Audit of GMHI and Guelph Hydro reveals $161.483 million losses by the municipal holding corporation

By Gerry Barker

June 22, 2017

What follows are highlights of a devastating audit by KPMG of Guelph Municipal Holdings Inc. (GMHI) and Guelph Hydro. The audit revealed a total of $161.483 million that was wasted by the Farbridge administration’s secret and abortive attempt to force the city to make Guelph self-sufficient in terms of electricity and other spin-offs.

One of the most startling statements concerned two senior unsecured debentures taken out by GMHI totaling $103.612 million as of December 31, 2016. The largest, due 2030, was for $65 million and no interest of the debenture has been paid for two years, increasing the principal due by $8.612 million. The other debenture is for $30.000 million and is due 2045. Both these obligations carry interest rates of 4.012 per cent and 4.112 per cent respectively.

The source of these debenture loans are described in the audit as the CDS & CO. As both are unsecured, the loans were made because of the City of Guelph’s ownership of GMHI and Guelph Hydro. It is difficult to imagine any financial institution committing $95 million without the assurance of repayment by the city. Regardless, the loans are unsecured. One can only conclude that a corporate relative within the city’s corporate family guarantees the liquidity of GMHI. The audit revealed that a $20 million credit facility has been arranged for GMHI but the source is not revealed. As of December 31, 2016, there has been no draw down on that facility by GMHI.

The balance sheet of GMHI shows assets of $230.596 million of which $162.653 million is composed of property, plant and equipment. Conversely, in my opinion, many of these assets are depreciating and failing to provide adequate cash flow to allow GMHI to continue to exist. The real liabilities of 163.474 million closely match the value of the total assets. The inclusion of shareholder equity of $67.122 million, according to the audit, is enough to match the total assets of $230.596 million to balance the books

In my opinion, the shareholder’s equity, and that’s you and me, is virtually worthless because there is not enough cash from operations and assets to allow redemption of the shares. This enterprise is so intertwined between various city-owned corporate entities that disclosure is inevitable.

This party needs wrapping up ASAP to avoid future cost blowouts.

This misguided project has been held up by the ability of Guelph Hydro to be the bank for GMHI. A search of the mysterious issuer of $95 million in debentures has been unsuccessful so far.

This audit reveals just how serious this experiment was mismanaged; how Guelph Hydro, wholly owned by the city, was sucked into the blind ambition of a mayor determined to turn the city into a world-class leader in power self-sufficiency.

It turned out to be a dismal, waste of the public’s resources and abuse of the public trust.

The audit performed by a respected auditing and financial management firm, KPMG, cost $2.8 million in 2016 and $2.5 million in 2015. These two audits totaling $5.3 million, were the cost of measuring the financial details of the failed projects initiated by the Community Energy Initiative (CEI) promoted by the former mayor as far back as 2007.

Here’s a note from the auditor’s report concerning fraud risk: “The audit team rebutted this presumption due to: “The majority of revenues are driven directly from the purchases of hydro with little judgment over revenue recognition required by management.”

Yes I know, I had trouble following that comment.

From 2011 to 2014, former Chief Administrative Officer of the city, Ann Pappert, served as Chief Executive Officer of GMHI. One would conclude in that position, both the former mayor who was chair of GMHI and Ms. Pappert would be in a position to know about the degree of “judgment over revenue recognition required by management.”

Keep in mind that this entire operation was cloaked in secrecy. It only started coming out of the closet when the GMHI CEO and CFO, Pankaj Sardana, reported the costs of poor planning and management of GMHI and its partner Guelph Hydro (GH).

May 16, 2016, Mr. Sardana and CAO Pappert both signed the document that revealed the estimated loss of GMHI to be $26.6 million. Ten days later Ms. Pappert resigned.

The utility’s operating arm, Guelph Hydro Electric Systems Inc., included the wholly owned Envida Community Energy Systems that was virtually broke. It owed $11 million to GMHI with no ability to even pay the interest of the debt. It had been involved in establishing the rooftop solar arrays on a number of public buildings; the setting up of the District Energy Nodes linked to the cogeneration system to supply hot and cold water to selected buildings.

But it was interrupted by the defeat of the former mayor in the October 2014 civic election by Coun. Cam Guthrie. It started an investigation about the role of GMHI and the link with Guelph Hydro. Now, a year and a half later, the truth is known about the cost of $161.403 million.

The unraveling of the GMHI and Guelph Hydro axis started shortly after the defeat of the former mayor.

The audit examining GMHI/Guelph Hydro operations for 2015 and 2016, commented:

“The district energy segment has continued to experience negative cash flows which are projected to be insufficient to recover the carrying value of the related assets.

In four years, the GMHI management failed to recognize their primary District Energy scheme was failing to meet profitability. Yet they kept spending public money of future large-scale projects including building two large natural gas-powered electricity generators in the city to achieve power self-sufficiency.

“Management has assessed Envida’s district energy property, plant and equipment for impairment and evaluated the cash flows associated with the Hanlon Creek Business Park, Galt District Energy (Sleeman Centre), and West End Community Centre. Based on value-in-use net present value calculations, management has determined that the carrying value of all the nodes are fully impaired.”

We now learn according to the audit, that there were not just two District Energy Nodes (pumps) in the Sleeman Centre and Hanlon Creek Business Park but a third in the West End Community Centre. The impaired value of the three is $12 million.

“Further, based on the obligations for contracts in place and the related estimated unavoidable costs of meeting the obligations exceeding the economic benefits to be received by approximately $50K annually over the life of the contracts, a provision has been recorded for $540,000 (18 years).”

This is another example of financial mismanagement by GMHI based on false assumptions.

