Wednesday, February 17, 2010

Kleen Energy: Sweetheart Tax Deal Could Leave Sour Taste

From $200 Million to $1 Billon: Project Escalates Over Seven Years

Over the course of the last week, Kleen Energy has been in the headlines for a tragic explosion which occurred at the plant on February 7.  One after another, news stories have referred to Kleen Energy as a billion dollar project.  However, in the last decade, as Kleen Energy sought municipal approval to build the plant, local news stories often referred to its value as about $200 million.  And former Mayor Thornton and the Common Council approved a 25 year tax stabilization plan which appears to be based on a value of only $100 million. 

The Kleen Energy plan is set to generate $59 million in taxes over 25 years, but some say it might have generated considerably more, between $125 million and $400 million.

Did the city negotiate itself out of a lucrative source of tax revenue, or has it cemented a steady, though fractional spot, on the tax rolls with the Kleen Energy plant?

When he was campaigning for his first term as mayor of Middletown, Sebastian Giuliano pointed to a "tax stabilization" deal then-mayor Dominique Thornton, had made with Kleen Energy.  The deal offered the proposed power plant a 25-year stabilization plan, made possible by state legislation, which would allow the power plant developer to pay lower taxes in the first year of the plant's operation, and to catch-up over the course of 25 years.  The state law allows the municipality to set the rate at a stable level to encourage the construction of plants which generate electricity.

According to a Middletown Press article in March 2003:

The agreement...would allow the plant to pay taxes on a increasing scale over a 25-year cycle. The plant would pay less taxes at the start of the cycle, and more toward the end.

Under the agreement, the plant would pay the city around $1.7 million in taxes during its first full year of operation. The plant would pay higher taxes each year, and would pay the city a total of around $56 million over the 25-year cycle.

At the time, according to the Hartford Courant on April 9, Kleen Energy representative William Corvo explained that the city was not delivering a tax abatement, but that it would be getting all the taxes it was owed, just spread over a fixed 25 year schedule.  

The Deal: Generous to a Fault?

The agreement which Mayor Thornton proposed, and the Common Council voted to accept, called for fixed payments on the set assessed value.  When the deal was negotiated for Middletown by Hartford law firm Robinson and Cole, at a cost of $15,000, the  value for the tax stabilization plan was pegged at about $100 million, substantially lower than the $200 million referred to by Kleen Energy representatives and supporters of the plant in news articles of the day.  The valuation of the plant was at half it's stated value at the time.

No doubt, it was a well-negotiated deal by Kleen Energy, and justified, by city leaders, as a way to get a substantial new property on the tax rolls. In addition, tax stabilization flattens out depreciation, which devalues industrial property over the course of time, and helps the city, generate a steady flow of tax dollars.  It allows the power plant to predict expenditures, and to attract financing.

But was the tax stabilization plan generous to a fault?   That deal was struck and agreed to with bipartisan support on the Common Council at their regular meeting, April 24, 2003.  The deal received enthusiastic support from Town Planner Bill Warner, and Democratic Council member Gerry Daley.  Other members of the current Common Council were on the council when the agreement was improved, including Ron Klattenberg, Joe Bibisi and Robert Santangelo.

David Bauer, now a Common Council member, and then a concerned citizen, argued at public hearings that the deal was too rich.  Republican Council member Fran Patnaude agreed, as did Councilman Earle Roberts who expressed dismay that details of the deal were not readily available, nor was access to the attorneys from Robinson and Cole who struck the deal.

With the tax stabilization, Kleen Energy could plan for a set payment, and not worry about escalating tax rates. 

Recently Mayor Giuliano said that when Kleen Energy struck their deal with the city of Middletown, the agreed-upon estimated assessed value of the Energy plant was $100 million.  Giuliano was not mayor at the time of the agreement.  No inflationary, escalation or normalization clause was built into the contract, and state law did not prohibit such a clause.
Giuliano said that the city was in good negotiating position when the deal was made.  Kleen Energy needed the site with its proximity to water, and to transmission lines, to present an attractive package to the Siting Council.

