An independent report on the upcoming sale of El Paso Electric to a private equity firm suggests that while the deal might be great for the company’s top executives, there’s limited benefit for ratepayers.
The study was commissioned by El Paso businessman Ted Houghton and written and released by Kenneth Anderson, a former member of the Texas Public Utility Commission.
In May, El Paso Electric announced the utility would be sold to JPMorgan’s Infrastructure Investments Fund, or IIF, for about $4.3 billion. The complex deal includes big payouts for top El Paso Electric executives and some financial and philanthropic commitments made by the IIF.
“There are, however, several provisions that, while not particularly unusual, do illustrate how the Merger Agreement benefits current directors, officers and shareholders while providing limited or no benefit to (El Paso Electric’s) ratepayers,” Anderson writes in the report, which was provided to El Paso Inc.
He added that some of the agreement’s provisions might actually “result in some economic harm to ratepayers unless regulators … get further clarification from the purchasers.”
Unlike most other Texas utilities, El Paso Electric operates as a monopoly, so its 420,000 customers in West Texas and New Mexico don’t have the opportunity to choose among competing providers.
Since it is not subject to the discipline of market forces, the company is regulated and cannot raise rates without the approval of City Council and state regulators. That is why El Paso Electric’ proposed merger with the IIF is being closely scrutinized by some in El Paso’s business community who worry the interests of ratepayers will be an afterthought.
Among the critics of the upcoming sale is former El Paso Mayor Larry Francis, who said the deal would be bad news for ratepayers and the city.
“The impact on the ratepayer is enormous,” Francis said. “Based on what we know today, either they’re going to have to raise rates, or cut costs, or the company will not be able to handle the load to get the (return on investment), and in effect go bankrupt.”
El Paso Electric spokesman George De La Torre responded in a statement.
“We have read the paper and respect the regulatory review process, which will consider both the agreement and its benefits,” it reads. “We are confident that this agreement is in the public interest, particularly given the significant benefits for our customers, employees, community and El Paso Electric,”
Houghton, an El Paso businessman who founded Houghton Financial Partners, said that the first priority of the sale should be protecting ratepayers and the utility.
“That’s the key to any kind of transaction, especially when it serves the greater public. We don’t want to revisit what happened to El Paso Electric in the 90s or what’s happened to other utilities around the country, regarding acquisition and management issues,” Houghton said, referring to El Paso Electric’s Chapter 11 bankruptcy filing in 1992.
“There have to be protections to make sure this is viable going forward,” he added.
Houghton said Anderson’s experience on the utility commission was reflected in the study. Anderson served on the PUCT from 2008 to 2017
“He’s gone through these types of situations, so he brings a great wealth of knowledge to deals like this,” Houghton said.
Part of the study is a review and analysis of information contained in the public documents El Paso Electric had to file with the U.S. Securities and Exchange Commission to move forward with the sale, including 8-K and proxy statements.
The rest of the study, which was finished on Aug. 12, outlines alternatives to some of the sale provisions.
Anderson writes that he believes the commitments made by the IIF to the state regulators were in good faith, “but many of them lack detail or are subject to various interpretations.”
“The transaction was negotiated between sophisticated parties that each had real bargaining power and who reached a mutually beneficial agreement, assisted by experienced counsel and financial advisors,” Anderson writes. “But the vast majority of (El Paso Electric’s) customers, the captive ratepayers, have no choice about from whom they buy their electricity.”
Anderson said the commitment by the IIF to provide $21 million in rate credits to customers, which executives have held up as an example of their commitment to customers, is “not very meaningful.” If the credit were allocated to all customers on a per-capita basis, everyone would get about $1.36 in credits per month, he said.
Anderson added that industrial and commercial customers could see some benefit.
“Given the consideration being offered to (El Paso Electric’s) shareholders, directors and executive officers, the rate credit by itself does not appear to be much of a reason to support the proposed transaction,” he writes.
Anderson proposes an alternate solution to doling out the $21 million rate credit over five years, saying it should instead be applied to some of the utility’s upcoming capital investments and the same amount deducted from El Paso Electric’s rate base.
“That at least is a real long-term benefit to all ratepayers,” Anderson writes.
Anderson also questions why the IIF and its affiliate Sun Jupiter would pay a premium for El Paso Electric.
“Annualized, the current quarterly dividend is almost $62.8 million, which would only represent 2.7% return on Sun Jupiter’s investment of $2.31 billion in a utility that is not experiencing dramatic growth in electricity consumption,” Anderson writes.
As a possible solution, Anderson suggests state regulators determine whether equity being put up by the IIF “is borrowed or if some post merger recapitalization is contemplated.”
“If either scenario is contemplated by IIF, intervening parties should strongly urge the PUCT to impose additional ring-fencing conditions including strengthening the independence of El Paso Electric’s board of directors and requiring the IIF affiliates to get prior approval for any such post-merger restructuring from El Paso Electric’s retail regulators,” Anderson writes.
Right now, the utility is going through regulatory approval of the sale. The deal is expected to close in 2020. The El Paso Electric sale needs regulatory approval from several entities, including the PUCT and the city of El Paso.
Francis, who is now retired, said the funding details surrounding the deal are too vague and that the city needs to review the study.
“The city has a lot of homework to do,” Francis said. “The implications in this deal are very large. We just cannot afford to jeopardize our own electric utility with some kind of financial gerrymandering that on the surface looks like might be happening.”
Email El Paso Inc. reporter Sara Sanchez at email@example.com or call (915) 534-4422, ext. 105.