plant. Clever huh?
Tuesday, September 30, 2008
"Greed is, for lack of a better word, good." - Gordon Gekko
While watching the shocking “Bloody Tuesday” banking industry collapse on September 16th, you may have been confused by the mention of “credit default swaps” (CDS) cited as one of several culprits in the banking collapse. The CDS’s they were talking about are the derivative first cousins of the “auction-rate securities” MAMU and MDFB have been swindling our cities into so they could get utility revenue bonds issued without the constitutionally required local voter referendum. With the derivatives, MDFB, MAMU and Wachovia bank could make money swapping the floating interest rates of our long term bonds. The definitions of these two types of derivatives (there are other kinds) are in the links above. In short, both are contributors to the meltdown and they are equally toxic but to different victims. The credit default swaps are bets between two bank gamblers that a third party will or won’t default on a debt. Auctions-rate securities are derivatives of long-term maturity debt instruments i.e. corporate or municipal bonds where the interest rate is regularly reset through a dutch auction giving the municipality a bouncing and unreliable interest rate. Like a truck load of angry rattlesnakes, auction-rate securities should not be dumped in any small town, school district or other public entity just so a few elected officials can get money for their pet pork projects but avoid the wrath of their constituents in the voting booth. As Jefferson County, Alabama learned to its sorrow, when it comes to public financing “Boring is Best.” Public entities should stick to plain vanilla revenue bonds with no derivative gambling features attached. Old-fashioned bonds are safe, easy to understand and they never slither up your pant leg and bite you in the ass.
What does the banking meltdown have to do with us? The federal bailouts are happening in the Wall Street stratosphere of high-finance. The guys begging for bail-outs from our politicians are greedy pinheads, the Gordon Gekko’s of the investment banking world, and they deserve to bleed out…slowly. Unfortunately the other pinheads in Washington who failed in their oversight duties will probably bail them out one way or another. We, on the other hand will sit here like ducks during hunting season holding our rotten derivative loans that our little towns got through MDFB and MAMU but because we have no Washington lobbyists to bail us out we will eventually have to pay for our stupid mistakes. Unlike the too-big-to-fail banks, no one is going to bailout the Rolla’s, Owensville’s or Hermann’s because we’re too-little-to-rescue.”
Example: On Wednesday morning the Bloomberg ticker announced: “Alabama County Sued by Bond Insurers Seeking Resolution to Debt Crisis.” Bloomberg’s ticker also said: “Princeton Interest Rate Quadruples on Lehman-led Debt Issue.” Both the Good ole’ Boy Alabama pols and the prestigious Princeton eggheads made the same greedy mistake. They both let slick investment bankers sell them “good as cash” derivative swaps like the ones MAMU sold their member towns – not credit default swaps like AIG’s, but auction-rate securities spun off their revenue bonds. Now the same crooks and liars that sold our dumb town officials these risky gambling instruments are going to be squeezing both the public and non profit institutions at the end of the sucker line to get the cash they need to cover their own losses. The quote of the fictional Gordon Gekko: "Greed is, for lack of a better word, good" wasn’t a movie invention, it was taken right out of the Wall Street playbook.
So with this collapse of the investment banking system the dominoes will fall on every bank including Wachovia. Our Secy. of State Robin Carnahan thinks she has a deal with Wachovia to pay back some of their individual victims but bigger sharks are after Wachovia for their own purposes and Wachovia may not last out the week. After the failure of the House bail-out vote it’s like watching one of those slo-mo films of an old casino imploding. Carnahan is still “thinking” about whether she will investigate or take any action against MDFB and MAMU. If somebody doesn’t, all of the MoPEP and MJMEUC members who let themselves be herded by MAMU into the very same auction-rate securities market will be like the kid at the end of the snap-the-whip line at the ice rink – they’ll be slammed into the wall at a high rate of speed just as Princeton and Jefferson County were when their auction-rate floating interest rates quadrupled. When the Minnows of MAMU say they can’t pay Wachovia (or whoever owns them next) four or five times the variable interest rate that they told their borrowers would be such a good deal, Wachovia will sue to get the money that – however immorally – is still quite legally owed to them. After all the Gordon Gekko’s need every dime they can find to cover their own losses in the rotten derivatives market they got us into.
