By Brandon Wilson
bwilson@mdjonline.com
All parties in the lawsuit filed more than one year ago against Cobb Electric Membership Corporation and Cobb Energy have reached a settlement agreement.
The settlement agreement, which was filed with the Cobb Superior Court clerk Thursday, allows any party to back out of the deal by Nov. 10. The settlement was announced at a 45-minute news conference conducted at 11:00 a.m. inside the Marietta law firm of Hylton Dupree.
Plaintiffs in the case "clearly support it" and believe it is in the "best interest" of the nonprofit electric cooperative, said Pitts Carr, attorney for the plaintiffs.
After the news conference, David Flint, representing the co-op, said the board of directors "does not want to do it" and said Dwight Brown, President and CEO of both the co-op and for-profit Energy, "hates it."
"We agreed to do it," he said, "because we believe that litigation is distracting, expensive, uncertain and a complete pain in the ass ... We just want peace in the valley."
Details of the proposed settlement include: the buyout of all Energy's preferred and common stock by EMC, giving the co-op 100 percent ownership of Energy; the spin-off of all Energy subsidiaries, except for the three that are related to utility operations; the return of all meters and employees from Energy back to the co-op; the termination of the 40-year management contract, which includes the 11 percent management fee that EMC has been paying Energy; the buyout of Brown's remaining Energy contract to manage the company, leaving him as the CEO and president of only the co-op with a set retirement on or before Feb. 11, 2011; and possibly amending EMC bylaws regarding how members elect directors and benefits offered to those directors.
Attorneys Flint and Carr agreed that the stock purchase and other settlement details could be wrapped up by the end of the year.
Additionally, the Cobb Energy name would remain as a legal trade name for use by the co-op, which has nearly 200,000 members in five counties and revenues of about $550 million per year.
With EMC incurring all of Energy's debt, the stock buyout and the buyout of Brown's remaining Energy contract, the deal is expected to cost the co-op about $40 to $43 million.
For the settlement to become a reality, the parties will review a fairness opinion drafted by international investment banking outfit Houlihan Lokey, which deals in acquisitions, mergers and financial restructuring. Parties expect to receive that letter by Nov. 5. Following review of the letter and all parties choosing not to opt out of the settlement, Superior Court Judge Steven Shuster will have to approve the settlement as part of a fairness hearing scheduled for 1:30 p.m. Dec. 2.
The settlement is in regards to a lawsuit filed by EMC members claiming that Energy has drained assets from the co-op since its inception, and further was created to ultimately profit Brown and owners of preferred stock. Plaintiffs, led by Marietta businessman Bo Pounds and former Cobb Commissioner Butch Thompson, also claim the 1997 creation of Energy violated Georgia Law, and its 40-year management agreement with the co-op should be nullified. The suit against Brown and the two companies was filed Oct. 22, 2007.
Whether the restructuring that would result from the settlement is called a "merger," as Flint calls it, or a "bailout," as Thompson calls it, the settlement is likely considered a win for the plaintiffs.
Buyout of all Cobb
Energy stock and termination of management fee
As part of the settlement, the co-op would purchase all of Energy's preferred and common stock - a cost of about $10 million to $12 million. The bulk of the buyout pertains to the preferred stock.
On Oct. 17, Energy released its list of shareholders of preferred and common stock. It was revealed that there are slightly less than 400,000 shares of preferred stock. Preferred stock is purchased at $25 per share and does not change in value like the company's common stock does. It does, however, pay hefty quarterly dividends, which equates to 8.85 percent each year, according to court documents.
Shareholders of preferred stock were informed in a Sept. 30 letter from Brown that their third-quarter dividends would not be paid as the co-op may be purchasing all of the preferred stock.
Flint said, as part of the settlement, the third quarter dividends will be paid. That will be the final payout.
Brown and his wife are the owners of the most amount of preferred stock - 120,000 shares worth $3 million - giving the Browns $66,375 in quarterly dividends, which equates to $265,500 per year. Energy pays out a total of $221,250 in quarterly dividends, or $885,000 annually on its preferred stock.
The buyout of all preferred stock will cost almost $10 million, attorneys said.
All of the common stock, which is set up like a trust for the employees - similar to an employee stock ownership plan - is worth less than $1 million, Flint said.
Flint said the common stock is valued at $46.10 per share; however, another appraisal of the stock could be done before the settlement.
The termination of the 40-year management contract is also part of the settlement. The contract, which has almost 30 years left, included an 11 percent fee that the co-op was paying to Energy for operating expenses.
Carr said this fee translates into a payment of $5.5 million each year to Energy.
Spin-off of Energy subsidies
Under the restructuring and the buyout of all Energy stock, Energy becomes a wholly-owned subsidiary of EMC and the majority of nonprofitable, non-utility-related subsidies created by Energy would be "sold off, closed down or liquidated," Carr said.
All the proceeds from the liquidation of these subsidiaries would go directly to the co-op.
