To the Forum:My name is Fran Brennan. I live in Princeville and I’m writing to express my views against the proposed purchase of Kaua’i Electric by the emerging Co-op. I am not against the Co-op concept. I really favor them.
To the Forum:My name is Fran Brennan. I live in Princeville and I’m
writing to express my views against the proposed purchase of Kaua’i Electric
by the emerging Co-op.
I am not against the Co-op concept. I really favor
them. But I am opposed to the KIUC purchase of K.E. I am not an expert on
electrical companies. I know how to plug things in, and how to write big checks
for electric power. I can also testify that the checks get 35 percent smaller
if you use solar waterheating, because I recently converted without any
assistance or support from K.E.!
Prior to retiring in 1995, I was an
Executive Vice President of a Fortune 300 corporation. My job was strategic
planning and mergers and acquisitions and the management of the companies post
acquisition. I managed five significant acquisitions in a five year period in
the United States, Canada and the United kingdom, investing over a billion
dollars, back when a billion dollars was a lot of money. I did learn during
this process that frequently, the best decisions were acquisitions not made
after performing a thorough and objective due diligence. This is a key point
regarding the K.E. situation. It appears that due diligence by KIUC was minimal
and the wisdom of not purchasing K.E. was never even considered.
Amazing as
it sounds, in the span of only a few months, a mere handful of people:
1.
organized themselves as a corporation
2. almost magically arranged for
nearly $300,000,000 of federal loans
3. participated in what they described
as a serious “auction”
4. successfully contracted to purchase an electric
power company from a national company that had decided after 30 years of
trying, that it wasn’t a good business for their shareholders, even with the
highest electric rates in the country.
I will give the Co-op founders
credit for good intentions but they must have become carried away in the quest
for victory. The purchase price is simply too high.
Looking at the bios of
this group I cannot find that they had much if any experience in purchasing
companies, especially complex companies such as a public utility. I did not see
a lot of experience that would make me comfortable that they would know how to
manage one if they acquired it.
I would not object to the sale if the small
group were buying it for themselves with their own money but this is not the
case. They have arrogantly acted on behalf of 30,000 ratepayers who were never
asked if they wanted this arrangement, nor informed that they would have to pay
so much for it that the possibility of a bona fide rate reduction would be slim
to none in the foreseeable future. This unauthorized assumption of authority
should not be legally binding on K.E.’s customers. Governments can not spend
money in this manner without a referendum; how can a group of private
citizens?
I do not believe that the buyers recognized the complexity of
what they were doing. It does not appear that they sought the normal
professional assistance that businesses use in multi-million dollar
transactions. I’m speaking of the use of qualified investment bankers
experienced in the business being acquired, and actuarial/accounting support
from the outside to help them evaluate the purchase from both a risk and value
perspective. Buyers normally depend on these specialists for an objective,
independent opinion that the price makes sense and is fair. This is a critical
missing piece, especially when the responsibility for repayment of any debt is
to be transferred to others not a party to the purchase decision. Morgan
Stanley represented the Seller, Citizens’ Utilities. Who represented
KIUC?
Had they utilized such expertise, I am convinced that an aging
utility, with less than state of the art equipment, distressed enough to be
declared a discontinued business by their parent company, would never justify a
premium of over $100,000,000 above the book value of the business, as verified
by their own accountants. A range from book value to book value plus 20 percent
would be more appropriate for an undistressed company, depending on the result
of a thorough due diligence inspection. A purchase price of $270,000,000 is a
Christmas present to Citizens for a company purchased 30 years ago for
$9,000,000 and whose book value at year end was $169,000,000.
While price
alone is sufficient reason to abort the sale, it is far from the only
reason.
It appears that the embryonic co-op has foolishly waived all future
claims against K.E. for any environmental risk not known and identified today,
no matter who was responsible when the problem was caused, or how egregious and
expensive the process to rectify the situation. I would urge anyone interested
in sharing my fear in this regard to read the section on environmental due
diligence on pages 40 and 41 of the sale agreement. Significant discoveries of
environmental contamination, uncovered after the purchase is finalized could
potentially cost us more than the purchase price itself. It would be insane to
relieve Citizens and their Insurance Company of this responsibility. No wonder
KIUC was the winning bidder.
The third strike is KIUC’s agreement to honor
K.E.’s pledge to build another old-fashioned power facility using fossil fuels,
when the need for such a facility is very questionable. This will drive the
overall cost of the acquisition to over $300,000,000 when this facility is
constructed.
As a current purchaser of KE power, I object to this small
group’s uninvited and unwelcome activity on my behalf. I do not believe that in
a democracy, my family and I should be required to be the beneficiary of such
kindness. To permit such a travesty to occur will be a mistake with economic
consequences that will outlive many of us and prevent our children from
enjoying the full benefits of future improvements in the field of energy
technology.
I’m not a fan of big government but someone must help safeguard
the interest of the public in this situation. Caveat Emptor should not prevail
in situations where 99.99% of the “buying public” has been precluded from the
entire process.
I would welcome the help of the PUC, the county, the U.S.
Navy, the Consumet Advocate, the Governor, the Attorney General, the SEC,
and/or the Federal lenders to help stop the sale on these terms.
From the
fragments of the contract available to the public, it appears that the KIUC has
agreed to all aspects of this sale as desired and dictated by the seller, from
price to contract terms. This is ridiculous considering the marginal quality of
K.E. as a business, and the risks presented by the absence of objective,
professional, third party due diligence are just too great.
Thank you for
your time and attention and I wish to leave you with this thought: Sometimes
the very best decision is NOT to buy.
William F. (Fran)
Brennan
Princeville