Our problem is two pronged and only the second one has to do with derivative swaps:
PROBLEM #1 – MJMEUC audits have failed to recognize $2,160,352,403 in liabilities which are now the debts of MoPEP member towns because each town “owns” a % of that debt.
· If or when authorities finally investigate MDFB and MAMU, (as they so richly deserve) their ‘07 management letter says their accounts for the past three years are in such poor shape that it would be difficult - but not impossible - to figure out what the collateral damage is to their small town victims as a result of Kincheloe’s power plant shopping spree. The MJMEUC 2007 management letter confessed to “significant deficiencies” and “material weaknesses” of MJMEUC and all affiliates which means that at least their last three audits (or more) are generally worthless because, 1.) They use Quickbooks which is inadequate for the complex calculations they should have been making. 2.) The complex calculations they should have been making on MJMEUC-MoPEP liabilities for what is now a $2,160,352,403 debt for equity investments in eight power plants have not been reflected in their ’05 to ’07 audits so the audits are incomplete and totally misleading as to the financial condition of MAMU, MJMEUC and MoPEP. 3.) The MJMEUC accounting and billing staff are spread too thin and they were too inexperienced to cope with the “increased complexity of accounting needs.”
· Because of the “significant deficiencies” and “material weaknesses” of the incomplete audits of the prior years of MJMEUC audits, the 32 cities that are member investors in MJMEUC-MoPEP haven’t had correct contingent liability information from MJMEUC on the $2 billion in revenue bond debt which each member should have passed on to their own auditors so that liability could be correctly reflected in their city audits. The reason the information about their percentage share of MJMEUC’s $2.1 billion debt should have been included in their local audits is to show the full extent of each town’s contingent liability for the highly-leveraged revenue bond loans Kincheloe (MJMEUC-MoPEP) took out to buy equity positions ($2,160,352,403) in coal-fired power plants that have constantly rising construction costs. Why is this disclosure at the local level necessary? Because their monthly electric revenues are pledged as collateral for MJMEUC’s power plant investments! If things go wrong, their electric revenues can be seized to pay MJMEUC’s investment debts and this would leave the individual member cities with little or no revenue left to pay their own expenses. Full disclosure would at least provide them with a warning so they could take steps protect themselves against a major loss of electric revenue.
Example: To this date the City of Rolla alone has an estimated total contingent liability of $131,851,727.60 for the power plants (not including their other share of MJMEUC-MoPEP overhead and other debts that are passed through each month as a “direct cost”). The unfortunate utility rate payers of Rolla have no idea they have an outstanding obligation that is six times their annual city budget! To find out what the contingent liability of the total MJMEUC-MoPEP debt of $2,160,352,403.89 is for your MoPEP town, go to the updated 2008 Schedule M attachment to the MoPEP contract and do the math to see what your town is obligated to pay. The Schedule M lists are titled, “This Exhibit allocates shares of Resource Obligations for the purpose of implementing MoPEP #1 Agreement Section 15.8. [of the MoPEP contract].” It also says the “Allocations of Resource Obligations apply only to Pool members for whom the Agreement is cancelled,” but that’s not true. The Schedule M “Allocation of Resource Obligation” percentage determines the size of a lot of the bills MoPEP sharecroppers are paying now and the really big ones they will pay in the future.
PROBLEM #2 – the toxic MAMU pool loans with their floating interest rate derivative swaps.
· Most MoPEP members still don’t know they’re directly involved in the national news stories about the collapse of auction-rate securities and credit derivative swaps but if they borrowed money for diesel generators or any other local utility project over the last eight years through MAMU and MDFB they are hanging right up there with Bear Sterns, Lehman and AIG, it’s just that Kincheloe hasn’t bothered to tell them yet. If Wachovia (formerly A. G. Edwards and soon to be somebody else) like the other big 10 banks this week, is looking for cash to shore up their losses so they can avoid a Washington Mutual fate, they will do what other banks are doing to Jefferson County, Alabama and Princeton - suing to get what they can out of the customers they sold floating interest rate loans with derivative swaps. The con was perpetrated nationwide. In addition to MAMU’s victims, in Pennsylvania alone there are 110 school districts whose loans are contaminated with derivative swaps and who may be sued like Princeton and Jefferson County if they refuse to pay interest rates that may have suddenly doubled or quadrupled.
