The GMHI Odyssey: Following the money leads to a staggering hit on city finances

By Gerry Barker

July 24, 2017

The epic unraveling of the Guelph Municipal Holdings Inc, (GMHI) affair is like watching a kitten untangle a ball of wool.

There are so many moving parts, bopping through a dense fog of spin, denial, obfuscation and malfeasance.

What people are expecting is how much did this excursion into a fantasy world of power self-sufficiency coupled with providing co-generated hot and cold running water to buildings actually cost?

Guelph Speaks used two official documents to reach its conclusion that GMHI cost the city $157.422 million most of which is not recoverable. The two documents include the audited consolidated balance sheet of GMHI and the Guelph Hydro 2016 financial report. By any definition losses can only be described as “staggering.”

The long-term effect is a severe restriction of capital and operational spending. That amount represents about 40 per cent of the total 2017 city operational and capital spending budgets.

In my opinion, it has jeopardized capital spending on the $63 million South End recreational centre and the Downtown library (again) of an estimated $60 million. Keep in mind that city council has approved capital projects including the $34 million police headquarters and the $20.5 millionWilson Street parking garage.

There is no easy solution to this. The project is a failure financially and leaves the city with few alternatives to recover the losses of GMHI. Increasing debt, property taxes and user fees are not alternatives. Rationalizing cost of operations is now a necessity to reduce overhead costs. It’s the only way out of the situation because the city cannot win the lottery.

It all started in April 2007 when the new city council unanimously approved Mayor Karen Farbridge’s proposed Community Energy Initiative (CEI).

Here are the goals set by the CEI to achieve by 2031:

* Use 50 per cent less energy per capita

*   Produce 60 per cent less greenhouse gas emissions per capita

*   Encourage and facilitate community-based renewable and alternative energy   systems.

The staff report at the time, said the CEI would position Guelph among the top energy performers in the world.

Today, the key management players are no longer employed by the city, leaving behind a multi-million dollar losing legacy that has challenged the most skilled financial practitioners among us. Item: The city has spent more than $2.8 million just to have the KPMG accounting firm perform a financial autopsy on this turkey, aka an audit.

The people associated with the GMHI project, have left the building. They include the former mayor, Karen Farbridge, and Chair of the GMHI Board of Directors; former Chief Administration Officer and Chief Executive Officer of GMHI, Ann Pappert; Former Chief Financial Officer Al Horsman; City Solicitor, Donna Jacques and Jasmine Urisk, who at the time, was Chair of the board of directors of Guelph Hydro. Other peripheral managers have also departed at all levels of the City of Guelph Corporation.

These include members of the city administration, Guelph Hydro, GMHI and Envida Community Energy Inc. and Guelph Hydro Electric Services Inc. (GHESI), the operating division of Guelph Hydro. In addition, GMHI and Guelph Hydro entered into contracts to supply power and co-generation thermal heating and cooling system.

These contracts were never fulfilled and the city has negotiated settlements, it is reported.

The Guelph corporate family of companies

So here is the cast of operational participants, all belonging to the City of Guelph’s corporate family.

GMHI was set up under the express direction of former Mayor Karen Farbridge. She took on the job of Chair of the GMHI board of directors in 2011. She handpicked her board thereby maintaining complete control. At the time of formation the assets to be managed included the Guelph Junction railroad.

Her mission was to implement the CEI announced in 2007. It was the product of a series of meetings with many of the leading citizens in the city described as stakeholders. They included members of the city administration, Union Gas, Guelph Hydro, business and industrial representatives, the University of Guelph, School Boards and the Guelph Chamber of Commerce.

It was an all-star cast that produced the agreement and thrust of turning Guelph into a world-class jewel of conservation, self-sufficiency in power, renewable energy sources, total management of waste and the gradual reduction of the use of fossil fuels to reduce the effect on climate change.

It was dreamy, heady stuff that stirred the environmental souls of those participating. But little happened for four years until the corporate vehicle, GMHI was established in 2010. In 2013, the Farbridge-dominated council approved moving Guelph Hydro unto GMHI.

The wheels of this ignoble experiment started to come off in 2009 when Guelph Hydro’s subsidiary, Ecotricity Corporation reported a loss of $3,945,000. The report said the loss was due to declining methane gas from the Eastview landfill. An impairment charge of $2.984 million was taken that year.

Update: Guelph Hydro has paid to take over the Eastview gas generating plant paying some $550,000 for it. Now which city corporation gets that money?

What is the interpretation of an ”impairment” charge? If the recoverable amount of an investment is less than its carrying value, then the asset is deemed to be impaired. The value must be written down to the recoverable amount.

