Utah Gov. Signs Bill to Fund Oakland Coal Terminal

Utah Gov. Gary Herbert this week signed a bill appropriating $53 million in state money to fund construction of a coal export facility in Oakland.

For over a year, Bowie Resource Partners, a Kentucky-based coal company with mines in central Utah, had been attempting to line up $53 million in the form of a loan to four counties from the Community Impact Board (CIB), an agency that disburses grants and loans to mitigate the impacts of extractive industries on federal land within their boundaries.  Such localities receive no tax revenues from federal land so the federal government rebates a share of the royalties it receives from mining, oil, and gas companies so that local governments can afford such things as road maintenance, water and power infrastructure, schools, and other local projects.

When questions arose concerning the legality of using CIB impact mitigation funds for an out-of-state project that would expand, rather than mitigate, the impact of coal mining in Utah, Republican state Sen. J. Stuart Adams authored a bill to circumvent the CIB by providing a grant out of the state’s transportation budget.  According to a recent report in the East Bay Express, Adams is among the Utah politicians who have received campaign contributions from Bowie Resource Partners.

Adams introduced his bill in the final weeks of the Utah Legislature’s session, a maneuver that left little time for opponents to mobilize public opposition.  Even so, a major Utah newspaper, the Deseret News, owned by the influential Mormon Church, published an editorial opposing the bill and questioning why public funding was needed if the project was viable on its economic merits.  The Utah legislature passed the bill by the deadline and the governor signed it Tuesday.

Pension Funds Targeted

As No Coal in Oakland explained in a recent post, the $53 million of public money from Utah is only a fraction of the overall $275 million that investment banker Jeff Holt plans to put together to fund the project.  The East Bay Express has reported that Holt has been orchestrating the effort to build a coal export facility in Oakland.

According to the plan Holt pitched to the four central Utah counties in March 2015, $200 million of the $275 million would be raised from pension funds; $50 million from Utah public funds; and the other $25 million from “sources in California” (apparently a reference to California public funds for local site preparation and infrastructure).   The pension funds, by far the largest stakeholders in the project, would only be debt investors–i.e., lenders without recourse if their private unrated debt proved worthless.

Meanwhile, Holt’s plan called for Bowie, the coal mining company, to own 100% of the common Class A stock in Terminal Logistics Solutions, the new company that Holt said would be created to operate the terminal.  Under Holt’s plan, Bowie would put up no money of its own, but would have total control of the operation.

Although this complex transaction involves public funds in Utah and California, there appears to have been no public disclosure of the identity of any pension funds willing to invest $200 million in a coal terminal at a time when many pension funds are divesting from coal and it is becoming increasingly difficult to lure investors of any kind into large investments in what is perceived to be a dying industry.

At the same time that the legislation in Utah was pending, the press has been publishing ever gloomier appraisals of the coal industry’s declining fortunes as coal loses out to cleaner energy sources.  Last Sunday’s New York Times carried a typical article entitled “As Coal’s Future Grows Murkier, Banks Pull Financing.”  According to the Times, growing numbers of banks are not willing to lend money to the coal industry.  Bowie came out for special recognition because of Bowie’s apparent inability to complete the acquisition of several major Western coal mines from Peabody, a coal mining giant hovering on the edge of insolvency:

One of Peabody’s best hopes for avoiding bankruptcy, analysts said, was the potential sale of three mines to Bowie Natural Resources.

Bowie is a rare breed of coal company. It has been expanding its operations, focusing largely on Utah, a state that still relies primarily on coal to generate electricity. Still, Bowie in recent weeks has apparently had trouble raising the full $650 million in debt to acquire the mines.

If banks are balking at Bowie’s voracious appetite for loans, how then will conservative pension funds be lured into financing Bowie’s Oakland beachhead to the tune of $200 million?

One answer may be that the pension fund trustees will not be told that they are investing in coal.  A “teaser” that Holt created to show how the Bank of Montreal would market the opportunity to fund the coal terminal made no mention of Bowie or coal.  The terminal is described generically as a “multi-commodity bulk terminal” located somewhere on the “West Coast, US.”

Such investments can be further sanitized by grouping them with other investments in a private debt infrastructure fund.  “Infrastructure” presently has positive associations for many of the same prospective investors who would eschew investments in fossil fuels.  Holt is a managing director of Bank of Montreal’s Infrastructure Capital Markets group which advertises its expertise in private placements in debt capital markets, shorthand for connecting up borrowers and lenders for a fee.

One thing appears certain: if the deal goes through, the Bank of Montreal and Jeff Holt will do well regardless of the long-term fate of the other investors. Workers who have no say in whether their future pensions are tied to a risky coal venture will pay the price if the Oakland coal terminal turns into a “stranded asset.”

Risk to Utah Taxpayers

Utah taxpayers may also be blindsided.

In an interview with the Salt Lake Tribune, Sen. Adams made light of the risks, describing the mechanics of the Utah legislation as a trade between two accounts, like trading two five-dollar bills for a ten, but the reality appears to be that Utah is planning to invest public money into the privately-controlled entity, Terminal Logistics Solutions, with no guarantee that the public will see any return.

Tom Sanzillo, director of finance for Energy Economics and Financial Analysis, has characterized the investment as “a highly risky undertaking that is likely to end in losses for Utah.”   Writing in an op-ed piece published in the Salt Lake Tribune published before the bill became law, Sanzillo said the risks include:

• That the bill would essentially allow a low- or no-return subsidy for a public-private partnership. It would allow this subsidy to take the form of a loan or grant to local governments and it includes a mechanism that ultimately would let the state forgive loan and interest payments. The proposed statute would limit state recourse for repayment to revenue from the port project, which isn’t likely to pan out.

• The bill offers no guidance as to how state and local officials are to protect Utah taxpayers in port negotiations. Key here is whether the state’s $53 million is subordinated to the $200 million that the private sector is supposed to invest alongside this public money. The original state application by the Utah counties says that a $200 million companion investment from a private institutional investor would be available by June 2015. This benchmark has been missed. That means the only player in this transaction with an open checkbook and a deep pocket is the state of Utah.

• The bill is constructed on the back of an existing state investment vehicle designed to assist local governments in maximizing the best use of their resources. This transaction would fly in the face of that purpose, concocting a complex entanglement in global coal markets at a time of deep distress across these markets.

“If Utah were to take part in the Oakland port scheme it would be buying a pig in a poke,” Sanzillo concluded.

Confirming the speculative nature of further investments in coal export infrastructure, this month China released new statistics indicating that it used less coal last year than in 2014, suggesting that the country has passed its peak in coal consumption.