HIGH PLAINS PETITIONS COURT FOR PERMISSION TO ISSUE 1.575 BILLION IN MUNICIPAL BONDS

CORRECTION: The article below originally stated $2.25 Billion as the bond total, due to the incorrect amount of $750 million (rather than $75 million) being added to the $1.5 Billion in First Mortgage Revenue Bonds. The correct bond total is $1.575 Billion. We regret the error.

High Plains Diversified Energy Corporation filed suit in Lubbock County on April 18, 2011 seeking court approval to immediately issue 1.575 Billion in municipal bonds to purchase two Odessa power plants. It will also use bond funds to make improvements to the SPP power grid which services Lubbock and to build the infrastructure to connect the Odessa plants to the Lubbock power grid. I have broken down the lawsuit into various sections with my comments below.

THE BOND ISSUE

High Plains is requesting permission to issue 1.5 Billion in “First Mortgage Revenue Bonds.” The bonds will be backed by the power plants themselves and by the revenue generated from the sale of power generated by the plants. High Plains is also requesting permission to issue an additional 75 million in “Subordinate Bonds”. Prior to issuing the Subordinate Bonds, High Plains and Republic will enter into a new agreement in which Republic will assign its right to receive 40% of the future revenues from the power plants to High Plains in exchange for the 75 million in Subordinate Bonds. This will have the effect of allowing Republic to the immediately cash out of the project with 75 million dollars before any power is ever generated by the plants and without putting up any private money to purchase the plants.

PAYING FOR THE BONDS

The First Mortgage Revenue Bonds will be paid out of revenues generated by the sale of power from the plant. The Subordinate Bonds will be paid out of a “special fund” that will be funded from revenues available after payment of the First Mortgage Revenue Bonds. The problem with the funding plan is that the WTMPA will not be able to take any power from the plants until June 1, 2019. This means that for eight years, High Plains will have to sell the entire 1,500 MW of power to “Off-take Entities” under Power Purchase Agreements. To date, High Plains has not secured one Power Purchase Agreement with any Off-take Entity. High Plains recognizes this problem and tells the court as follows:

“It is presently anticipated that amounts to be derived under the Power Purchase Agreements with Off-take Entities may not be sufficient to fully pay the expenses described in Paragraph 11 above, and the requested periodic payments on the First Mortgage Revenue Bonds. Accordingly, any insufficiently will be funded from the proceeds of the First Mortgage Revenue Bonds.”

What this means is that the bond issue will be oversold because the amount of bonds sold will be more than needed to purchase the plants and build the improvements to connect to the Lubbock power grid. The purchase price of the two plants is 520 million. It is anticipated that the cost to connect to the Lubbock power grid and to refurbish the now idle plants will be approximately 200 million. This means that a bond issue of 1.5 Billion will be secured by improvements worth only 720 million. The remainder of the funds from the bond issue will be used to pay interest on the bonds for eight years until WTMPA begins taking power from High Plains. This is like buying a house for $200,000 and taking out a $400,000 loan against it and using the extra $200,000 to make the mortgage payments. No bank would make such a loan. This does not even take into account paying an additional 75 million to Republic partners. So in effect, a 720 million project will cost Lubbock taxpayers 1.575 Billion. If Lubbock is required to bail out the project before 2019, which is highly likely based upon the highly leveraged nature of the transaction, the taxpayer will own assets worth 720 million and owe bond payments of 1.575 Billion.

NO GOVERNMENT OVERSIGHT

In addition to requesting permission to immediately issue bonds to purchase the plants, the lawsuit requests a court declaration that the assets of the plants are exempt from all taxes and exempt from all government oversight. The reason for the tax provision is that elected officials of the City of Odessa are angry that the two power plants are being purchased by a tax exempt entity after the private utilities that built the plants were given tax free status for eight years. The purchase by High Plains, a tax exempt entity, will cost Odessa taxpayers 6 million in lost tax revenue. A link to a story run on the local CBS affiliate regarding the tax loss is here. Elected officials in Odessa are not accepting the loss of tax revenue without a fight. They have enlisted the help of their local State Representative Tyron Lewis and Midland Representative Tom Craddick to introduce a bill that would make the High Plains purchase of the plants subject to taxes by the City of Odessa and other taxing authorities. See the story here. The High Plains lawsuit seeks to short circuit this issue by getting a court declaration that it is exempt from all taxes before the legislature has a chance to pass the proposed Odessa legislation so that it can later argue that it is ‘grandfathered’ in and not subject to the provisions of the bill.

High Plains also specifically requests that it be declared free of all government oversight. In its pleadings it states that the court should decree that “High Plains has been properly created and it is not necessary for other governmental entities to pass resolutions, acknowledge, or ratify the creation of High Plains; (vii) no further authorization by WTMPA or its member cities is required in connection with the issuance of the Bonds, nor the acquisition and/or construction of the Project, nor performance by High Plains under the Development Agreement…” In other words, High Plains wants to issue bonds backed by the WTMPA member cities but doesn’t want any oversight on how the funds are spent or how the project is managed. This of course is great for High Plains and Republic, but bad for the Lubbock taxpayer.

WHAT CAN BE DONE NOW?

Although the taxpayers of the WTMPA member cities are nominal defendants in this lawsuit, to intervene in the suit would require the citizen to post a bond in an amount necessary to pay lost bond revenues and attorneys fees if the private citizen’s intervention was unsuccessful. This has a chilling effect which prevents any private citizen from objecting to the proposed bond issue. The City of Lubbock will not intervene because, to date, not one member of the City Council has publicly opposed the project. Neither is it likely that the Texas Attorney General will oppose the project because Greg Abbott has never been inclined to take the side of taxpayers over powerful special interests such as Republic Power Partners. The best hope for the taxpayer of Lubbock is that the City of Odessa, with 6 million in tax dollars to lose, will oppose this deal and save us from this 1.575 Billion dollar financial disaster.

Odessa, please rescue us.