Utah Coal Company’s $53 Million Money Grab for the Oakland (or Ensenada!) Coal Terminal

  • Port of Ensenada, Baja California, Mexico
Photo:  The Port of Ensenada, Mexico, may be the destination of Utah coal if Wolverine Fuels gives up on building a coal terminal in Oakland.  Photo Source: Wikipedia.

For two years, $53 million of public funds have been sitting in limbo in Utah while the City of Oakland’s ban on coal is being tested in the courts.

The money was originally intended to finance a coal export terminal in Oakland but it now seems possible that Wolverine Fuels, Utah’s largest coal producer, may have its sights set on building a terminal in Ensenada, a Mexican port city 65 miles south of San Diego.

On Monday, a Utah Senate committee advanced a bill that would put the money out of reach of other competing infrastructure projects and earmark it specifically for the construction of  “a bulk commodities ocean terminal.” The legislation (SB 248) would eliminate provisions of an earlier bill passed in early 2016 that placed Utah’s Community Impact Board in charge of the money and required a determination by an impartial financial analyst that the investment would be prudent.

The original plan was for the $53 million to be loaned to four Utah coal counties which would in turn invest the money in a wholly owned subsidiary of Wolverine Fuels (formerly known as Bowie Resource Partners) to build a coal terminal on a publicly owned Oakland waterfront property adjacent to the Bay Bridge toll plaza.

Wolverine Fuels has backed two lawsuits against the City of Oakland.  One is a challenge to Oakland’s ban on coal; a federal judge ruled that the ban was not supported by the evidence provided and this is now under appeal in the Ninth Circuit. The second is a suit in state court following the city’s termination of its lease with the local developer for failing to meet contractual deadlines. Phil Tagami’s Oakland Bulk and Oversized Terminal LLC (OBOT) claims millions of dollars in damages as a result of the lease termination and the City’s alleged disruption of Tagami’s plan to build a coal export facility.

Oakland or Baja — A Swindle Either Way?

Last August, the Utah Office of Energy Development signed a memorandum of understanding with Baja California, Mexico, establishing “a close binational collaboration” to explore expansion of a bulk-handling facility at the Port of Ensenada to enable Utah to get “energy resources” (coal and possibly natural gas) to overseas markets.

In Baja for the signing of the agreement was Carbon County Commission Chairman Jae Potter, a major backer of the Utah coal industry and a central figure in earlier efforts to finance the prospective coal terminal in Oakland.  The state of progress in negotiations between Mexican officials and Utahans has not been made public. Wolverine may still be hoping to build in Oakland and cultivating a Mexican plan as a backup plan or perhaps Ensenada is the main focus and the lawsuits in Oakland are just about squeezing the City for money.

According to public documents, the projected cost of building the terminal in Oakland was $250 million, though some portion of that may have been budgeted to line the pockets of developers and bankers. “Confidential” email in 2015 between Bank of Montreal investment banker Jeffrey Holt and Utah officials revealed that the fundraising plan was to get $50 million from the State of Utah and another $200 million from private investors. Commissioner Potter later confirmed that the private investors to be targeted would be pension funds lured by the prospect of high interest payments on unrated private debt.

Compared to junk bonds, which have poor credit ratings because of their high risk, unrated private debt consists of loan instruments that have never been evaluated by a rating agency and offer even higher returns than junk bonds to cover for the unevaluated level of risk.

During the Oakland City Council’s proceedings on whether to ban coal storage and handling in Oakland, industry analyst Tom Sanzillo submitted an expert opinion concluding that the Oakland coal export terminal was likely to fail financial targets. “From Day One, the coal component of this project will be a financial drain on the City of Oakland as a whole and will remain so for the foreseeable future,” Sanzillo concluded. “It is not a risk worth taking.”

The structure of the deal, however, was going to make a lot of money for the coal company, the Oakland developers, and the Bank of Montreal which put together the deal, regardless of who got burned in the end.

The Bank of Montreal would make money in fees charged to both the borrowers and the lenders.  The coal company would essentially have ownership and control of a quarter-billion dollar export terminal while having risked no money of its own.  And the local developer, Phil Tagami’s OBOT, would be hired to design and build the terminal, making a handsome profit before the terminal handled its first filthy trainload of coal.

Swindling the People of Oakland?

Moreover, the public would be saddled with the losses when and if the whole scheme collapsed—for example, if overseas markets for coal declined.  Under the terms of the City’s agreements with the developer, the City was to get its investment in rehabilitating the former Oakland Army base from lease payments it would receive from OBOT.  But OBOT is just a paper company that was concocted to shield Phil Tagami and his partners from any liability in the event that the terminal proved a bust.

