PUC approval document rewritten in October. The financial formula for paying back the $215 million purchase of Kauai Electric was changed in October, three weeks after the state Public Utilities Commission approved the sale to the Kaua’i Island Utilities Cooperative.
The cooperative must pay back the federal Rural Utilities Service loan in 25 years, rather than the 30-year term the cooperative’s organizing board has told its members. The final deal was signed on Oct. 31.
The $215 million deal is believed to be the largest single financial transaction ever made on Kaua’i.
The change in the loan term came after an admission made on Oct. 24 by KIUC chairman Gregg Gardiner that he had made a misstatement regarding the length of the federal loan term in the filing to the PUC, and hadn’t told the KIUC board about the difference in terms.
“Although I saw that the forms of the Resolutions provided by the Rural Utilities Service specified a 25-year loan term, I did not at that time believe that to be critical,” Gardiner said in an affidavit given under oath to the PUC on Oct. 24. “I wanted to start the loan application process with the Rural Utilities Service and assumed that the eventual loan term could be resolved during the remaining application process. I should not have assumed this could be changed. This was an error on my part….Due to this error, I did not raise the issue of a 25-year instead of a 30-year loan term with the Board.”
The 30-year loan term appears in the co-op’s application to the PUC filed on March 15, 2002 and “all subsequent filings in the Docket were also based on a 30-year term,” Gardiner states in his affidavit.
Following the approval by the PUC, based on a 30-year loan term, the RUS issued an approval letter. The RUS letter contained a typographical error that also stated that a 30-year term would be used to pay off the $215 million loan.
On October 9, RUS loan documents arrived at KIUC offices, specifying a 25-year maturity for the loan.
Gardiner said he later called the RUS, thinking it was a mistake.
The RUS told Gardiner that paperwork they had from the co-op didn’t justify giving assets, such as generating equipment owned by Kauai Electric, a 30-year life span. Gardiner said in his affidavit that he didn’t realize the PUC documents couldn’t be amended, and went about trying to gather enough information to prove the assets did have a 30-year life before the loan was signed.
Gardiner said updated documents were sent to the RUS showing that the assets had a lifetime of about 29.6 years.
On Oct. 18, the RUS notified Gardiner that the approved loan term would be kept at 25 years.
This necessitated a request to reopen the PUC’s “docket” for the approval of the sale. The amended application was dated Oct. 22 and approved after Gardiner provided the PUC with his affidavit dated Oct. 24.
The changes in the term of the loan met with no objections from intervenors including the County of Kaua’i, and should result in financial benefits for KIUC members, though there is a possibility of some negative financial effects.
“What it does mean is that the loan gets paid off earlier, and for our members, that’s a good thing,” Gardiner told The Garden Island prior to his departure for a national rural utilities meeting in Tennessee being held this week. He is being joined by newly-elected KIUC board members.
“So instead of financing the thing for 30 years, we finance it for 25, which means it’s paid off earlier,” he said. “All the numbers and projections that we talked about are the projections for that 25 years.”
Documents filed by the KIUC with the PUC in late October claim that paying off the loan five years earlier than first anticipated will mean around $330,000 more in customer rebates over the first 10 years of co-op ownership, increased projected equity, and some $2.75 million in interest debt the co-op won’t have to pay because of the shorter loan term, according to the PUC’s amended decision and order regarding the sale.
The financial down side is that the amount of projected free cash flow will diminish by $14.5 million over the same 10 years. Cash flow can be defined as the amount of cash flowing through a business within a certain period of time.
The KIUC states in the PUC document that the free cash flow over the 10 years should build up to $76.49 million compared to an earlier estimate of about $91 million.
“There’s substantially nothing different,” Gardiner said. “If you look at the change, it is so small as to not matter. And it’s very old news, and there’s a lot of other, more important things that we could be talking about on Kaua’i than something that happened in October of last year.”
William Milks, the Honolulu attorney who represented the County of Kaua’i during the formation of the KIUC, said the change has no impact on his past work for the county in analyzing the sale of the utility to the cooperative because the retail rate of kilowatts of electricity sold customers will not be affected.
However, Milks said an impact could come when promised paybacks to co-op members are tallied and the paybacks are lower than expected, as there could be less of a cash flow due to the higher principal and interest rates payments on each billing from the RUS under a 25-year loan.
Clayborn Crain, a spokesperson for the RUS, said no action is planned to be taken by the RUS against the KIUC because of the misstatement in the PUC filing, but the change in financing will put “more pressure on the co-op to keep costs down.”
Crain confirmed that his agency made a typographical error in a set of loan papers sent to the KIUC.
In regards to letting the public know about the loan payment term change, Gardiner said, “it was made public,” filed with the PUC, at public libraries, and in the same manner all other documents were filed regarding the sale of KE to KIUC.
“We changed no procedures, we did everything exactly the same,” he said.
However, outside of documents filed with the PUC about five months ago and provided to The Garden Island by the state agency about ten days ago, no public notices of the loan maturity change are apparently available.
A check with librarians at Kapa’a Public Library and Lihu’e Public Library shows no KIUC documents have been sent to the libraries since about a month prior to the PUC approval of the sale in mid-September 2002.
No posting of Gardiner’s affidavit, and the rewritten PUC document, appear in the PUC document section of the KIUC Web site at www.kiuc.coop.
The only public record mention to the KIUC board of the change is a vague one, and appears in the Oct. 10 minutes of the KIUC board available on the KIUC Web site. A brief item in the minutes states: “Chairman Gregg Gardiner informed the Board that he and our attorneys were working with RUS to resolve some issues regarding useful life of equipment.”
Notice of the loan change became more widely known through a series of e-mails and Web site postings generated on Kaua’i over the past two weeks.
Walter Lewis, an opponent of the KIUC purchase of Kauai Electric for $215 million, said if the information had been made known directly to the public it might have affected the outcome of the recent KIUC board elections.
“Mr. Gardiner’s delinquency in this matter (reopening of PUC docket) is not generally known,” Lewis said. “If it had been and the significance of his conduct were appreciated his candidacy for election to the KIUC governance board may not have been successful. People sometimes are not elected to offices if it appears that they were not faithful to their duties to inform accurately their associates and governmental authorities.”
TGI Editor Chris Cook can be reached at mailto:email@example.com or 245-3681 (ext. 227).
Staff Writer Paul C. Curtis can be reached at mailto:firstname.lastname@example.org or 245-3681 (ext. 224).