8/6/2007
Menasha money going up in steam
Workout. Nothing to do with exercising, nothing to do with muscles. Rather the legal definition – a debtor’s plan to take care of a debt…. Often created to avoid bankruptcy or foreclosure proceedings.
The City of Menasha has a mess on its hands. A report released last week, meant to detail a “workout” for the City, values its Steam Utility Plant with a debt in excess of $39 million – at only $13 to $17 million. Now that’s what I call a mess.
Can’t close down the plant. Well, they could. But then the city would be saddled with the debt – with no cash flow to help pay it.
Here’s what’s recommended in the new report:
- Renegotiate rates. The consultant believes prices can be negotiated which are higher, benefiting Menasha Utilities, but lower than the cost of the customers producing their own steam. Good.
- Implement improvements to operations that can reduce cost.
- Put in place a reliable spare parts program.
So tonight, Menasha will be asked to approve more debt for the Steam Plant– $13.9 million! And – along with the debt, the Council will be forced to approve an additional tax levy to support the debt service.
The city’s debt position is stable but not good. From Moody’s, related to the bond issue to be considered tonight: “The Assignment of the A3 rating and downgrade reflects Menasha's moderately sized tax base favorably located in the Fox Valley region, pressured but sound financial operations, average wealth levels, a high debt burden resulting largely from substantial steam utility obligations… and continual struggles at the utility to become self-sufficient, which has a potential negative impact on general city operations.”
This too, as an attempt to summarize the genesis of the problem: “In 2004 the city decided to convert a portion of its electric generation plant into an industrial steam production facility to assist neighboring paper mills who expressed an interest in purchasing steam from a central power plant utilizing coal as the primary fuel, thereby significantly reducing operating costs – something especially important for an industry which has been under strong pricing pressures.”
In order for this new, essential debt to be sold, the city must agree to an “irrepealable tax in the years 2007 through 2009.” The tax will be in addition to the city property tax. Wow.
It’s a mess.
I know hindsight is 20/20. Easy for kibitzers to kibitz, Easy to kibitz after tough decisions are made. And I know Mayor Laux and the Common Council are as discouraged and concerned as anyone. And, as I’ve said before in these pages, Mayor Laux is a great guy – and Menasha’s Mayor since 1988.
Here’s the question. Will and should Menasha voters hold Mayor Joe accountable in 2008?
In the meantime, cities contemplating any new energy-type operations – take the advice a friend has offered me time and time again – stick with what you know.
COMMENTS
Thanks Jo for this article! You couldn't have said it better.
There have been only a handful of people trying to get this point across. If other residents are not serious enough to start speaking up, we won't have a financially sound city to live in. With all of our Mayor's financial degrees and expertise, I cannot understand why this issue was not properly addressed at its onset and solutions worked out. And this is not the ONLY issue contibuting to Moody's rating.
A combination of poor, proper, planning and rash decisions has put us in the worst position. It's been ongoing for 16 years. This financial fiasco hasn't occurred just because of our steam plant. Residents, pay attention and help your city, without it totally coming out of your pocket.
Mary Nebel (Mon Aug 06 08:42:55 2007)
I totally agree with Mary. As a former Alderman (who voted NO for the steam plant), because the coucil was blind sided with this issue. Never sign anything unless all your i's are dotted and t's are crossed. I believe we would not be in this mess if all of the Common Council had been included in the beginning. If I were still on the Council I still would be voting NO on issues regarding the steam plant.
So as to be instructive to current and future alderpersons (in many cities, not just Menasha), what should council members insist on happening/seeing before approving these big projects? The original engineers apparently provided very bad guidance - was there a way to better research them - that would have been seen at the time, without hindsight? JE
Mary Ann Mulvey (Mon Aug 06 09:35:58 2007)
I've read the report and it appears that the key question is whether the existing customers are willing to pay more for the steam the plant produces. We need to get the answer to this question as promptly as possible. If the answer is no, then we need a plan B, or better yet, plans B, C & D, running from worst alternative to best alternative.