It’s not difficult to understand that when assets are wriitten down, that’s real money lost forever.

There is more on this to come

Suddenly, the door was shut to public participation. Only a few politicians and civil servants were in on the plan’s execution.

It is now believed that Guelph Hydro was the banker for GMHI. The first step was to have Guelph Hydro form Envida Community Energy Corporation to be the hands-on builder of new projects, including installing solar panels on the roof of the Sleeman Centre and several public building throughout the city. Envida now owes millions in debt to GMHI.

The audited GMHI balance sheet revealed a startling statement that concerned two senior unsecured debentures taken out by GMHI totaling $103.612 million as of December 31, 2016. The largest was for $65 million, due 2030 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 million and is due in 2045. Both these obligations carry interest rates of 4.012 per cent and 4.112 per cent respectively.

The source of these debenture loans is described in the audit as the CDS&CO. As both are unsecured, the loans were made because of the City of Guelph’s owneship 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 also revealed that a $20 million credit facility was 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.

It is now clear that there was a lot of money flowing between various city-owned corporations. It was a five-year irresponsible mismanagement of public funds that has left the citizens with a $157.422 million price tag with no benefits to show for it. And, also there remains no possibility of repayment of rapidly depreciating assets.

Adding up the numbers

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 pay its bills and continue to exist. The real cash 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 as a liability, 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. The record now shows that GMHI is so intertwined between various city-owned corporate entities that disclosure of the facts is an expensive and difficult task.

It would appear the debenture funding came through Guelph Electric Services Inc., the operating arm of Guelph Hydro. Envida was involved in other projects including the District Energy nodes set up in the Sleeman Centre and Hanlon Business Park.

Through all this GMHI activity, the public had no clue as to what was happening with their money. Item: Hydro bills for the 55,000 clients of Guelph Hydro increased electricity fees by 42 per cent in four years. In the past year the billing has decreased.

Today, Guelph Hydro reports a total of $228.3 million in assets. Its long-term debt is listed as $94.3 million and net income for 2016 was $7.1 million. It would take 13.28 years of $7.1 million in net income to repay it. Amazing coincidence! That’s 2030 the year the $65 million unsecured debenture is due for redemption.

Would you or I want to merge with a utility that carried an impaired debt of $94.3 million? How does the city merge or sell Guelph Hydro with that problem?

Now this is when it gets interesting. In May 16, 2016, Pankaj Sardana, CEO and CFO of GMHI, said there was an impaired charge to GMHI of $68 million. He explained that this was provided by a group of investors, without naming them.

Accounting for those pesky two unsecured debentures

But on the audited GMHI consolidated balance sheet there is a liability of $95 million composed of two unsecured debentures, one being $65 million and the other $30 million. The auditor reported the source of the debentures was CDS&CO. Remember this is now an impaired asset.

It is apparent from the audit by KPMG and the Guelph annual 2016 financials that Guelph Hydro has assumed the hit on the debentures and lists $94.3 million as debt.

Is it coincidence that the GMHI debenture debt has morphed over to Guelph Hydro who lists it as debt? Why would Guelph Hydro, well established with earnings of $7.1 million report debt of $94.3 million? If these figures are accurate, according to official public audits and financial documents, then the total GMHI loss includes the worthless shareholder equity, $63.122 million and the Guelph Hydro debt of $94.3 million totals $157.422 million.

On a historical note, some members of the Gang of Seven city councillors walked out of a closed session in January 2016, preventing council to continue its business because of a lack of quorum. Interviewed later, Coun. Phil Allt said their action was to “protect the staff and the corporation.”

Wonder how that worked out for them now that the details of the GMHI debacle is being revealed?

 

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4 Comments

Filed under Between the Lines

4 responses to “The GMHI Odyssey: Following the money leads to a staggering hit on city finances

  1. geo

    The amount of money wasted by these ignorant zealots would cover infrastructure spending for years. There would be no need for exorbitant tax increases disguised as special levies.

  2. Joe Black

    People should be in jail.

  3. Capricorn

    Thank-you Gerry for this detailed summary. If all this juggling of public money and the resulting debt is accurate, why has no one been exposed and held accountable? The public deserves an explanation from those responsible!

    • Capricorn: Most of those responsible have either left the city or are no longer on council: Karen Farbridge, Ann Pappert, Al Horsman, Donna Jaques, Scott Worsfield,Janice Sheehy, Todd Dennis, Lise Burcher, Ian Findlay, Maggie Laidlaw. There were more middle management staff who resigned. Regardless of the GMHI losses, a number of management left leaving a vacuum of skilled employees. These past three years have been difficult for the Mayor and council, regardless of their political bent. Don’t expect things to change before the next election.

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