· The member towns MAMU pimped to get their utility project funded through the MDFB bond pools are 100% exposed to “Bloody Tuesday’s” meltdown in the banking-derivatives market but MAMU’s debtor towns don’t know how much their exposure is because MAMU has never given their auditors the information about the extent of their so-called “revenue bond issues” for their diesel generator or other utility project that was funded through MAMU and MDFB. The information on what the current “swapped” interest rate is on their floating interest rate loans would alerted their auditors to what the current interest rate swaps were costing them and what multiples they might have to pay if the system collapsed - as it just did. At the time he arranged their MAMU* utility revenue bonds through MDFB, Kincheloe did not explain to them how dangerous derivative swaps were. It’s quite safe to assume that none of the elected officials, who rubber-stamped the MAMU loan deals they were so happy to get so they could avoid a public vote, would know a derivative from a dumpster. They just wanted somebody to do the paperwork and give them a check. They always “trust the experts” anyway so no explanation was necessary. The Gordon Gekko’s figured it was a waste of time to give them information they don’t want and couldn’t understand. (*MAMU takes an administrative fee of 1.5% on the declining balance for the term of each loan so they have no incentive to advise anyone that this is a high-risk deal that they shouldn’t be in.)
· The ’07 William’s Keepers management letter confessed to “significant deficiencies” and “material weaknesses” of MJMEUC and all affiliates for the last three years but they were referring to the $2 Billion in new MJMEUC debt for the coal-fired power plants that has never shown up on MJMEUC’s books. The auditors do not seem to be aware that there is another “material weakness” which is MAMU’s involvement in the auction-rate securities market. Their audits have also not exposed the full extent of the liability MAMU has with the third-party loans they’re involved in and their risk of being sued by members when they figure out who led them into these toxic loans by not giving them full disclosure of the risks.
Our Secretary of State Robin Carnahan got a settlement out of Wachovia for some individuals who complained but it remains to be seen if Wachovia survives to pay them. Wachovia is now on the chopping block and Carnahan may not have a deal anymore or the remnants of Wachovia may not have the money to pay anyone back. That may be the end of her interest in this crisis but we hope not. We hope there are some elected officials in this state who aren’t Gekko clones.
If MJMEUC and MAMU ever get their bookkeeping problems straightened out it’s unlikely they will ever admit to their culpability by sending out a letter to each Mayor of the MoPEP member cities with the MAMU loans with a message that might go like this: “Greetings MoPEP-ers, Remember those coal-fired power plants we told you about? Well it’s the funniest thing but we have just figured out that you are now liable for $68 million of our hasty investments…”
What does the banking meltdown have to do with us? The federal bailouts are happening in the Wall Street stratosphere of high-finance. The guys begging for bail-outs from our politicians are greedy pinheads, the Gordon Gekko’s of the investment banking world, and they deserve to bleed out…slowly. Unfortunately the other pinheads in Washington who failed in their oversight duties will probably bail them out one way or another. We, on the other hand will sit here like ducks during hunting season holding our rotten derivative loans that our little towns got through MDFB and MAMU but because we have no Washington lobbyists to bail us out we will eventually have to pay for our stupid mistakes. Unlike the too-big-to-fail banks, no one is going to bailout the Rolla’s, Owensville’s or Hermann’s because we’re too-little-to-rescue.”
Example: On Wednesday morning the Bloomberg ticker announced: “Alabama County Sued by Bond Insurers Seeking Resolution to Debt Crisis.” Bloomberg’s ticker also said: “Princeton Interest Rate Quadruples on Lehman-led Debt Issue.” Both the Good ole’ Boy Alabama pols and the prestigious Princeton eggheads made the same greedy mistake. They both let slick investment bankers sell them “good as cash” derivative swaps like the ones MAMU sold their member towns – not credit default swaps like AIG’s, but auction-rate securities spun off their revenue bonds. Now the same crooks and liars that sold our dumb town officials these risky gambling instruments are going to be squeezing both the public and non profit institutions at the end of the sucker line to get the cash they need to cover their own losses. The quote of the fictional Gordon Gekko: "Greed is, for lack of a better word, good" wasn’t a movie invention, it was taken right out of the Wall Street playbook.