Giuliano said that during his administration, a similar deal was worked out for two new gas-fired peaking generators at the NRG plant.  He insisted that a clause in the agreement be added to allow for an adjustment of the true tax rate.  As such, the two peak generators will bring in as many tax dollars as the entire Kleen Energy plant over the same time period, though the peaking generators are assessed at a much lower value.

Many recent accounts about the Kleen Energy explosion have called it a billion dollar plant.  One estimate pegged the value at $1.3 billion.  At the low end, Mayor Sebastian Giuliano has said that after the explosion he has been privy to the estimated insurance replacement cost of the plant, and it's more than $600 million.  

To imagine what the city might have negotiated, here's one scenario.   With a plant valued at $600 million, the city might have offered the company a generous tax stabilization value for the plant at half its actual value, or $300 million.  Using the current mill rate of 25.5, the stabilized tax rate would average around $5 million ($300 million x .70 assesed value x .0255 mill rate) in taxes a year.   Over 25 years, that's $125 millon, or double what the current agreement nets in taxes for Middletown.

Though the original deal with the city was struck in 2003, it took several years, and some helpful state legislation, for Kleen Energy to put together the financing of the plant. 

Capacity Legislation Assists Financing

Despite the tax stabilization, Kleen Energy was not able to put together a financing package immediately because the collapse of Enron had soured high-end financiers from fronting money for energy projects.  It wasn't until 2005 when the Connecticut State legislature enacted CT Act 7501, that Kleen Energy was granted a capacity agreement by the Department of Public Utilities Control.  This grant, which was won under hard-fought competition with other municipalites, guaranteed capacity purchase, not electricity purchase, by Connecticut Light and Power (CL&P), in a deal reported to be worth 60% of the plant's revenues or about $300 million over the 15 year contract.

This guaranteed payment was apparently enough to convince investors at Energy Investors Funds to package $985 million in construction financing in exchange for an 80% ownership position.  Financing was underwritten by Goldman Sachs.

Only one obstacle stood in the way of plant construction, water to cool generators and to create steam to power generators. The plant requires 7 million gallons a day to be pumped from the Connecticut River Aquifer.

Kleen Energy proposed a plan to the city in which it would drill two wells, one for it's needs, and one for use by the city.  A deal for the water was first proposed by former Mayor Dominique Thornton, but when Giuliano got into office he renegotiated the deal, allowing the wells to be drilled.  One would be leased to the city for $1 a year.  The water used by Kleen will be metered, and Kleen Energy will pay for all water usage, and in addition, will pay taxes on the well and water system, assessed in 2007 at $13.2 million, netting approximately $300,000 in taxes annually.

The Common Council voted to approve the water deal, adding the item to the Council agenda at the last minute, and thereby thwarting public comment on a deal which was not without controversy.

Interestingly, at the time, David Bauer, by then a Councilman, noted that the tax stabilization deal with Kleen Energy could rob the city of a potential $200 million in taxes over 25 years which made him reluctant to vote for any new deals with the energy plant.

An Object Lesson in Negotiation

Construction on the Kleen Energy plant began in 2008, and the plant was reportedly 95% complete when a disastrous natural gas explosion did significant damage to the plant, killed 5 workers, and injured 12 on February 7.

Kleen Energy president William Corvo has stated the plant will be rebuilt, and Mayor Sebastian Giuliano echoed that optimism, but added that he feels that it has delayed the opening of the generating plant by at least a year.  Others have estimated that recovery and repair could take substantially longer.

Giuliano said that he expects the $1 million owed to the city in the tax agreement to be paid, on schedule this year, but that the higher amounts owed once the plant is generating energy will have to wait until the plant is on line.

If the plant is put online, at the very least Middletown will receive the promised tax revenue, but some sources are questioning the ability of the plant 
to be reopened in a timely manner to provide needed electric generating capacity.  And if the plant cannot be completed and running by 2011, others are beginning to question whether the capacity agreement may stand.  Even a worldwide credit rating agency has put the Kleen Energy loan on a "watch negative" list.

In the brightest scenario, Kleen Energy will recover, rebuild and be generating electricity in a year, paying taxes to Middletown as scheduled.  Still, with a plant value that has blossomed from an estimated $200 million to $1 billion, this deal is an object lesson for the city.  Middletown's leaders need to create deals which are attractive enough to lure appropriate development to the city and simultaneously protect the city from inflationary factors which can reward the developer and punish the individual taxpayer.


