How Robert Prichard’s Role in Gas Plant Talks Cost Taxpayers Millions: Part Two

In my last Huffington Post article, recall that Rob Prichard and his Toronto law firm Torys were retained by the Ontario Ministry of Energy, (effectively Dalton McGuinty) to pay off and make the U.S. hedge fund EIG quietly go away without further embarrassing the McGuinty government with EIG’s messy and public legal action against the McGuinty government.

As previously discussed, EIG had launched a $300 million legal action in Ontario against the Ontario Ministry of Energy and the OPA, over their alleged conspiracy with Eastern Power and its operating company Greenfield (collectively, Eastern Power) to breach the lending agreement that Eastern Power had with EIG.

EIG had provided a $263 million credit facility to Eastern Power in order to finance Eastern Power’s development and construction of a proposed Mississauga gas plant.

As previously reported, the McGuinty government cancelled this gas plant, within six months of the execution of this lending agreement — but not before approximately $59 million had been drawn down by Eastern Power from this lending facility.

Notwithstanding that the Ontario government was neither a party to this lending agreement or a guarantor of the loan, the Ontario government provided Prichard with a mandate to pay off EIG the outrageous sum of $146.5 million, which Prichard forked over in order to prevent any further litigation with EIG, with respect to this loan.

In my previous article, I argued that the McGuinty government did have a choice to fight this specious legal action and potentially save the taxpayers all or a substantial chunk of those $146.5 million dollars, but the McGuinty government chose instead to pay these greedy hedge fund dudes off, so as to protect the McGuinty government and its brand — at the clear expense of the Ontario taxpayers.

Now, ironically, the Wynne government has decided to cut $150 million in funding to the city of Toronto, over the next three years, according to a recent Globe and Mailarticle.

These funds had been promised to the city of Toronto by the former Liberal Finance Minister Dwight Duncan as compensation for the city of Toronto assuming some of the public housing costs, that had been downloaded on the city of Toronto by the province.

So the Liberal government has no problem cutting a cheque unnecessarily for $146.5 million to a greedy American hedge fund, as hush money. Similarly, the Wynne government has no problem cutting the city of Toronto off from $150 million that the city needs to house its homeless and disadvantaged.

Well, I am glad the Wynne government has its priorities straight.

This Liberal government appears to favour greedy US hedge funds, well-connected gas plant owners and its friends on Bay Street, to Toronto’s homeless and working poor.

In the context of the Liberal government blowing millions upon millions of dollars to hush up the Mississauga gas plant, the story just gets even worse.

Recall, Rob Prichard and his Tory law firm associates were paid by the McGuinty government the very generous sum of $350,000 in fees for two weeks of work.

It should be noted Prichard’s fees during those two weeks also included his work in settling the strained relationship with Eastern Power.

Or more accurately, Prichard’s fees were earned for paying off the costs incurred by Eastern Power in reliance of the gas supply contract it had with the McGuinty government.

And also for paying off costs that Eastern Power had incurred for matters quite unrelated to the subject contract with the province.

In addition, Prichard ‘s fees were earned from also paying off the additional relocation and financing costs that Eastern Power incurred in building a new alternate gas plant in more gas plant-friendly Lambton.

For simplicity, I am estimating that the McGuinty government once again chose to protect its image and its Liberal government at the expense of the taxpayers, to the tune of about $63.8 million dollars.

Let me elaborate.

Pursuant to a public tender, Eastern Power entered into, with the McGuinty government, a long-term fixed price contract in which it would supply energy generated from its natural gas plant, to the Ontario government, provided that Eastern Power could secure sufficient financing to develop, build and operate the said Mississauga gas plant.

Unfortunately, Eastern Power — a private company and owned by the Vogt brothers — was a thinly capitalized company. Eastern Power had great difficulty securing conventional Canadian bank financing.

According to the Ontario provincial auditor’s report, (page 12) as a result of numerous factors, including Eastern Power’s inability to secure financing in a timely fashion, Eastern Power was in apparent breach of its contract with the McGuinty government.

And the McGuinty government could have terminated this contract with Eastern Power well before it publicly announced the cancellation of the gas plant, and thus saved tens of millions of taxpayers’ money and a lot of aggravation.

Even after Eastern Power secured very expensive financing from EIG, the U.S. hedge fund, the auditor noted on page 19 of his report that Eastern Power may still have been in breach of the government’s contract. The auditor stated:

“We noted that EIG alleged that Greenfield (Eastern Power’s operating company) had breached 17 covenants of the lending agreement as of January, 2012…Since some of those covenants had been breached prior to the cancellation of the plant, Greenfield may well have been potentially in default of the agreement (Government contract) and if so possibly subject to penalties at the time the plant was cancelled.”

When the McGuinty government announced the cancellation of the Mississauga gas plant, according to the auditor’s report (page 13), government officials were looking at least two obvious options: 1) terminate the contract with Eastern Power or 2) try to reach a settlement with Eastern Power.

According to same auditor’s report, the McGuinty government unfortunately chose door number two, that is, negotiate a settlement with Eastern Power, because the government feared that by unilaterally terminating the Eastern Power contract, this action would trigger lawsuits from both Eastern Power and EIG.

The auditor wryly noted, that notwithstanding that the McGuinty government chose to negotiate, the hedge fund EIG still brought legal action against the McGuinty government.

