Customers lose in El Paso Electric sale, ex-Texas PUC official says; EPE leaders disagree
- Aug 31, 2019 2:52 am GMT
Aug. 30--Whether the sale of El Paso Electric is a good move for customers depends on whom you ask.
El Paso Electric and its customers will be better off with the 117-year-old utility as a privately owned company rather than its current state as a publicly traded company subject to the whims of the stock market, officials with the utility and the J.P. Morgan Chase investment fund that wants to buy it said in recently filed documents.
But Kenneth Anderson, a former commissioner on the Public Utility Commission of Texas and a power sector consultant who wrote a report about the proposed deal, said he sees all the sale's value going to shareholders -- and little if anything for ratepayers.
Ted Houghton, a well-known El Paso businessman who commissioned Anderson's report, said it shows the proposed sale is "not a good deal for ratepayers or the utility" because too much money is going to a small group of shareholders, company board directors and executives. Not enough money is going to customers or staying with the utility, he said.
"I am not against the sale," but state regulators and city officials need to help negotiate a different deal, he said.
J.P. Morgan's Infrastructure Investments Fund, or IIF, a New York based investment fund for retirees and their families, agreed June 1 to buy El Paso Electric for $4.3 billion, which includes about $2.8 billion for the company's stock shares and assuming about $1.5 billion in company debt.
The sale must be approved by two-thirds of shareholders -- most of whom are large institutional investors who are scheduled to vote at a special meeting Sept. 19 -- and by Texas, New Mexico and federal regulatory agencies, and the city of El Paso before it can become final.
Texas Public Utility Commission begins review process for proposed sale
The Texas Public Utility Commission has agreed to hear the case directly, possibly in November, rather than have the hearing held before an administrative law judge.
The PUC has six months, or until mid-February, to approve or reject the sale application filed Aug. 13 by El Paso Electric and IIF, according to a ruling by a PUC administrative law judge.
People and organizations that want to intervene in the case must file a notification with the PUC by Sept. 17.
First to file as intervenors in the case are: Texas Industrial Energy Consumers, a group representing large electric users in the El Paso area; the city of El Paso; and the Texas Office of Public Utility Counsel, which represents consumers.
EPE and IIF also recently filed a sale application with the New Mexico Public Regulation Commission and the Federal Energy Regulatory Commission, or FERC.
IIF, with an asset value of $12.2 billion at the end of June, according to the PUC filing, owns 19 companies in the U.S., Europe and Australia, including 10 in the energy sector. The companies employ about 9,000 people and serve about 20 million customers, it reported.
IIF's large size and its resources will help the utility secure project "funding efficiently rather than being subject to the constraints imposed by EPE's (small) size and public market volatility," Nathan Hirschi, EPE chief financial officer, said in testimony filed with the PUC.
El Paso Electric also "will benefit from its association with IIF's portfolio of companies," which will provide the utility with additional resources and expertise, especially in the renewable energy sector, Hirschi said.
Anderson, the ex-PUC commissioner, said El Paso Electric as a public company has been able to get financing to build power plants and other projects in recent years.
Ellen Lapson, a New York financial consultant working for IIF, testified in the PUC filing that the sale will free EPE "from the demands of public shareholders for a constant pattern of quarterly growth in reported earnings and dividends." IIF's investors have a much longer time horizon "than the short-term focus of mark-to-market investors" in the stock market, he said.
El Paso Electric's 429,000 customers in the El Paso and Las Cruces areas will benefit by getting a $21 million rate refund over three years, and the communities will benefit from $100 million over 20 years, or $5 million a year, to promote economic development in the company's service area, Hirschi and other EPE and IIF officials pointed out in their filed testimonies.
Millions for shareholders, executives; 'pennies' for shareholders
Anderson noted that shareholders, company executives and company board members would get millions of dollars more in share payouts from the sale than the $21 million in bill credits, which, he said, will only amount to pennies for ratepayers.
More: El Paso Electric executives, board members to get big paydays under proposed sale
If the $21 million rate refund were allocated evenly to all of El Paso Electric's customers in Texas and New Mexico, it would amount to around $1.36 per month over the three-year period that the utility wants to allocate the bill credit, Anderson noted. However, it's likely residential customers would get a smaller credit and commercial customers a larger one, Anderson said.
The economic development fund is a nice feature of the sale, but if it's coming from El Paso Electric's revenues, that's $5 million a year that won't be invested in the utility's electric system, he said.
