“Life-of-unit, take-or-pay, step-up”…the language of high-risk investment

Even if each city council sat down and read their MoPEP contract word by word they still wouldn’t have a true picture of the total magnitude of their risk. What they have never seen are the contracts Kincheloe and the MJMEUC board have signed to purchase stock in these high-risk power plants. Each investment contract they sign in each new coal-fired plant has clauses called “life-of-unit, step-up” and “take or pay” provisions. This contract slang is described in the share purchase contracts, in the official Fitch Ratings notice for MJMEUC’s Plum Point bonds and in the bond ratings for subsequent bond issues by AMBAC and other rating agencies. By the way, MJMEUC’s revenue bonds on the Plum Point project in Arkansas have a rating of A-. “B” ratings are junk bonds.

“Take or pay” means the investors (that’s us through MJMEUC/MoPEP) must pay the revenue bonds off in full even if the plants never open and/or if they don’t produce enough revenue to pay off the bonds and their other debts. If one or more of these plants fail, or just can’t make a profit, Kincheloe and the MJMEUC board have pledged the electric revenues of every MoPEP city to pay off every penny of MJMEUC’s billion-plus revenue bond debts. That’s why the MoPEP contract takes a first lien on all the electric revenues of every MoPEP town so they can reach past your city government and grab the payments you make for your electric bills before they hit the city’s mailbox. Without the “take or pay, life-of-unit" and "step-up" shackles MJMEUC could not have swung this huge leveraged financing deal. If this half century or more of indentured servitude had been explained to each of the 31 towns face-to-face so they could clearly understand the risks involved, this ruse would have died at birth.

“Life-of-unit” means that you’re on the hook for any liability these plants present as long as the “unit” can still splutter out a single kilowatt. There are “life-of-unit” contracts or there are contracts with fixed start and end dates. this is the bad kind, the one that doesn't end as long as they can throw in a little renovation to keep it going, the one where the liability never ends. You have no idea how long you’re liable for these plants and the damage they can do nor does anyone else. One can only hope they’re operative and profitable for at least as long as their 30 and 40-year debts. In the event of the failure of any one of the plants to operate profitably so they can pay their bond debts from the earned revenues of the plant, all the MJMEUC board (with Duncan Kincheloe prodding them) have to do is add your ‘share’ of the bond debt cash shortage for the non-performing plant to the “direct costs” on your local electric bills and you’re stuck with it. If there’s ever an actual bond default, the bond trustees backed by yards of federal law and precedent will come and suck out every dime of your utility revenues – and your city revenues if necessary - to pay off the debts owed to bond holders and all other creditors. What then will you use to buy power, pay your utility employees and maintain your antiquated, un-regulated utility company?

“Step-up” provision means that if any other investor in the project pulls out the remaining investors have to “step-up” their participation in the investment by as much as 200%. Fitch Rating service explained this provision in MJMEUC’s bonds for the Plum Point contract as follows: “Power Purchase Contracts: The unit power purchase contracts are valid and enforceable, extend through the life of the bonds (2036) and require each participant to pay its proportionate share of all costs of operating the project, including debt service. Under the step-up provision each system is obligated to a 200% step-up in the event of a default by another participant." However, the Arkansas participants have no step-up requirement in either of the following situations: “if initial start-up is delayed over 11 months with operation not beginning by July 1, 2011 (guaranteed commercial operation date is July 31, 2010); or during an outage which exceeds five years in length.” Arkansas protects its citizens a little better than the state of Missouri does.

Construction projects, especially multi-billion dollar construction projects can run into all kinds of expensive problems and it has happened that plants fail and never open. The “development costs,” strikes, material delays, environmental challenges to their permits, pollution lawsuits charging downwind health damage – a very real possibility since the $4.3 billion AEP settlement - can cause the price of these multi-billion dollar plants to exceed their initial budgets. The contracts Kincheloe and MJMEUC’s board signed obligates MoPEP members to pay and pay and pay no matter how excessive the cost overruns may be. Missouri’s small towns and other public entities should never be on the speculation end of any kind of high-risk investment and these are very high-risk investments. In fact, Missouri’s investment laws (more details on those later) prohibit public funds from being used or “invested” without the required backup securities. For instance all bank deposits, Certificate of Deposits, even checking accounts in excess of the FDIC insured amount in any bank must be backed by stocks and other securities to protect citizens against the loss of their money. A high-risk investment, which is backed by nothing but the stock certificate of the high-risk investment, is for high-flyers in the stock market, the professional and institutional investors, the big hedge fund pros who can afford the risk and the losses.

If it were legal for small town mayors and council members to invest our tax money in stocks and other instruments of speculation such as the MoPEP subterfuge, every town in America would long ago have been financially ruined by elected blockheads with a “hot tip” in the stock market.