So with this collapse of the investment banking system the dominoes will fall on every bank including Wachovia. Our Secy. of State Robin Carnahan thinks she has a deal with Wachovia to pay back some of their individual victims but bigger sharks are after Wachovia for their own purposes and Wachovia may not last out the week. After the failure of the House bail-out vote it’s like watching one of those slo-mo films of an old casino imploding. Carnahan is still “thinking” about whether she will investigate or take any action against MDFB and MAMU. If somebody doesn’t, all of the MoPEP and MJMEUC members who let themselves be herded by MAMU into the very same auction-rate securities market will be like the kid at the end of the snap-the-whip line at the ice rink – they’ll be slammed into the wall at a high rate of speed just as Princeton and Jefferson County were when their auction-rate floating interest rates quadrupled. When the Minnows of MAMU say they can’t pay Wachovia (or whoever owns them next) four or five times the variable interest rate that they told their borrowers would be such a good deal, Wachovia will sue to get the money that – however immorally – is still quite legally owed to them. After all the Gordon Gekko’s need every dime they can find to cover their own losses in the rotten derivatives market they got us into.
Our problem is two pronged and only the second one has to do with derivative swaps:
PROBLEM #1 – MJMEUC audits have failed to recognize $2,160,352,403 in liabilities which are now the debts of MoPEP member towns because each town “owns” a % of that debt.
· If or when authorities finally investigate MDFB and MAMU, (as they so richly deserve) their ‘07 management letter says their accounts for the past three years are in such poor shape that it would be difficult - but not impossible - to figure out what the collateral damage is to their small town victims as a result of Kincheloe’s power plant shopping spree. The MJMEUC 2007 management letter confessed to “significant deficiencies” and “material weaknesses” of MJMEUC and all affiliates which means that at least their last three audits (or more) are generally worthless because, 1.) They use Quickbooks which is inadequate for the complex calculations they should have been making. 2.) The complex calculations they should have been making on MJMEUC-MoPEP liabilities for what is now a $2,160,352,403 debt for equity investments in eight power plants have not been reflected in their ’05 to ’07 audits so the audits are incomplete and totally misleading as to the financial condition of MAMU, MJMEUC and MoPEP. 3.) The MJMEUC accounting and billing staff are spread too thin and they were too inexperienced to cope with the “increased complexity of accounting needs.”
· Because of the “significant deficiencies” and “material weaknesses” of the incomplete audits of the prior years of MJMEUC audits, the 32 cities that are member investors in MJMEUC-MoPEP haven’t had correct contingent liability information from MJMEUC on the $2 billion in revenue bond debt which each member should have passed on to their own auditors so that liability could be correctly reflected in their city audits. The reason the information about their percentage share of MJMEUC’s $2.1 billion debt should have been included in their local audits is to show the full extent of each town’s contingent liability for the highly-leveraged revenue bond loans Kincheloe (MJMEUC-MoPEP) took out to buy equity positions ($2,160,352,403) in coal-fired power plants that have constantly rising construction costs. Why is this disclosure at the local level necessary? Because their monthly electric revenues are pledged as collateral for MJMEUC’s power plant investments! If things go wrong, their electric revenues can be seized to pay MJMEUC’s investment debts and this would leave the individual member cities with little or no revenue left to pay their own expenses. Full disclosure would at least provide them with a warning so they could take steps protect themselves against a major loss of electric revenue.
Example: To this date the City of Rolla alone has an estimated total contingent liability of $131,851,727.60 for the power plants (not including their other share of MJMEUC-MoPEP overhead and other debts that are passed through each month as a “direct cost”). The unfortunate utility rate payers of Rolla have no idea they have an outstanding obligation that is six times their annual city budget! To find out what the contingent liability of the total MJMEUC-MoPEP debt of $2,160,352,403.89 is for your MoPEP town, go to the updated 2008 Schedule M attachment to the MoPEP contract and do the math to see what your town is obligated to pay. The Schedule M lists are titled, “This Exhibit allocates shares of Resource Obligations for the purpose of implementing MoPEP #1 Agreement Section 15.8. [of the MoPEP contract].” It also says the “Allocations of Resource Obligations apply only to Pool members for whom the Agreement is cancelled,” but that’s not true. The Schedule M “Allocation of Resource Obligation” percentage determines the size of a lot of the bills MoPEP sharecroppers are paying now and the really big ones they will pay in the future.
