Saturday, July 26, 2008

MoPEP's new "adder" fee will "never be noticed by members in their bills."

You wouldn’t think it from the millions they’re raking in every month ($135 million in MoPEP sales in ‘07) but MoPEP has a cash flow problem. In March, Duncan Kincheloe was informed by MJMEUC-MoPEP’s financial advisor, Sandra McDonald of McDonald Partners, Inc., Alamo, California, that they needed to have more in reserves and she said they should do it, “…ideally prior to MJMEUC’s next financings.” Their next financings? That’s unwelcome news. When were they planning to tell their sharecropper cities about “their next financings?”

McDonald recommended they build unrestricted reserves of at least 60 to 90 days operating cash (i.e. $16-$24 million). She pointed out that MoPEP’s ‘A’ to ‘A-’ credit ratings were weak and “MJMEUC’s bond ratings are largely a reflection of the financial condition of those communities that participate in MJMEUC projects. Standard & Poor’s notes that the rating on joint action agencies with take-or-pay contracts (the hell-or-high water contracts such as MJMEUC’s which strengthen overall ratings) rely more heavily on the credit quality of the participants.” They rely on the city's credit quality? That’s a laugh. The MoPEP sharecroppers haven’t had any “credit quality” since they signed their MoPEP contracts and depleted their reserves trying to pay MoPEP’s second-hand, double marked-up electric bills which include the Massa’s bills for “…all of MJMEUC-MoPEP’s Direct costs without limitation.”

McDonald continued, “Adequate liquidity at the participant/member level is particularly important for MJMEUC/MoPEP since the organization has below average liquidity and relies heavily on monthly true-ups. Ideally, MJMEUC’s members will maintain 90-120 days of cash on hand at their own systems and limit general fund transfers to a specified percentage of annual revenues (typically less than 5% for ‘A’ category systems). Higher levels of liquidity are typically maintained at the member level since local rate action may require several council meetings.” The members maintain “higher levels of liquidity” and “maintain 90-120 days cash on hand in our towns?” Since when? Some of our struggling little communities haven’t been “liquid” since the ‘93 flood. This must be one of the fairy tales they tell the rating agencies. Ms. McDonald seems to think Kincheloe can wave his magic wand and all his sharecroppers will jump to raise their rates to accommodate his extravagant spending habits. Ms. McDonald needs to get out of her California office and spend a little time in Missouri where one of the MoPEP cities threw their mayor out on his ear, several others petitioned the state for audits and one has filed a lawsuit – all over their suddenly inflated MoPEP rates. If she thinks we will meekly allow our rates to be raised every time Kincheloe goes shopping for another Billion or two of stock in antique technology, the woman has inhaled too much smog.

So, on April 3, Kincheloe and the MoPEP guys began to discuss how they could increase their reserves. The first suggestion was that they add 1.00¢ or more per MWh to everyone’s bill, an “adder” they called it. That would rake in up to $2.5 million. Staff member John Grotzinger, right on cue, suggested putting 100% of the energy sales margin into reserves. (Now here comes typical MoPEP thinking) “This is not a large amount, and would not be noticed by members in their bills,” Grotzinger explained. Kyle Gibbs (Marshall) asked if the adder could be made simpler such as a fixed rate. Michael O’Gara (Fredericktown) said “the more complicated the billing is, the more difficult it is to explain to customers and governing boards.” If Gibbs and O’Gara explain these MoPEP intrigues to their home town governing boards they must be among the very few who do.

Finally they agreed to do what Kincheloe had planned for them to do before the meeting began. They will, 1.) Dump the excess of the off-system energy sales into the pot. 2. Contribute some short-term savings when the Nebraska City 2 plant goes on-line in May 2009. The differential between the price of the NC2 MW of $31/MWh compared to MoPEP’s current average base load expense in the mid-$50 range is about $24. In other words, if the sharecroppers don’t immediately benefit from the $24 differential between the high MoPEP rate and the cheaper NC2 rate so MoPEP can sock a few million more in the MoPEP kitty….well, who’s to know? The really good one was, 3.) Add a monthly charge designed to generate approximately $1.25 million during the rest of 2008 “(with the understanding that the adder would need to be adjusted upward in 2009 to progress toward appropriate reserve levels and keep pace with operational growth).” To jack an extra $1.25 million out of the member cities over the next eight months they will just add about 65¢ per MWh to the bills and next year it will go to $1.00 or maybe more. So the upshot to all this is that the member cities have to pay to compensate for MJMEUC-MoPEP’s credit weakness that management didn’t anticipate and prepare for before they began this equity investment club disguised as an electrical wholesaler.

Typically in business, cash reserves are accumulated from exercising restraint and not spending all your annual revenue (it’s called “savings”). Cash to build reserves are taken out of profits after they’re earned instead of rewarding yourself by spending those profits on say…a million dollar building and all the trimmings. In other words reserves are taken out of earnings not out of billings. That’s how it’s done in successful businesses but given his record you would never accuse Kincheloe of being a crackerjack businessman. MJMEUC is building its reserves with the Whack-a-Mole method. Every time those furry little suckers try to come up for air, they smack them down with another unlimited fee. After all, it will “not be noticed by members in their bills.