Under the umbrella of the co-op, Energy would remain to operate the three utility-related, profitable subsidiaries - ProCore Solutions, a center that answers calls from customers; a software/hardware company that handles billing services; and a tree-trimming service.
ProCore Solutions was said to be "very profitable."
"ProCore was growing quickly due to serving other co-ops," Carr said.
Other co-ops the call center caters to include Comcast, Flint said.
It is anticipated that the money ProCore makes would help offset incurred debt of Energy. Additionally, "ProCore was charging a 50 percent charge (to EMC), which is a multi-million dollar charge that will be terminated," Carr said.
Future of Dwight Brown
As part of the settlement, Brown would receive a net buyout of $478,000 for his remaining management contract with Energy. His contract is through February 2011.
He makes a dual salary of $300,000 to $350,000 from both Energy and the co-op. He would continue to serve as president and CEO of EMC and earn his same salary from the co-op.
Brown and his wife would keep the $3 million he was given as a loan for the purchase of preferred stock. Part of the $3 million loan - the $1 million from the co-op - will be worked off as part of his contract as he remains head of EMC. The $2 million loan from Energy will be forgiven.
According to the proposed settlement document, by June 1, 2009, "EMC's Board of Directors will adopt a succession plan" for Brown to assure the orderly transition to a replacement CEO and president.
Carr said Brown will announce his retirement from EMC on or before Feb. 11, 2011 - which is the end of his contract.
When asked by the Journal if Brown feels he has taken a beating over the course of this lawsuit, Flint said: "I think that Dwight Brown, and I will defend him, was a visionary, I think he has done great things for the customers of Cobb EMC and I think he has really been beaten up in the press, and I admire his strength and stamina ... He has great fortitude to put up with what he has gone through."
Plaintiffs had argued that Brown, as president of both Energy and the co-op, is in breach of fiduciary duty and has a conflict of interest. Many supporters of the plaintiffs have said they think Brown should be removed from the top position.
In response, Carr said, Brown is staying in his position because, as this is a derivative suit, the court does not have the option of removing directors. Nor does the court have authority to unwind contracts with employees and the companies, Carr said.
Future of the EMC Board of Directors
Plaintiffs in the lawsuit had also wanted amendments made to EMC bylaws regarding the way directors are voted in.
Shuster in August ruled that there should be a better way for directors to be elected. The co-op's annual September meeting was postponed until a determination for that could be reached. As part of the settlement, the directors are to meet within 60 days of approval of the settlement to determine how members can vote for directors. One option includes mailing ballots to all the co-op's 200,000 members. Current bylaws require members to attend the annual meeting and vote in person.
When asked if management is urging mail ballots, Flint said he did not know.
The postponed '08 annual meeting would then be conducted within 60 days of the meeting to determine how members can vote.
Four directors are up for re-election in '08 and three more are up for re-election in '09.
Further, according to the proposed settlement, plaintiffs may seek an amendment to EMC bylaws "prohibiting the payment of retirement benefits for Cobb EMC directors prospectively."
Current bylaws allow directors who serve at least one term (3 years) to receive monthly retirement benefits of $1,200 for 16 years when the board member reaches the age of 65, Carr said.
Attorney fees
As for attorney fees, which are believed to be in the millions of dollars throughout this lawsuit, Flint said Energy does not have coverage to pay for the attorneys and, therefore, they will be paid by Energy. The co-op does have coverage, Flint said, but the EMC and attorneys are in dispute with them as to how much they are going to pay.
As for the cost of the plaintiffs' lawyers, Carr said they will apply for a fee, which would be determined by the court. Likely what is approved, he said, will be paid by the EMC insurance coverage.
Was the creation of Cobb Energy worth it?
When Energy was created in 1997, some said it was necessary because of the threat of deregulation and to prevent a hostile takeover on the cheap.
When asked if the co-op is concerned of this threat if the proposed restructuring goes through, Flint said, "We are very concerned about that ... This settlement does not remove the threat of hostile takeover."
Flint said investment funds and investor-owned utilities are trying to acquire EMCs in urban areas such as Cobb EMC.
In return, Carr said, "We've looked high and low in the United States, and we do not believe there has ever been the hostile takeover of an EMC. We do question what the real motives of that was at the time (Energy was created)."
Not to mention takeover would require approval by the board, co-op members, the secretary of state, department of administrative services and state revenue department, then the Superior Court would have to be convinced that it is in the members' best interest, Carr said.
When asked if the creation of Energy resulted in lower rates for EMC members, Pitts said "no," Flint said "yes." Did it result in higher rates? Flint said "yes," Carr said "no."
When asked if EMC would have been better off not creating Energy, Flint said, he did not think so. He said, "raiders would have come in under deregulation."
Flint said Brown thinks there is still a risk of a takeover, but Flint said Brown wants to do what is in the best interest of the co-op regarding a settlement.
Carr said of the proposed settlement, "This is not perfect, but it stops the bleeding and it gets problems resolved."
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