PROBLEM #2 – the toxic MAMU pool loans with their floating interest rate derivative swaps.
· Most MoPEP members still don’t know they’re directly involved in the national news stories about the collapse of auction-rate securities and credit derivative swaps but if they borrowed money for diesel generators or any other local utility project over the last eight years through MAMU and MDFB they are hanging right up there with Bear Sterns, Lehman and AIG, it’s just that Kincheloe hasn’t bothered to tell them yet. If Wachovia (formerly A. G. Edwards and soon to be somebody else) like the other big 10 banks this week, is looking for cash to shore up their losses so they can avoid a Washington Mutual fate, they will do what other banks are doing to Jefferson County, Alabama and Princeton - suing to get what they can out of the customers they sold floating interest rate loans with derivative swaps. The con was perpetrated nationwide. In addition to MAMU’s victims, in Pennsylvania alone there are 110 school districts whose loans are contaminated with derivative swaps and who may be sued like Princeton and Jefferson County if they refuse to pay interest rates that may have suddenly doubled or quadrupled.
· The member towns MAMU pimped to get their utility project funded through the MDFB bond pools are 100% exposed to “Bloody Tuesday’s” meltdown in the banking-derivatives market but MAMU’s debtor towns don’t know how much their exposure is because MAMU has never given their auditors the information about the extent of their so-called “revenue bond issues” for their diesel generator or other utility project that was funded through MAMU and MDFB. The information on what the current “swapped” interest rate is on their floating interest rate loans would alerted their auditors to what the current interest rate swaps were costing them and what multiples they might have to pay if the system collapsed - as it just did. At the time he arranged their MAMU* utility revenue bonds through MDFB, Kincheloe did not explain to them how dangerous derivative swaps were. It’s quite safe to assume that none of the elected officials, who rubber-stamped the MAMU loan deals they were so happy to get so they could avoid a public vote, would know a derivative from a dumpster. They just wanted somebody to do the paperwork and give them a check. They always “trust the experts” anyway so no explanation was necessary. The Gordon Gekko’s figured it was a waste of time to give them information they don’t want and couldn’t understand. (*MAMU takes an administrative fee of 1.5% on the declining balance for the term of each loan so they have no incentive to advise anyone that this is a high-risk deal that they shouldn’t be in.)
· The ’07 William’s Keepers management letter confessed to “significant deficiencies” and “material weaknesses” of MJMEUC and all affiliates for the last three years but they were referring to the $2 Billion in new MJMEUC debt for the coal-fired power plants that has never shown up on MJMEUC’s books. The auditors do not seem to be aware that there is another “material weakness” which is MAMU’s involvement in the auction-rate securities market. Their audits have also not exposed the full extent of the liability MAMU has with the third-party loans they’re involved in and their risk of being sued by members when they figure out who led them into these toxic loans by not giving them full disclosure of the risks.
Our Secretary of State Robin Carnahan got a settlement out of Wachovia for some individuals who complained but it remains to be seen if Wachovia survives to pay them. Wachovia is now on the chopping block and Carnahan may not have a deal anymore or the remnants of Wachovia may not have the money to pay anyone back. That may be the end of her interest in this crisis but we hope not. We hope there are some elected officials in this state who aren’t Gekko clones.
If MJMEUC and MAMU ever get their bookkeeping problems straightened out it’s unlikely they will ever admit to their culpability by sending out a letter to each Mayor of the MoPEP member cities with the MAMU loans with a message that might go like this: “Greetings MoPEP-ers, Remember those coal-fired power plants we told you about? Well it’s the funniest thing but we have just figured out that you are now liable for $68 million of our hasty investments…”
Sunday, September 14, 2008
MJMEUC-MoPEP gets an “F” on their 2007 audit Management Letter
Alliance
Some genius finally stutters “A-h-h-h…is this ah-h…a clean audit?” The auditor smirks and says, “Well, that’s not exactly a professional term but yes, I’d say it was a “clean” audit. [I’ll say it’s a ring-tailed baboon if that’s what it takes to get my check and get out of here.]” The next day the local paper headline reads, “Idiots get a CLEAN audit” misleading the public into believing that no one is embezzling or mismanaging their tax money in city hall, the school district or county. The sad fact is that every case of embezzlement is preceded by several “clean” audits. Audits have only one chance in 327 of catching someone stealing public money. Embezzlers are not found out by auditors, they’re exposed by pissed-off co-workers who rat them out.