One critical issue in designing any alternative plan is what, if any, contractual liability the city would have to the existing customers based on the existing contracts. That is, if the plant was simply closed, or sold, and the city takes the large financial loss entailed, would it have additional loss exposure based on claims from the existing customers? Don't know the answer to this question, but it should be looked at.
Interesting. Thanks Christopher. JE
christopher evenson (Tue Aug 07 11:39:07 2007)
Christopher Evenson should read the memo (select 'memo' when you get to the page, and just scroll down past the Mayor's tome to the email from Tom Danz to Don Merkes) written by the President and COO of Whiting Paper, which critiques the Sargent & Lundy report from the POV of a steam plant customer.
I can't speak to your question, Jo, about what could have been known ahead of time that would have spared Menasha citizens from this financial boondoggle. However, I've noticed that you have pretty good investigative skills when it comes to what Steve Kagan is saying vs. doing. Could I prevail upon you to exercise them on this issue? You seem to have a warm relationship with our mayor, so maybe you could get some insight from him. Here are a few hints.
I've heard many people who have been watching this for a long time remark that there were not multiple bids on the project. Whether it was engineering, financial forecasting, or the actual build-out, my understanding is that the usual process of issuing RFP's and evaluating multiple proposals was not followed.
From the outset we've been told that there was a strong likelihood that SCA would come on board as a customer. As it turns out, we should be grateful they did not since it now appears that every puff of steam from Joe's Teakettle is being sold below actual cost. This week, when the question was put directly to Doug Young, the General Manager of Menasha Utilities, he acknowledged that they have not contacted SCA to discuss selling steam to them. The council rep who asked did not follow up with what would have been my next question, "Have you EVER approached SCA with a proposal?" Perhaps you could ask this question, and find out what SCA's response has been, if any.
I'd also like to know, since he's not saying, if the Mayor has actually read and taken to heart the frank assessment of the S&L report offered by Tom Danz, President and COO of Whiting Paper. Whiting has been in business in Menasha for over 100 years and has survived in an extremely competitive market through thick and thin. I would think any advice they would choose to give our novice energy tycoons would be gratefully accepted. But I've been wrong before.
Last Monday evening the utility put Dick Sturm, Operations Manager at the steam plant, in the hot seat in front of the council and concerned citizens. It was impossible not to feel a great deal of sympathy for Dick and his crew who have been working horribly long hours without a break for months to try to make a go of this. Sadly, the main obstacles to mere break-even performance of this investment of taxpayer dollars are deeply flawed business plans, contract terms that will disadvantage the city for years to come, and a persistent unwillingness to conduct this as a real business with lines of accountability. Those are not problems caused by or which can be solved by Dick Sturm or his crew.
A citizen stood at the podium Monday night and laid out a detailed proposal for three alternative plans for the steam plant. Her statement was more coherent than anything that has come from the administration at city hall, or from the management of Menasha Utilities. If you have a conversation with our mayor, Jo, maybe you could ask him if he's gotten a copy of her proposal and if he'll be distributing that to the Utility Commission.
The steam plant was originally sold to Menasha citizens as a project that would cost $12 million. The costs have now ballooned to over $39 million and projected profits have morphed into enormous losses. We have taken the first steps onto the Debtor's Death Spiral, borrowing money to cover interest costs, and interest costs are rising each time the city's debt is downgraded. The average income in Menasha is significantly lower than that of surrounding communities, and the increased tax burden on residents of a city that already pays the highest property taxes in the area is beginning to take a toll. The tax money pouring into the steam plant due to incompetence in negotiating the sales agreements, constitutes a subsidy by the people of Menasha to three corporations who benefit from the errors of those who still appear to think they have some expertise in these matters. That's not a negative attitude - that's just the facts, ma'am.
Good luck with your investigations, Jo. I know there will be many in Menasha waiting with baited breath to hear the results.
Joanne Roush (Thu Aug 23 16:40:57 2007)
Got to agree with Joanne. It's interesting to reread the Due Diligence report, Utility Commission minutes and some of the alderpersons' blog entries.
Reminds me vaguely of what's happening half the world away, but that's another topic.
How interesting... JE
christopher evenson (Fri Aug 24 10:03:01 2007)
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