Although the City made its original deal with a joint venture consisting of Prologis (one of the world’s largest logistical infrastructure companies) and California Capital and Investment Group (CCIG), the Tagami company that actually has a creditworthy balance sheet, the City agreed that CCIG could assign all its rights under its agreements with the City to any affiliated business without showing that the affiliate had any assets or financial capability.

Thus, a shell corporation without any assets of its own could substitute for the creditworthy companies which originally negotiated the terms of the lease disposition and development agreement with the City of Oakland. What would that mean if the project went broke? Oakland would have no one to sue for lease payments owed to the city, and could only ‘recover’ worthless coal-shipping infrastructure that would require enormous investment to repurpose for productive use. Tagami and his partners, on the other hand, would walk away with the cash.

Swindling the People of Utah?

Enter the new legislation in Utah.  The money for “a bulk commodities ocean terminal” could be used to finance a terminal in Oakland or in Baja, although these funds are intended for local investment.  The money comes from rebates of mineral leasing revenues collected by the federal government from companies extracting fossil fuels from federally owned land. These rebates, by law, are supposed to spent helping communities that are unable to assess property taxes against federal land to meet the counties’ needs for construction and maintenance of roads, waterworks, and similar public projects. In Utah, the Community Impact Board (CIB) has authority over these rebates and decides how to spend them or lend them to local governments impacted by mining.

Lawyers question whether it is lawful to invest these funds in a mining business, no matter how many intermediate transactions are put in place to obscure the actual destination of the money.

It gets worse though.  If passed, SB248 would allow the State to turn $53 million over to a subsidiary of a coal company without recourse if the investment went belly-up.  SB248 specifically provides that the loan to a multi-county association would be “secured solely by a pledge by the interlocal agency of net revenues received” from the coal terminal and would otherwise leave the multi-county association off the hook.  In other words, the bill lets the State claim it is not making an outright loan to a private business without assessing the risk, even though that’s precisely what it’s doing; but, on the other hand, if the multi-county association makes an unwise investment that produces no revenue, it will not be required to reimburse the State.

But wait a minute.  Surely there must be some “due diligence” that the counties must perform before they can get ahold of the $53 million. Actually, no.  The main requirement (aside from some procedural steps) is that the counties must submit an application that demonstrates they have “taken steps to plan for a bulk commodities ocean terminal.”  Perhaps a sketch on the back of a napkin?

Swindling the Pension Funds?

In November 2017, before changing its name to Wolverine Fuels, Bowie Resource Partners tried to raise money for a merger with Murray Energy, the largest underground coal mining company in the United States. Bowie’s attempt to raise $510 million was laughed off the market by Wall Street in 10 days despite escalating interest offers that reportedly reached 13%.

Coal investments are toxic, not just because of divestment campaigns, but also because investors are dubious about the economic and regulatory future of coal, which is the most toxic of all fossil fuels and contributes the most to greenhouse gas emissions.  Bowie/Wolverine cannot interest informed private investors in the opportunities they are selling.

Here is where the Bank of Montreal came into the picture. As Commissioner Potter admitted, the plan was to raise $200 million from pension funds.  Pension funds are vulnerable to sales pitches for unrated debt for infrastructure projects because “infrastructure” sounds like a positive good.  Outside investment managers for private pension funds are not required by law to reveal to pension fund trustees the details of the particular projects in which an infrastructure investment fund invests.  Unless pension fund trustees have adopted rules prohibiting investments in coal infrastructure, their outside managers can make such investments without the trustees’ knowledge.

That seems to have been Bank of Montreal’s plan. According to Bank of Montreal’s investment banker Jeffrey Holt, “The script was to downplay coal.” In other words, a duplicitous scheme all the way around.

Beating Other Infrastructure Proponents to the Punch

One final aspect of SB248 deserves mention.  The lapse of time between the original bill allocating $53 million to “throughput infrastructure projects” for the Oakland coal terminal and the filing of SB248 last week has made it possible for proponents of other infrastructure projects to apply for the funds and spoil all the planning done by Wolverine Fuels and its political allies.

Rumors have circulated in Utah of other projects for which applications might be submitted to the Community Impact Board (CIB), including some, like rail lines at least partially located within Utah, that might be more politically saleable.  Polling has shown that most Utahans oppose the expenditure of mineral lease rebates on an out-of-state export terminal for the benefit of a private mining company.

By moving $53 million out of CIB’s jurisdiction, SB248 appears to be Wolverine Fuel’s solution to that problem.