The Management Letter. What no one talks about in the public meeting where the auditor is presenting his incomprehensible audit report, is the other document he was also required to prepare by Generally Accepted Accounting Principles or GAAP and that document is called the “management letter.” This important letter was concealed in a plain brown wrapper and slipped to the alpha dog official before the meeting started. It tells management what they’re doing wrong and management hopes you never find out about it. The “management letter” contains things the auditor found that were; violations of law, a breach of public trust, violations of GAAP or just plain stupid. All those goodies are hidden in the ‘secret’ management letter but the management letter isn’t really a secret - management just wishes it could be. The management letter is a part of the audit and both were paid for with your taxes so if you demand to see under the Sunshine Law they have to give it to you. Even though the management letter is supposed to tell the whole truth, most auditors tend to take it easy on their clients or use a lot of audit jargon to disguise what they’re saying or they tell the worst of the bad news verbally so as to leave no fingerprints. If they always told the bald-faced truth they wouldn’t be invited back to do more audits and make more money.
*GAAP: the Generally Accepted Accounting Principles is the standard framework of guidelines for financial accounting. It includes the standards, conventions, and rules accountants follow in recording and summarizing transactions, and in the preparation of financial statements.
The “Sarbanes-Oxley Act” One fallout of the Enron disaster is the 2004 Sarbanes-Oxley Act which, in Section 404, requires CFO’s like Duncan Kincheloe to take full responsibility for their audit reports. If the audit report and management letter sucks then whining “But I didn’t know,” by the CEO making the big bucks can get him/her a jail sentence these days. The SOA also stuck it to “sweetheart” auditors who have been much too kind about what they say in their management letters to protect their sources of income. They are no longer allowed to whisper the worst of the bad news in the CEO’s shell-like ear or discuss it at a closed board meeting where the public can’t hear, now they have to put it all in writing in the management letter.
That’s why it was such a surprise to read the June 7, 2008, Williams Keepers, LLC management letter to the MJMEUC-MoPEP 2007 audit that “we identified certain deficiencies in internal control over financial reporting that we consider to be significant deficiencies and other deficiencies we consider to be material weaknesses.” That sentence said this was not going to be the usual tap-on-the-wrist management letter.
Material weaknesses and significant deficiencies in an audit are really bad things. How bad are they? The cover letter explained. “A material weakness is a significant deficiency, or a combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the financial statements will not be prevented or detected by the entity’s internal control.” Williams Keepers continued, “…because of inherent limitations in internal control, including the possibility of management override of controls, misstatements due to error or fraud may occur and not be detected by such controls.” “Material misstatement” is an auditor’s way of saying “everything in this audit may be false.” The term “management override of controls” means the books were cooked because the boss ordered someone to do it. (all emphasis marks when quoting the audit report are this editor’s)
A Nov. 18, ‘04 CFO.com article, “Where Material Weaknesses Really Matter” by Marie Leone explained that material weaknesses are divided into two categories: "Category A" material weaknesses, according to Moody's, concern control problems with specific transaction-level processes such as tax accrual, bad-debt reserves, and impairment charges. These require attention, but Doss maintains that external auditors can effectively "audit around" them and still deliver an unqualified opinion of the financial statements. The less-common "Category B" material weaknesses, however, cannot be circumvented by auditors. These offenses can derail an organization, stresses Doss, because they represent "company level" control problems such as ineffective control environments, audit committees, and financial reporting processes, encompassing everything from a lax code of conduct, to feeble fraud-prevention guidelines, to poor attempts at assigning executive responsibility.” The MJMEUC audit and management letter has a lot of “Category B” material weaknesses in it not the least of which is using Quickbooks (for Dummies), and not being able to find $340,000. Then there is the problem of being three years behind on recording the size of the contingent liabilities that each MoPEP town is responsible for due to the Billions in debt for coal-fired plants.
