Tuesday, September 29, 2015

Financial fraud at BC Hydro?

What is a deferred expense?
The term "deferred expense" is used to describe a payment that has been made, but will not be reported as an expense until a future accounting period.
In 2002, WorldCom, a company with a peak net worth of $100 billion, submitted the largest bankruptcy filing in United States history. The action followed an accounting scandal that created billions in illusory earnings. Edmonton born Bernard Ebbers, WorldCom's former CEO, is now in Louisiana, serving the tenth year of a 25-year sentence.
Fraud at WorldCom
WorldCom was accused of having inflated profits by $3.8 billion over a period of five quarters. The company undertook the massive fraud by capitalizing costs that should have been expensed. Capitalization of these costs allowed the company to spread the expenses over several years instead of recording all the costs as expense in the current period. Such deferral of costs allowed the company to report lower expenses and therefore inflated income.
But, beyond its flawed financial reporting, WorldCom was spending huge sums to add capacity when the market was already oversupplied. Similarly, BC Hydro, despite 10 years of flat domestic demand, is proceeding with unprecedented additions to its power capacity. In addition, the utility has contracted for so much high-cost power from private producers that it has at times been forced to turn off its own low-cost generators.

In fiscal year 2015, BC Hydro purchased 13,377 GWh of electricity from independent power producers for $1,064,000,000 ($79,540 per GWh). In the same period, BC Hydro sold 14,020 GWh to large industrial users for $748,000,000 ($53,250 per GWh).

In other words, each GWh of power purchased from IPPs was resold for $26,290 less that it cost. However, the loss was not limited to $352 million since the utility had to pay distribution, administration and other overhead costs in addition to the power acquisition price.

Note: The chart above is created by using BC Hydro reports that disclose purchases from independent power producers and electricity sales to residential, commercial and industrial users. The quantity of power from publicly owned generating facilities is calculated as the difference between domestic user demand and private power supplied.

What is the driving force between BC Hydro's style of operations? Clearly, it not a desire to meet needs of the province's electricity consumers.

Not to be forgotten is that term-debt of BC Hydro is rising rapidly. With current capital projects estimated above $10 billion and with British Columbia's record of exceeding initial estimates by 100% and more, long term-debt of the utility may exceed $30 billion within five years.

That borrowing is in addition to the more than $50 billion in long term energy purchase commitments.

Since Liberals assumed power, BC Hydro has paid $10.8 billion to the provincial and local governments. In the same time period, the utility's long term-debt rose by $9.4 billion. Consequently, it is a simple argument to say that every dollar transferred to government was a borrowed dollar.


Justine Hunter at The Globe and Mail provided BC Hydro preps for rate review. It contains this statement:
Because rates haven’t kept up with Hydro’s real revenue requirements, the corporation has been amassing debt in what it calls “deferral accounts” – those accounts will reach more than $5-billion by 2018.
It an analysis that is less than honest. First, the deferred charges already exceed $5-billion by hundreds of million of dollars and that would have been apparent to Ms. Hunter if she'd read the 2015 annual report of the public utility. Secondly, the idea that debt and deferrals are caused because "rates haven't kept up" - as if prices have some animate existent of their own - is errant nonsense.

Readers here will know the reporting tricks are there to disguise actual results and facilitate transfers of "surplus equity" to government accounts. Thee Liberal Government defers BC Hydro expenses, then skims its pretend-profits to create pretend-surpluses. However, revealing that inconvenient truth would not serve groups the media wishes to serve.

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Monday, September 28, 2015

Trusted editorial content may not be trusted

Postmedia is a company in trouble. It cannot sustain crippling debt to American debt holders with revenues from traditional advertising, circulation and digital paywalls. One of its responses is Postmedia Content Solutions, which aims to elicit cash in controversial ways. Part of their sales pitch:
We've learned that advertisers receive increased engagement when pairing their thought leadership with our trusted editorial content.

...You can provide us with content you've already created, or you can work with our dedicated Postmedia Works team to develop something brand new!
Writing at The Common Sense Canadian, Rafe Mair described - better than I might - how the "partnership" system works. Postmedia partners with LNG lobby to sell Woodfibre LNG – latest lapse in journalistic integrity.

