Suit Claims Developer Didn’t Intend to Build Irwindale Waste Plant

IRWINDALE — The organizers of a plan to construct a waste-to-energy plant in Irwindale are being sued for $11.5 million by a technical consultant who claims that the organizers never intended to build the plant but only wanted to profit from its financing.

The suit, filed in Los Angeles Superior Court, seeks $11.5 million from Pacific Waste Management Corp.; its parent company, Conversion Industries Inc., and Conversion’s president, John P. McGrain, all with offices in Pasadena.

McGrain termed the allegations “absolute baloney,” and said that Pacific Waste is committed to building the Irwindale plant and is continuing its efforts to obtain construction permits.

He said that the company has spent more than $7 million on the project. The company has refused to say how the money has been spent.

Expenses Paid by Bond Interest

Most of these expenses were paid by a $395-million bond issue sold by the Irwindale Resource Recovery Authority, an agency of the city of Irwindale.

Because the bonds were issued by a government agency and are tax-exempt, they carry a comparatively low interest rate. The proceeds were reinvested at a higher rate, generating an estimated $13 million in 18 months.

Pacific Waste was authorized to use the interest income to pay the project’s development costs.

The lawsuit, filed in December by David P. Diggins and his consulting firm, Diggins Inc. of Laguna Beach, alleges that the defendants “set about to erect an elaborate charade whereby they misrepresented the capacity and profitability of the project in order to obtain the issuance of bonds.”

“The sole interest of the defendants,” the suit claims, “was to obtain the ‘float’ or ‘arbitrage’ between the interest paid on the bonds and the interest rate realized by investment of the proceeds from the sale of bonds.”

Stephen J. Tully, attorney for Diggins, refused to elaborate on the charges or discuss evidence to support them.

Allegations Are Denied

Attorneys for McGrain, 40, a former securities broker, and the two companies have filed responses to the lawsuit that flatly deny the allegations.

The suit says that the defendants offered Diggins $1.5 million to serve as technical adviser to the Irwindale project about two years ago but repudiated the agreement a year later.

The suit seeks payment of the $1.5 million plus $10 million in punitive damages.

Diggins said in an interview that he put “quite a bit of work” into the project and that his efforts helped Pacific Waste obtain financing.

But, he said, he also developed figures that showed the project was economically infeasible. He said when he raised that point with McGrain, he was told that Pacific Waste did not intend to build the plant anyway.

McGrain insisted to The Times that the Irwindale project is feasible and denied that Diggins ever was hired for the project.

He said that Pacific Waste considered hiring Diggins to represent it in negotiations to buy equipment for the Irwindale plant because of his experience in that field, but did not because his fee was too high.

Proposed Power Plant

Pacific Waste has proposed construction of a plant that would burn 3,000 tons of trash a day to generate 80 megawatts of power, enough electricity to serve 40,000 homes.

The plant would earn money by selling the electricity to Southern California Edison Co. and by charging trash haulers for refuse disposal.

The company’s contract with Edison sets rates for 10 years under which it could earn $736 million, plus additional bonus payments for reliability.

But if the plant is not operating by November, 1989, Edison has the option of terminating or renegotiating the contract.

Permits Required

Pacific Waste must obtain permits from both the state Energy Commission and the federal Environmental Protection Agency to build the plant.

Its state application was suspended April 1 and will not be reinstated until the company lines up waste-supply contracts and finds ways of offsetting air pollutants that would be emitted by the Irwindale plant.

The Irwindale Resource Recovery Authority sold $395 million worth of bonds for the project in December, 1984, under an agreement that promised the authority a share of the plant’s income.

Initially the bonds were sold and the proceeds reinvested in six-month periods, with a spread between the interest rates on the bonds and those on the reinvestments ranging from 1.5% to 2.7%, yielding an estimated $13 million for the project’s development fund.