“Management’s cash flow projections were based on the business plan for the segment for the upcoming years. Their analysis took into account factors including the remaining contract periods for agreements in place with current customers (approximately 18 years), history of revenue and expenses to date, and the useful lives of the equipment. Further, based on current plans and direction from the Board, the analysis includes only minimal additional investments required to service current customers.”

Why then did the experience and track record of the GMHI Board and that of Guelph Hydro, make so many devastating mistakes that have resulted in the loss of millions of public funds?

The audit statements include an estimate of future employee benefits totaling $10.297 million. Again, the citizens of Guelph will be paying for this for years.

Why Did GMHI send $1.5 million to the city each year, (total $9 million) when it consistently lost money?

How can GMHI or the city afford to repay that $103.612 million in debentures owed to CDS & CO, the lenders?

Who are the owners of the CDS & CO?

With the shareholders equity of $67.122 million be written off in the years ahead, impairing the city’s ability to carry out the ten-year capital-spending plan?

CAO Derrick Thomson has already stated the capital plan is $170 million short to provide for major capital projects, including the South End recreation centre, new downtown Library and infrastructure demands.

Is the real goal of the Strategic Options Committee (SOC) charged with seeking candidates to sell Guelph Hydro or merge it with another utility, or to raise capital to recover the losses incurred by GMHI?

When will those councillors who served on the GMHI board of directors plus another independent member now serving of the SOC, be held accountable for what happened?

The audit documents can be found on the city website under the heading Agenda June 28.

It is the most shocking report that I have ever witnessed in my years of journalism. The secrecy resulting in an abuse of power should be a wake-up call for all citizens. The council should be held accountable to maintain the public treasury and never allow this to occur again.

This makes the $23 million cost overrun construction of the new city hall look like penny ante compared to the $161.403 million spent on this rape of the public purse.

The audit is first step. Now we know what happened, What is need is an independent investigation into how it happened and the impact on the citizens. More important, question those responsible and make them accountable.

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10 Comments

Filed under Between the Lines

10 responses to “Audit of GMHI and Guelph Hydro reveals $161.483 million losses by the municipal holding corporation

  1. Rena

    The fact that 2 members of this fiasco are sitting councillors is amazing. How they can show their faces in public is incredible. At the very least, please have the decency and resign.

  2. Spend

    Criminal or incompetence? If criminal, people need to go to jail.

    • Louis

      I say incompetence, especially since who we have pushing for it. I am surprised the regressive counselors haven’t been called out on their BS yet. But When Allt did for wanting Guelph as a sanctuary city, he resorted to name calling, and calling those opposed to it internet trolls.

  3. Fred

    Gerry,

    Would you be able to tell me what page of the financial statements shows the loss of $161.483 million?

    • Fred: I recommend reading the whole audit document. The $161,482 figure comprises the two unsecured debenture received by GMHI of $95 million ($65 million and $30 million) and the shareholder’s liability of $67 million (listed as a liability on the audited balance sheet. Regarding the largest of the two debentures, there has been no interest paid in two years according to the audit. That amounts to an additional $8 million owed on the principal now totaling $103 million.

      For purposes of accuracy, the $161,482 figure was extracted from the audit information and does not include the non-payment of interest on the debenture.

      Hope this helps.

  4. Fred

    Gerry,

    You do such a good job of raising big pictures issues but then let the details kill your message. You need to get a financial person to help you out. You need to look at the unconsolidated balance sheets of each organization. The GMHI consolidated balance sheet is adding Guelph Hydro (GHESI) and Envida to its own numbers. GHESI issued the 2 debentures to the public. The global certificates are held by CDS (custodian) and the end investors ( of which there will be many) have taken the credit risk of GHESI. Other than amounts lent to Envida, this is not lost money. The debt is being serviced by GHESI every six months. It’s the Envida debt that’s not current. To find lost money look at the balance sheet of Envida – that’s where our former leader wasted our $. The $67 million is equity and retained earnings on the consolidated balance sheet, primarily from GHESI.

    • Fred: Thanks for your comment.I appreciate your advice as this project is extremely convoluted and difficult to follow. You are correct about consulting with a financial person. I only examined the GMHI audit document by KPMG. I agree with your point of examining the Envida and GHESI unconsolidated balance sheets that were not available to me. The most interesting statement about the debenture loans is they were issued to the public by GHESI and held by what KPMG described as CDS&CO. KPMG stated that there had been no interest paid on the $95 million unsecured debenture for two years. Perhaps you might assist me to access the two unconsolidated balance sheets. It appears that the GMHI project still has a way to go to finally reveal the real cost of the exercise.

  5. Fred

    Gerry,

    The unconsolidated financials follow the consolidated statements http://guelph.ca/wp-content/uploads/council_agenda_062817.pdf

    CDS is the depository where all publicly traded securities are held – it is meaningless. You are correct that this is extremely convoluted. However, it is a closed system and without capital from the City, the losses will be absorbed by hydro ratepayers. I can’t find any reference to interest not being paid on the debentures. Please share the link if you can.

  6. Capricorn

    I appreciate all efforts to determine just how much was lost in this venture. It doesn’t matter if the lost money will be felt by taxpayers or hydro customers…they’re one in the same. One thing that is clear…citizen’s money was over leveraged, and the details were kept in the shadows. It would be appropriate to have a full accounting of what took place and by whom. In no other position would so much money be lost with no accountability!

    • Capricorn: Totally agree. The secretive culture surrounding the former administration should not be acceptable.There are just two councillors remaining who were on the GMHI board, Karl Wettstein and June Hofland. Their silence is deafening. Yet they have the gall to accept payment for serving on the GMHI board and voting on the various issues that have arisen out of this debacle. See no evil, hear no evil or speak no evil, kind of sums it up.

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