The phony Fitch Ratings reports. None of these systemic failures, these material weaknesses, show up in the 2005 MJMEUC audit and MJMEUC claims to have “lost” the 2006 management letter, but for the 2007 audit Williams Keepers suddenly got very busy and is going back over those three years to “restate” the audits. The Fitch Ratings analysts who gave MJMEUC their credit rating which was the only way they could take on so much debt, only saw – what the auditor now admits - were two very flawed MJMEUC audits and which Williams Keepers now says didn’t reflect MJMEUC’s real financial condition because they’re going back and “adjusting” and “restating” those old audits. Those audits didn’t even come close because the billions in debt weren’t included.
MJMEUC’s 2005 audit management letter contained only two mild cautions, one about their inadequate Quickbooks software and a recommendation to cross-train their billing personnel. They claim they can’t find the 2006 management letter. The 2005 and 2006 audits were the critical years for submitting copies of the audits and certain written assurances to Fitch Ratings to get a good rating for their participation in the Plum Point, Prairie State
Williams Keepers is now busy “adjusting” or shoehorning project cost schedules on the $2 Billion plant investments and “reclassifying” already recorded transactions to make them fit the GAAP accounting regulations. Gee, this will be swell news for all the non-reading MoPEP true-believers who have locked the financial future of their communities into this organization that unbeknownst to them has a perpetual first lien on all their electric revenues, an organization that has a choke-hold on all their power forever but which now they find out has been run by people who can’t keep their books straight. That is, it will be if they ever hear about it, but it’s highly doubtful that any of the true-believing Mo-PEP-ers have seen the ‘07 management letter or will ever see it. It’s even doubtful the board members of MJMEUC have seen it – as I said, it’s not a secret but management will try to keep it a secret if they can… including saying they lost the ’06 audit.
These were part of the material weaknesses they found in the 2007 MJMEUC-MoPEP audit:
1. Material Weakness in MJMEUC. MJMEUC has been using Quickbooks software for its general ledger. This is a material weakness for all their operations. With MJMEUC-MoPEP’s several unique and extremely complex business operations it would be impossible for them to perform some calculations such as figuring out why the MoPEP towns are spending $4 per kilowatt to make electricity out of diesel fueled generators (their WWII technology) but are selling it to MoPEP for a few cents on the dollar then letting MoPEP sell the same kilowatts back to them with MJMEUC’s markup. Using Quickbooks to try to keep track of the costs and liabilities on their $2 BILLION in highly-leveraged revenue bond investments is like sending Lance Armstrong to ride the Tour de France on a tricycle.
The auditor said that prior to MJMEUC’s involvement in the joint ownership projects MJMEUC’s activities largely consisted of, “passing along (sic) through monthly billing the costs of power purchased on behalf of its members with “appropriate markups to cover administrative overhead.” Being a markup middleman was a relatively simple process until Kincheloe went on a spending binge that ran MJMEUC and all the MoPEP and UPPA contractee’s into a massive $2 Billion debt to purchase shares in high-risk, coal-fired power plants. The auditors pointed out the difference, “MJMEUC now must account for the capital costs of these projects; for sophisticated debt financing transactions; for more complex arrangements for purchases from various power and transmission suppliers; and for the methods of recovering these costs from its members in periods sometimes far removed from the dates when costs were incurred.” Ouch! So, because Kincheloe - the business genius who invented the Great Diesel Generator Farm Project and who thought it was a good idea to rush into $2 Billion in shaky coal-fired investments when wiser heads were dumping them- has been using cheap software designed for Home Ec classes so your bills have probably been wrong but they’re not sure why they were wrong or by how much.
