WASHINGTON - A Nebraska court has ordered two public power executives associated with the Central Plains Energy Project to pay $3.3 million in damages to the American Public Energy Agency, a gas purchaser and bond issuer, ruling they took proprietary information about prepaid gas transactions that APEA helped to pioneer and conspired to use it to win contracts away from the agency.
The two executives are Evan Ward, director of capital strategies for the nonprofit Nebraska Municipal Power Pool, which provided energy-related services to APEA under contract, and J. Gary Stauffer, executive director of NMPP. In his July 8 decision, Lancaster County District Court Judge Steven D. Burns also prohibited the NMPP, Ward, Stauffer, and John Harms, a gas analyst and member of the NMPP management team, from participating in the Central Plains Energy Project.
Burns also ordered the three men and NMPP to pay $477,828 in damages to Falls City, Neb., in connection with the creation of CPEP.
The ruling may result in a management shake-up at Central Plains, which has more than $529 million of revenue bonds outstanding and is planning to issue more later this year to finance the purchase of natural gas under long-term prepaid contracts. It raises questions about whether and how CPEP's management will change, whether the Securities and Exchange Commission's Rule 15c2-12 on disclosure is deficient by not ensuring bond issuers disclose wholesale management changes, and whether public entities can have proprietary information, market participants said.
APEA representatives applauded the ruling. The "decision allows APEA to regroup and move forward with its business," said Bart McLeay, a lawyer with Kutak Rock LLP who represented APEA.
The NMPP said in a prepared statement that it was "disappointed by portions of the judge's ruling" and that it "was simply attempting to facilitate opportunities for its members and others for lower cost natural gas supplies.We are reviewing the ruling and considering all of our options."
The defendants typically would have 30 days from the date of the ruling to file an appeal, a court clerk said.
NMPP officials would not comment on whether they will appeal. Market participants, however, said the power pool could appeal on grounds that a public entity cannot possess proprietary information.
According to the APEA's complaint and interviews with those involved, the agency was formed in the 1990s and helped to pioneer prepaid gas transactions. In prepaid gas transactions, municipal utilities use tax-exempt bonds to finance the purchase of natural gas over a period of time, while also entering into a commodity swap with a third party to hedge against the risk of volatile gas prices.
The APEA issued billions of dollars of bonds through 2005 for such transactions. One of its customers was the National Public Gas Association, an interlocal group, which in turn sold the natural gas to the Omaha MUD, Cedar Falls, and other local systems.
Both the APEA and NPGA were provided with NNMP personnel and staff under contracts. Those NNMP employees oversaw the purchase, management, and resale of natural gas through the APEA and NPGA, according to court documents.
The CPEP was formed in September 2006, after Ward and Stauffer successfully brokered an agreement with the Metropolitan Utilities District of Omaha, a political subdivison of Nebraska that purchases and provides utility service, including natural gas, to the Omaha metropolitan area, and Cedar Falls, also a purchaser of natural gas. Thus, initially the members and customers of the CPEP consisted of MUD and Cedar Falls, which indirectly had been APEA's customers through its transactions with the NPGA.
Soon after its formation, the CPEP proposed to issue bonds to enter into a prepaid gas contract.
At that time, the Omaha MUD estimated it would save more than $58 million over 20 years.
But Falls City filed a lawsuit against the CPEP, NMPP, and five individuals connected with Central Plains project, including Ward, Stauffer, and Harms, asking the court in Lancaster County to issue a temporary preliminary injunction to prevent the issuance of the bonds.
Falls City filed the lawsuit on behalf of itself and NPGA, claiming that it had a contract with the NMPP, which was to benefit the NPGA and its members. Falls City claimed NMPP employees breached that contract and acted contrary to the interest of NPGA by forming the CPEP while being compensated by the NPGA.
The court denied Falls City's request for a temporary injunction and the CPEP proceeded with the bond issue and prepaid contract in early 2007. However, the court allowed the APEA to intervene in the lawsuit to sue Stauffer and Ward, claiming they conspired to improperly use or disclose APEA proprietary information by providing it to the CPEP and others. APEA officials claimed the CPEP would divert business away from it after it had delivered prepaid gas on contract with local purchasers and gas delivery entities for more than 10 years.
In fact, the APEA entered a dry spell after the CPEP's launch, landing no contracts after 2005 despite a major spike in prepaid gas deals nationwide, court documents said. Before that, the agency had averaged a contract per year.
The APEA accused Ward and Stauffer of taking and using proprietary information to compete with it, including complex economic models or spread sheets and a copyrighted handbook explaining these transactions, as well as their detailed knowledge of APEA's relationships with MUD and Cedar Falls.
In his ruling, Burns said that while the CPEP is a lawful endeavor, its creation was not. The judge said "unlawful or oppressive means" were used "in concert" by three executives and the NNMP, the nonprofit corporation that provided the APEA with financial services.
Ward was working for the APEA while simultaneously trying "in earnest to create an entity which would compete with APEA," Burns found.
Ward sent an e-mail signed "The Mole" encouraging the NMPP to change its relationship with the APEA, according to court documents.
Ward later distributed copies of a prepay structure used by the APEA for a bond deal, and other information. The defendants distributed a copy of APEA's transaction tutorial and a cash flow document, according to court documents.
Market participants said it is important that Burns found this information was proprietary to the APEA, even though it was a public entity.
"It may be argued that APEA is a governmental entity and therefore all of this information is publicly available," he said in the ruling. "It is also apparent that it would take very sophisticated calculations and estimates from publicly available information to produce things such as the pricing information for its gas purchases."
Stauffer, Ward, and NMPP were ordered to give back the proprietary information and were enjoined by the Nebraska judge from having anything to do with CPEP management. Ward's name appears on the $529 million CPEP bond statement as the project's manager, which many sources have said is a mostly administrative function, with some accounting responsibilities.
Officials with the Omaha MUD said last week that, with Ward's absence, the district will take over management duties of the Central Plains Energy Project.
But market participants point out that the MUD's primary experience is with purchasing and distributing natural gas and that it has never managed prepaid gas transactions. "It doesn't have any experience operating an interlocal agency," said one source who did not want to be identified.
Asked about this issue, Dan Crouchley, senior vice president and general counsel of the Omaha MUD, said the public power provider "is capable of doing it. And it should allow for a smooth transition."
The source also questioned whether the SEC's Rule 15c2-12 is deficient. The rule bars broker-dealers from underwriting the bonds of issuers who have not agreed to provide annual financial and operating statements as well as material event notices if any of 11 specified material events occur. Management changes are not among those specified material events.
"If an issuer completely loses it's management, wouldn't you think that is material?" the source asked.
First American Funds holds some CPEP bonds in its Nebraska ax Free Fund portfolio, a spokesperson confirmed this week.
Another similar bond-funded project that was expected to close by October 2007 will move forward this year, Crouchley said.