Anonymous said...

First off, great article and topic. I recall all of the things spoken about here, but respectfully disagree on some of the facts. Hindsite is 20/20 for projects such as these. At the time, the City saw an opportunity for tax dollars for many years. They struck a deal for 25 years which allowed Kleen Energy to build the plant and finance it. Two great things happened. First it forced NRG to rethink how they did business, and forced them to comply with clean technology and change over to cleaner burning fuels. This increased tax dollars the City now gets from the NRG plant.Secondly it brought a new well into the City's water picture. Both things make the deal worth it no matter what we may or may not lose in tax dollars.

As far as Middletown is concerned she took care of her tax base for years to come. We all know an escalator clause probably should have been built in, as we have seen the plants' worth more than double. But after last weekend, it all seems a moot point as we gather to get over the tragedy, and rebuild for the future of Middletown. If this plant is rebuilt, it will stay on the tax roll for many years past 25. I do however find it hard to fathom that it will get by the tragedy, past the litigation that is sure to follow, and be rebuilt at a speed which meets the proposed needed output for energy.

In the future the City needs to look at all potential deals for tax dollars which benefit ALL taxpayers, especially the single family homeowners who must have tax relief. One thing this tragedy showed was how Middletown can come together to solve her issues. It should be a lesson learned for all those involved in order to make sure this community is not fractured by taxing districts and seperate "special" areas. Enough of the piting neighbor against neighbor routine we all see way too often.

Middletown Eye (Ed McKeon) said...

Thanks for the thoughts on the topic.

No doubt, appropriate developers should be encouraged through tax abatement, and other inducements, to bring development, job, and taxes to town.

And, without a doubt, the priority is to get beyond the current tragedy. Though it will be a more difficult journey for some, than for others.

Still, the constant drumbeat of "the billion dollar project," is a reminder that the city needs to be very careful when entering into large, long term agreements with developers.

The amount of money lost in the deal shouldn't be shrugged off with a "better luck next time," especially when the city is in such difficult financial straits.

Yes, it will be better for Connecticut to have less expensive power (if in fact that is the result), and for Middletown to have a steady flow of taxes, but it would also be great if we got those things and if each resident were able to have a tax rate that's three mills lower.

Finally, as for hindsight, most of the history was taken from newspaper accounts of the day, from different newspapers, which seem to agree on the details of the discussions, and the votes.

Anonymous said...

Maybe someone could check with the Water Dept., but I heard from a reliable source that Director Guy Russo nixed the water deal with Kleen Energy some time ago.

Anonymous said...

I supported Kleen Energy and still do but wish Middletown was getting a more fair tax share than it will.

She let down the taxpayers as she sold us out for political reason. If something is worth upwards of a billion dollars and is getting taxed at 1/10th. How is that fair for Middletown taxpayers.

It has nothing to do with hindsight just foresight. Something missing from Middletown political landscape.

Anonymous said...

The real game changer and what got this plant built was the state legislation which allowed the state to back the bonds and buy long term electric contracts.
That legislation occured after the approvals and and after the tax deal.

At the time of aproval there were about 8 of these plants proposed in CT and it was very competative and they all had tax deals to try and make then worthy of private financing. The only one that got built was KLEEN.

There is no way anyone cold have predicted KLEEN would have been able to get the legislature to do what they did, that is the only reason this plant was built.

and yes there are 2 new wells owned and operated by the city worth millions and NRG will start paying $1.75 million a year on their improvements and the pipelines will pay a couple hundred thousand a year,

and maybe its a billion dollar project with extensive site costs, labor, pipelines wells but the actual taxable value is far less.

Anonymous said...

To use the term "sweetheart" deal before you even know all the facts is just wrong and simply designed to inflame people, is this the Middletown Press ?

Middletown Eye (Ed McKeon) said...

True, it's difficult to ascertain "all the facts" in a case like this, but on its face, with a tax savings of tens of millions of dollars, calling it a "sweetheart deal" might just be an understatement.