2. Prior audits were inadequate and left out a whole lot. The auditor has been trying to “help MJMEUC catch up on its accounting,” because they have apparently been behind since about 2005 or longer! The auditor reported, “MJMEUC’s accounting staff has not been able to maintain the general ledger on a timely basis in a manner that supports preparation of financial statements in accordance with GAAP.” The auditor explained that, “To further help MJMEUC catch up on its accounting, during the 2006 audit we analyzed and prepared documentation for the activity in the Bank of New York
3. Staffing problems. The 2006 audit had to be delayed until July 2007 in part because of “the many accounting adjustments.” MJMEUC’s staff couldn’t cope with all the demands of maintaining a correct “general ledger and supporting documentation in accordance with GAAP during 2007.” The auditor noted that another factor was that the staff was spread too thin and they were too inexperienced to cope with the “increased complexity of accounting needs, and lack of available supervisory time.” Then it gets worse.
4. Material Weakness in MoPEP Power Revenues and Costs. During the 2007 audit the staff noticed that the “revenues and costs on their Quickbooks general ledger for the year’s power sales and related costs did not appear to be accurate. Costs recorded in Quickbooks exceeded recorded revenues from MoPEP members by a significant amount.” The auditor concluded that, “There was either a problem with the accounting or a problem with the billings that had been rendered to members.” They identified about half the losses which were delayed MISO billings but can’t find the other half. As of the time of the management letter the accounting company had made “accounting adjustments….that significantly reduced the loss…to costs that should have been passed through dollar for dollar to members to approximately $340,000.” So out of about $700,000 or more of this mysterious vanishing money they adjusted half of it to reduce the embarrassment but they still can’t figure out if the remaining $340,000 fell behind a filing cabinet or its bills they should have passed down the billing pipeline to make the MoPEP members pay. Guess which one it’s going to turn out to be.
The upshot of the whole management letter is that there have been not minor but significant irregularities, significant deficiencies and large errors in MJMEUC’s bookkeeping going back to at least 2004 or earlier which still haven’t been satisfactorily identified or resolved they’ve only been partially… “adjusted” or “reclassified.” Those errors have not only impacted the MoPEP billings which were passed on down the line to local ratepayers but this amateur fumbling has also kept the audits and all financial reports to the members from accurately reflecting the information members should have had on what was happening with the cost overruns in $2 BILLION of high-risk, highly leveraged investments in power plant projects.
So, even if MoPEP members had been inclined to ask the right questions to make MJMEUC show some accountability to its members, and even if Kincheloe had been inclined to tell them the naked truth about their bloated and growing financial hazard, they wouldn’t have gotten the right answers because MJMEUC can’t keep their books in order so they wouldn’t have known what the right answers were! Now they’re going to buy better accounting software to replace their Quicken (for Dummies) bookkeeping system but like they say, “garbage in, garbage out.” Computers are only as accurate and as honest as the people who use them.
When will the 32 city council’s that walked blindly into their MoPEP contract without reading it get the answers they’re entitled to about Kincheloe’s investments, answers they should have gotten from the 2005, 2006 and 2007 audits? Where are the facts about the contingent liabilities for MJMEUC’s debt that each city needs to know and the reports on the cost overruns on Kincheloe’s coal-fired plant projects? The MoPEP contract made the city members responsible for every penny of MJMEUC’s investment debt therefore it is a “contingent liability” and as such should be shown in all their audits as it was for the first time this year in Owensville’s audit by Verkamp & Malone, CPA’s of Rolla.
How have the plant construction cost overruns impacted our MoPEP bills already and what will the impact be on local electric rates for the next 40 years? Have the project engineering reports on cost overruns been kept secret from MoPEP members because Kincheloe and the MJMEUC board are afraid their MoPEP sharecroppers will bolt if they know how bad the cost overruns are or have they been kept a secret because MJMEUC is running an amateur back room operation so bad that even the MJMEUC board doesn’t know how great a financial mess they’ve dragged everyone into with their investments?
These are the 2008 “Leaders” of MJMEUC, the board members who have had direct contact with the auditors. They’re the men who should have known all about these “material weaknesses” and how serious they were. These are the utility managers, the MJMEUC board members who are responsible but who were obviously asleep at the switch while all these problems were piling up: The MJMEUC Chairman is Bob Williams (Carthage ), Vice Chair is Jim Roach (Jackson
Audits and management letters are the CEO’s report card. This audit and management letter gets a big fat “F.” Normally when an executive gets an audit with management letter this lousy he is invited to resign. What is the MJMEUC going to do? Will they clean house starting at the top or take the cowards way out and pretend this bad report card doesn’t exist?
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