El Paso Electric already funds economic development efforts, Anderson said. The company puts millions of dollars a year into a city of El Paso economic development fund with a portion of its city franchise fee, as mandated by the city.
It's likely shareholders will approve the sale, Anderson wrote in his report, because more than 95 percent of El Paso electric's shares are owned by institutional investors, who would get $68.25 per share from IIF -- 17% above the company's closing stock price of $58.20 per share on May 31, a day before the sale agreement was signed. The stock has been trading for more than $66 per share in recent weeks.
"I am not against this transaction," Anderson said in a phone interview. IIF might be a good owner for the company, he said.
The basis of his report is "not that this be rejected, but here are the issues that the intervening parties need to smoke out in the proceedings," so certain requirements can be placed on the sale by the PUC, the city of El Paso and others, Anderson said.
Premium sale price raises questions
One of the biggest questions is why IIF has agreed to pay a premium price for El Paso Electric that would appear to bring an investment return well below what a pension fund normally wants, Anderson said.
Based on El Paso Electric's current dividend payout to shareholders and IIF's plan to spend $2.31 billion from its investment fund to finance the deal, the investment return would be 2.7% a year, Anderson calculated. Pension funds usually seek investment returns of 5% to 6% per year, he said.
This implies that IIF plans to increase its investment return "some other way because these pension funds have a fiduciary duty to their investors," Anderson said. "Do they have some plans to financially engineer" the acquisition financing after the deal closes to improve the return, and will that hurt El Paso Electric, he asked.
Andrew Gilbert, managing director of J.P. Morgan Investment Management Inc., the adviser for the Infrastructure Investment Fund, said in testimony filed with the Texas PUC that the purchase price for EPE is reasonable.
IIF invests for the long haul, J.P. Morgan executive says
"We seek investment opportunities that align with our philosophy and deliver stable, predictable value to our investors, and we believe EPE fits this profile," Gilbert said. "Assuming the proposed transaction closes, EPE will be the flagship investment in IIF's portfolio as our premier, stand-alone electric utility operating in the United States. ..."
In the 12 months ending June 30, IIF spent $2.8 billion from its investment funds for new acquisitions and to make investments in its existing companies, Gilbert said.
IIF has committed to maintain controlling ownership of El Paso Electric for at least 10 years, but "expects to hold the investment for much longer," Gilbert said.
"We invest in people and companies with business plans that we believe will be successful over a long period of time rather than looking for short-term investments, and we have no requirement to sell companies in any time horizon," Gilbert said.
EPE will remain an independently operated utility headquartered in El Paso, with its own local management team, Gilbert said. IIF has agreed the utility, which employs about 1,100 people, "will not implement any material involuntary workforce reductions" for at least five years after the sale is completed, he noted.
"Each IIF portfolio company is a distinct, standalone entity that has its own board of directors and management team," Gilbert said.
"We back strong management teams and support them with strong governance structures, along with the resources and benefits of scale that are associated with being an IIF portfolio company, " Gilbert said.
IIF is proposing EPE have a 10-member board of directors, which would include two IIF representatives, and the El Paso Electric CEO.
Currently, Adrian Rodriguez, the company's general counsel, is interim CEO since former CEO Mary Kipp left the company Aug. 1. Kipp said she thinks Rodriguez should become permanent CEO.
Seven board members would be "independent directors," as defined by the New York Stock Exchange, under IIF's plan. At least two would come from the company's service area, and at least two would have served on the utility's board immediately prior to the sale, or would be local business and community leaders, or from a university in the utility's service area, Gilbert reported.
Anderson said the New York Stock Exchange definition of "independent" is too wide, and allows directors who have ties to the company or its investors.
He suggests regulators require at least seven "disinterested" board members, who should not be allowed to have current or past ties within at least the past 10 years to IIF, J.P. Morgan Chase and its affiliates. The Texas PUC had a similar provision required in a recent electric utility sale, he said.
Houghton, who was on the EPE board for one year after it emerged from bankruptcy in 1996, said none of the company's current board members should be on the new board if the sale is completed.
The "current board is extracting the (high sales) price, and putting the utility at risk," Houghton maintained.
Vic Kolenc may be reached at 546-6421; email@example.com; @vickolenc on Twitter.
(c)2019 the El Paso Times (El Paso, Texas)
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