On Saturday, the Vancouver Sun illustrated how its resource industry partners pair interests with the Sun's "trusted" editorial content. A column was written by someone I mentioned here more than five years ago:
Columnist Don Cayo is one of the Vancouver Sun's advocates for big business. In the nineties, he ran the Atlantic Institute for Market Studies, a corporate-funded charity operating as a think-tank based in Halifax. Along with umpteen sister "charities" such as the Fraser Institute, Fraser Institute Foundation, Frontier Centre for Public Policy Inc. and the Canadian Constitution Foundation, it campaigns steadily for elimination of public health and other services and reductions in government spending and lower taxes, at least for higher income folks...
Taxing smarter would mean B.C. could collect more revenue from its resources is an ironic title. No one the Vancouver Sun represents is interested in BC collecting more natural resource revenue. I couldn't resist leaving a comment at the Sun's website but I repeat it here because it may not survive long at the newspaper's site.
Mr. Cayo states:
As well, "From 2009 to 2013, B.C. collected $2.3 billion from resource-right auctions and a further $2 billion from gross-revenue royalties."
A more honest report would inform readers that, in current days, natural gas royalties are far different. It might also note that B.C. receives less in mining tax revenue than it allows in mining tax credits to businesses and individual investors.

According to B.C.'s First Quarter Report, "Cash sales of Crown land tenures" have generated only $9.2 million in the first 9 months of 2015 and are forecast to bring in a total of $44 million in three fiscal years, 2016 to 2018 (Page 45).

Natural gas royalties are forecast to be $220 million in the current fiscal year (Page 15) but unrecorded drilling and other credits owed producers (a total now over $1.4 billion) have grown by $478 million in the last two fiscal years. If more prudent accounting principles were used, the province's gas royalty account would likely be in deficit.

By the way, Ministry of Natural Gas Development is forecast to spend $444 million in fiscal year 2016, up from $401 million in FY 2015 (Page 16).

Natural resource companies remove, sell and deplete public assets and they aim to pay the least possible share to resource owners. To further that goal, corporations invest millions of dollars in friendly politicians, public relations efforts, advertising, and "think tanks" that all try to convince citizens to moderate revenue expectations. In British Columbia, they've been successful.

In 2015, British Columbia received $570 per capita from natural resources. In 2001, the per capita revenue was $1,250 from natural resources, in 2015 dollars. Not surprisingly, the volume and value of materials now produced is significantly higher.

Keep in mind that when resource companies acquire equipment or when they rent executive offices in the downtown, the payments are not determined by revenue streams or profitability of the tenants. It is only taxpayers that are expected waive their right to a fair share of value.

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Thursday, September 24, 2015

The high life

The posh New York real estate linked to a US investigation of Malaysia’s prime minister, BC Liberal's new LNG business partner.
Malaysia’s prime minister must be feeling the heat. Accused of pocketing nearly $700 million from a state development fund, Najib Razak now faces an investigation by the US Justice Department’s Kleptocracy Asset Recovery Initiative, according to the New York Times. Besides the missing mega-millions, investigators will focus on properties in the US that were purchased in recent years by shell companies belonging to the prime minister’s stepson, Riza Aziz, as well as other real estate connected to a businessman and close family friend, Jho Low...

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Tuesday, September 22, 2015

Patronage, corruption and cronyism UPDATED

The September sale of BC Petroleum and Natural Gas Rights realized 577 thousand dollars, bringing the eight month total in 2015 to almost $9.5 million. In the year before Christy Clark became Premier, the total for the same months was almost $782 million. During January to August of 2008, rights sales brought in $2.3 billion, an amount 250 times the value of the current year.

When Christy Clark became leader of the BC Liberal Party, a key supporter and member of her transition team was Gwyn Morgan, a person with boardroom ties to two of the Liberals' favourite corporations: Encana and SNC-Lavalin. At the time, Morgan was also a director of HSBC, another ethically challenged operation.

We can't know what advice Gwyn Morgan gives to Christy Clark but we can see benefits the Premier provides to cronies in the natural gas business. The chart below displays provincial gas revenues from royalties and rights sales in the four years before and the four years after Clark took control of the BC Liberal Party.

Of course, these numbers are incomplete without productions statistics, which are provided by B.C. Oil and Gas Statistics, downloaded July 20.

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