Once again, I believe that in order to properly safeguard taxpayer money, it would have been far more prudent for the McGuinty government to take a hard line with Eastern Power.

Instead, once again, the McGuinty government appeared so desperate to avoid a messy and public litigation battle arising out of justifiably terminating the contract with Eastern Power, that the McGuinty government bent over backwards to accommodate the Vogt brothers of Eastern Power.

What the Vogt brothers lacked in capital, they made up in chutzpah — that is, unmitigated gall.
They knew that McGuinty was so desperate for a deal, that the Vogt Brothers made outrageous monetary demands.

The Vogts insisted that the government pay all their alleged incurred or “sunk” costs of $43.8 million, which Prichard apparently recommended paying — notwithstanding according to the auditor’s report, which states that only about $8 million could be actually supported with documentation at the time.

The auditor noted on page 16 of his report:

“Greenfield was expected to provide support for the costs at a later date. We found the support to be adequate for $8 million of costs. However, we found that about $36 million in reimbursements to Eastern Power for labour costs, including the cost of external consultants was never properly supported.”

Instead, had the government terminated the contract and forced Eastern Power to spend many years of litigation fighting the Government and justifying its “sunk costs” (that is, its expenditures on labor and equipment). With hard, verifiable, written supporting evidence, the Vogts would have probably settled for a $10 million recovery, as opposed to the $43.8 million paid to them. Estimated savings to taxpayers — $33.8 million.

Then, to add further insult to the financial injury of the taxpayers, Eastern Power insisted that the McGuinty government pay the sum of $19.6 million for matters unrelated to the disputed contract with the McGuinty government, and for which, I maintain, the McGuinty government had no legal obligation.

On page 15 of the auditor’s report, you can almost hear the auditor in utter amazement and disbelief report that, Eastern Power demanded a settlement of $15.4 million to be paid to it, arising out of its outstanding legal dispute with the Ontario Electricity Financial Corporation (OEFC), over its Keele Valley landfill gas plant.

As a precondition to beginning any negotiation regarding the Mississauga gas plant contract!

The Keele Valley landfill dispute had nothing to do with the Mississauga gas plant. But the OEFC and the OPA willingly coughed up $15.4 million in taxpayer money, just to bring the Vogts to the negotiating table.

But it even gets worse, if that is possible.

According to the auditor, ( page 17) the McGuinty government, as part of its settlement with Eastern Power and on the recommendation of Prichard, paid Eastern Power the sum of $4.2 million to reimburse it for the lands it purchased upon which to build the Mississauga gas plant and the adjoining 17,000 square foot warehouse used for storage. The sum of $4.2 million was the original purchase price for these properties.

But here is the kicker. The McGuinty government permitted Eastern Power to retain ownership of these properties.

And the auditor noted that the market value of the undeveloped site alone (excluding the warehouse) had increased to an estimated value of $5.3 million.

So let me recap. Prichard and the McGuinty government reimbursed Eastern Power for its original investment of $4.2 million, but instead of the government taking over the properties and then potentially reselling them at a profit, Prichard and McGuinty let the Vogts retain the properties so that the Vogts can make a huge profit on the resale of these properties — perhaps even triple their money!

The auditor concludes on the same page 17 of its report. “With such an increase in the land’s value since Greenfield purchased it, the OPA may have realized a net gain if it had chosen to restore the site, and we believe it should have assessed this option more formally. ”

This is classic, diplomatic and understated bureaucratic speak.

Reading between the lines, the auditor may be really saying to the OPA:

“Are you guys out of your friggin’ minds? What were you guys smoking? This is the dumbest deal ever!”

Once again the McGuinity government, through the good offices of Prichard, has appeared willingly to pay not only hush money, but bonuses on the hush money to Eastern Power so as to avoid public embarrassment and messy litigation.

And once again, had the McGuinty government terminated the contract and challenged Eastern Power in court, I believe that the McGuinty would not have been forced to pay the above $19.6 million. Savings to the taxpayers — $19.6 million.

Furthermore, as I have stated in my previous article and ad nauseam, the Ontario government has many very competent and experienced litigators and business lawyers in its Finance and Energy Ministries and engineers in the government.

There was no need to go outside to hire Prichard, his firm and other outside legal negotiators and engineers at a total price of about $ 4.4 million dollars in fees, according to the auditor’s report (page 20), to secure the very costly settlements that these Bay Street lawyers negotiated. Savings to the taxpayers — another $4.4 million.

Lastly, it would have been more prudent for the government to bring a more experienced and more financially viable and capitalized gas plant developer and operator, than the Vogts, to build and operate an alternate gas plant in Lambton.

Accordingly, in such a scenario, the government would not have been further stuck with an outstanding bill for $6 million that Eastern Power owed to another equipment supplier. And which, as part of the government settlement, you guessed it, the government willingly shelled out to close the deal with the Vogts (page 19 of thereport).

Savings to taxpayers — $6 million.

Estimated total savings — about $63.8 million.

That is a lot of cheddar, sport fans.

I hope the Ontario legislative committee follows the money on this one as well, and calls on the carpet — all those government and non government lawyers who either opposed or supported settling with Eastern Power — for their sworn testimony.

If you take into account McGuinty’s financial kiss of $146.5 million to the U.S. hedge fund and about $63.8 million that the government should not have shelled out to the Vogts of Eastern Power and others, that is about $210.3 million that could have been better spent on public housing and the working poor in Toronto and in other cities of Ontario.

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