Information Sought

Attorneys for Miller Brewing Co., which owns a brewery across the Foothill Freeway from the proposed site of the waste-to-energy plant and opposes the project, have asked the city of Irwindale for information about how interest from the bond issue has been spent.

Charles Martin, who is both city attorney and city manager for Irwindale, said he has written a letter to Manufacturers Hanover Trust Co. of New York, the bond trustee, asking for a report on expenditures.

Martin said he regards the interest proceeds as money to be used by Pacific Waste to advance its waste-to-energy project and is not particularly concerned with the expenditures as long as the $395 million itself remains secure so that investors can be repaid if the plant is not built.

The bond issue provided that interest rates could be adjusted every six months for the first 18 months with the expectation that the bonds would be converted to a fixed rate by July, 1986, with repayment guaranteed thereafter by plant revenue.

Unforeseen Delays

McGrain said that unforeseen delays forced changes in the financing plan. However, he said, the bonds have been converted to a fixed rate.

McGrain said that the bonds are now held by the investment firm of Ehrlich-Bober & Co. of New York, which is the bond underwriter, and will be remarketed soon.

The fixed rates range from 7% on bonds maturing in 1991 to 9.5% in 2015, according to an official with Manufacturers Hanover Trust Co.

McGrain said that these rates mean that there may not be any additional income gained by reinvesting the proceeds. .

Statements filed by Conversion Industries with the Securities and Exchange Commission indicate that although the company has little revenue, its executives and consultants have been well paid, partly from money generated by the bond issue.

Costs Exceed $5.8 Million

Conversion Industries reported that development costs payable from bond interest through April 18 exceeded $5.8 million.

The statement did not specify how the money was spent, but noted that HDR Techserv, which is managing the effort to obtain state and federal permits for the plant, had received about $2 million.

HDR Techserv’s parent company, Centerra Development Inc., provided most of Conversion’s income in 1985 by buying a 2% interest in future revenue from the Irwindale project for $700,000.

According to a prospectus published a year ago in connection with a stock offering by Conversion, Centerra had an option to acquire an additional 6% interest in the Irwindale project for $2.1 million, but elected not to exercise it.

Special Bonus

Conversion’s financial statements disclose that McGrain was paid a special bonus last year of $345,000 for his services on the Irwindale project, in addition to $110,000 in salary, and received a further bonus of $148,750 in January.

Dennis Enright, a New York City financial consultant to Pacific Waste, received $392,500 in fiscal 1985 and an additional $101,250 in January, all paid from bond revenues, according to documents filed with the SEC.

In addition, Michael Montgomery, a South Pasadena attorney who is a member of the state Fair Political Practices Commission, was paid $164,583 in January as the final installment of his fee of $493,750 as Pacific Waste’s counsel on the 1984 bond issue, according to documents filed with the SEC.

Martin, as bond counsel to the Irwindale Resource Recovery Authority, earned the same amount, though his payments were spread out in four annual installments, with the final one due in 1988.

No Longer Paramount

McGrain said that while the Irwindale project remains important to Pacific Waste and its parent, Conversion, the project is no longer as central to the companies as it was when the project was initiated.

The Conversion prospectus declared that the company’s only material assests were its contract with Irwindale to build a waste-to-energy plant and its access to bond proceeds.

Since then, the company has acquired rights or undertaken negotiations to acquire interests in a waste-to-energy plant in Hudson Falls, N. Y., a project to generate electricity from natural gas in Saskatchewan, Canada, and hydroelectric plants in Idaho, according to SEC filings.

Conversion reported to the SEC that it ended its 1985 fiscal year last November with assets of $1,799,410 and liabilities of $340,752.

In June, Conversion announced that it had sold more than 1 million new shares of stock, netting $6.1 million for the company.

Conversion announced on July 1 that it had agreed to acquire a Baltimore company with interests in waste-to-energy projects in Pennsylvania and Florida.

The company said that its three largest stockholders as of April 18 were McGrain, Enright and Laurence J. Peck, a public relations consultant who is president of Pacific Waste.