Anonymous said...

About the two new wells,mentioned by Anonymous 6:54. The City does not own or operate these wells although it does own one of the parcels of land. Unless something has changed, these wells are permitted to withdraw a total of up to ~7.4 Million Gallons per Day (MGD) from below the CT River. Kleen will require up to 5.8 MGD for cooling and other purposes. The remainder, ~1.6 MGD,is available to the City for either industrial or potable (after treatment)use. Presumably the City will profit from the sale of this available water to other towns or industrial entities.

The Tax Stabilization Deal should have at least considered inflation. And, it is more likely that location, location location is what caused Kleen to come out the winner among the possible sites for a new Power Generating Plant.

The genius of Armetta Associates to see the potential in this old quarry spot cannot be overlooked. Instead of a dirty landfill they proposed to Kleen it up for the benefit of mankind, and themselves...They were so close.

Despite the hubris of Kleen , the tragedy was undeserved and the project should continue. Perhaps humility gained in the aftermath will inspire the magnanimity and wisdom of Solon and a renegotiation of the Tax Stabilization Deal.

ARLJ said...

At a bare minimum the event that has occured at the Kleen Energy Plant on February 7th has brought attention to many citizens statewide of the everyday negotiations and foresights of developers whose interest are in the betterment of communities as well as a source of income.
With this being said I have to lean sharply torward the posts that support the advancement and understanding of how business is conducted.
When I awoke this morning free of military personel surrounding my home and armed soldiers walking the streets, I stretched and made my way into a new day of negotiating the time ahead. This is America and we are Blessed with this daily. Forego the negative attacks on those who have taken the innitiative to succeed and also given back to the community as well. One only needs to look at the politicians who sit in Washington, D.C. and daily negotiate their future,not ours.
So the moral of this story is that we, as a community, need to stand strong and give back not sit behind a blog and whine about all the crooked so called deals that we have been cursed with. Why not find the good in your so called bad/sweetheart deals and write about that.
I am personally tired of reading negative press, Healthy comments lead to Healthy thoughts which in turn lead to production not appathy.
Let see if the Middletown Eye can report some positive comments about a proportionately negative incident.

Paul Torop said...

My guess is that before the sun went down that Sunday, lawyers and accountants gathered to address the legal and financial issues. Issues such as what do the fire and liability insurance policies cover? Is the Errors and Omissions policy paid up? That’s a policy that defends and pays any judgments when a board member or officer of the Corporation is targeted in a civil suit. Is there any possibility of criminal charges against the officers and board members if it is concluded that they behaved recklessly and compromised safety to get the plant up and running sooner than scheduled? What public statement should be made that would express anguish and sympathy without admitting any guilt or taking any responsibility? How much money is there to pay the interest on what was borrowed, since now there won’t be any money coming in for a while?
I’ve been unable to get a lot of information about the loans, since they were made privately. One article in the financial press said that Kleen Energy closed a $985 million bank financing deal involving a syndicate of more than 20 financial institutions, arranged by Goldman Sachs Credit Partners. Another article reported that the amount borrowed and distributed to investing financial institutions by Goldman Sachs was 1.1 billion dollars. The interest rate on the loans has not been made public. A knowledgeable source estimated that in the post-Enron environment and before the FED drastically lowered rates to fight the recession, Kleen would have had to pay somewhere between 5 and 8% interest. 6% of a billion dollars is an annual interest bill of $60 million!!! If the opening of the plant is delayed for a year, Kleen will have to come up with an unexpected 60 million dollars that won’t be offset by revenues. Do they have this much money from the loans that hasn’t yet been spent? Would they try to borrow new money? If so, they would have to pay sky-high interest rates, since their debt has been downgraded to just above junk status. Could they declare bankruptcy and walk away from the project, leaving Middletown with frustrated hopes and a destroyed river bank? It’s possible that at this time even they don’t know what they will do.

Gordon said...

It was Bush's fault.

Anonymous said...

All interesting view points, and to be honest things I never even considered. Thanks everyone, I for one hope this plant survives and becomes a viable, productive Middletown Neighbor. To the 5 souls, may they rest in peace, and may God's perpetual light shine upon them!