Merger Of CVPS, GMP Parent Began More Than A Year Ago
09/29/11 7:50AM John Dillon and Anne Galloway
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(Host) Shareholders of Central Vermont Public Service Corporation approved a proposed merger with GazMetro, the parent company of Green Mountain Power.
The merger would profoundly change the utility business in Vermont. If regulators approve the deal, one company - Green Mountain Power - would soon serve 70 percent of the state's ratepayers.
The merger between these two companies was not a sure thing. CVPS initially favored an offer from another company. But GMP sweetened its bid. And it carefully worked the political angles by keeping the administration of Governor Peter Shumlin tightly in the loop.
VPR teamed up with the investigative website VT Digger for a behind the scenes look at the deal. VPR's John Dillon and VT Digger's Anne Galloway used public files and internal documents obtained under the state's open government law to produce this report.
(Dillon) The first tentative steps toward the sale were taken more than a year ago. That's when CVPS President Bob Young announced his retirement.
The company had looked at other deals a few years before, but opted to remain independent.
But soon after Young's retirement announcement in July 2010, the board formally took the plunge. It voted to hire a financial advisor to help boost shareholder value - meaning, it was willing to entertain suitors.
And then in November, 2010, GazMet from Montreal made an unsolicited offer to buy CVPS for $25 per share. Other companies soon countered with more money.
But that's getting ahead of the story.
The month-by-month account of the bidding war for CVPS is spelled out in documents filed with the Securities and Exchange Commission.
I've been sifting through these papers with Anne Galloway, editor of VtDigger.org.
Anne, let's take this step by step, using the proxy statement that CV provided its shareholders in advance of the merger vote. This basically is a public disclosure of every twist and turn in this bidding process.
(Galloway) Exactly. And what this shows is that it clearly benefited CV to wait before agreeing to a deal, because as the months went by, the price went up.
(Dillon) As we've said, GazMet started with a bid for $25 a share. And it steadily increased the offer to $34 a share as other companies got into the bidding. And although at the time that was the highest offer on the table, the CV board first went with another company.
(Galloway) Now this is mid-May and the CV board decided that the GazMet deal was complicated. CV worried it would be shot down by regulators. So CV asked all of the companies involved in the bidding for more details.
(Dillon) And this proxy statement spells out who was bidding. There's GazMet out of Quebec. And then there's Fortis, a Newfoundland company that owns a bunch of utilities. And an outfit known as Company B. It's not identified any further than that.
(Galloway) And so a series of meetings and working dinners ensued. CEO Bob Young and his team met over meals with each of the bidders. And CV's message was essentially: "We don't know enough to decide at this point." The concern was particularly with the GazMet bid. CV wanted more information.
(Dillon) And, meanwhile, the price kept going up. By May 25th, GazMet had upped its offer from $34 to $35 per share. At that point, Fortis said: ‘We're done. We won't go any higher.' Then - as the CV board was meeting on the evening of May 26th, Fortis decided to up the ante.
The next morning it had increased its bid by $1 a share to $35.10. Fortis also agreed to keep seven members of the CVPS board.
(Galloway) So that was pretty much the deal that CVPS announced on Memorial Day. CV agreed to be acquired by Fortis but remain an independent company. So Fortis won.
(Dillon) But not so fast! That was just round one. GazMet came back.
(Galloway) They did indeed. They made a counter-offer in June - and they disclosed it publicly, unlike the earlier back and forth. They boosted the share price a bit, and promised $144 million in savings over 10 years for ratepayers.
(Dillon) And that triggered a lot of intense back and forth. GazMet made some key concessions. They agreed to pay a $17 million termination fee that Fortis required if its deal was canceled. And they said there wouldn't be any lay-offs, beyond senior management.
Many of those executives, though, will do well under this deal. The proxy says directors and top executives would earn $18 million through the sale of stock. And they could get as much as $6.4 million in "golden parachute" payments if they're let go at the time of the merger. Also, the proxy says former CEO Bob Young would earn $8 million from the sale of his shares of stock.(Galloway) But the biggest sticking point in the negotiations was still this $144 million in potential savings for ratepayers. CV was nervous about that provision all along.
(Dillon) GazMet ultimately satisfied CVPS that the $144 million was real. But the validity of that number - and how and when those savings can be realized - will be closely examined by regulators.
Liz Miller is commissioner of the Public Service Department. That's the agency that represents consumers. I interviewed her this week.
(Miller) "And so as we go forward we'll be looking at where the savings specifically will be achieved. We'll be expecting to put into place reporting measurements essentially to see that they'll be achieved. And finally, a path that makes sense."
(Dillon) So Miller will be looking for many more details before the Public Service Board holds hearings on this in February. But Anne, there's a political as well as a business and regulatory dimension to this deal.
VT Digger and VPR asked the Shumlin administration for internal emails from GMP and CV to top state officials. Here they are. Lots of stuff, copies of draft press releases, outlines of the various proposals. It looks like the governor's team was kept tightly in the loop.
(Galloway) Yes. And from reading these, it's safe to say Shumlin favored GazMet over Fortis. Just after the Fortis deal was announced Commissioner Liz Miller warned her staff not to issue any press statements. The governor, she said, was - quote - "honked off." He didn't like the Fortis deal.
(Dillon) GMP's point person on this deal was Neale Lunderville, who used to work for Republican Governor Jim Douglas. Lunderville traded emails with Shumlin's chief of staff, Bill Lofy. They both used their personal email addresses, by the way, not their GMP or state accounts.
At one point, Lunderville promised Lofy he would deal with Rutland Republicans speaking out against the deal. The local politicians were concerned about the impact on the Rutland economy and workforce. And as part of the final offer, GazMet promised to invest in Rutland.
(Galloway) GazMet and GMP offered another big sweetener. They promised to put 30 percent of VELCO - the company that owns the state transmission network - into a public trust. That trust is supposed to produce about $1 million a year to help low income ratepayers.
(Dillon) Yes. And this VELCO part gets really complicated, really fast. Michael Dworkin is a former chairman of the Public Service Board who now runs the Institute for Energy and the Environment at Vermont Law School.
He's written a 60 page law review article on this public trust issue involving transmission companies. Here are just a few of the points Dworkin says the PSB will have to look at.
(Dworkin) "There are issues about management; there's issues about operational control; there's issues about who gets the profits if it makes money; there's issue about who pays the debt if it loses money. And there are an awful lot of issues about whether a minor majority can take the whole institution along, or whether it needs to have a super-majority to make sure there's something close to consensus on major issues."
(Dillon) That last point - who controls major decision - could be a big deal if there's a new power line proposal, for example, to bring more power down from Hydro Quebec.
And Anne, there's also a big question about whether this merged company has to pay back ratepayers for helping bail out GMP and CVPS some time ago.
(Galloway) It's called regulatory "clawback." More than a decade ago, both CV and Green Mountain Power were in financial trouble. And they were allowed to charge higher rates in order to save them from bankruptcy. Regulators at the time said if they got sold, that money would have to come back in some form to their customers.
(Dillon) Yep. Dworkin told me the board will look closely at this issue as well.
(Dworkin) "People will be asked to testify on it. They'll be asked to show the amount that comes to ratepayers or gets invested in good projects will be more than otherwise would have been invested or more than otherwise would have been returned to ratepayers. So it will be an exercise in what you might call public interest accounting, tested in a hearing room in front of the public."
(Dillon) So needless to say, this merger will be followed closely. AARP is getting involved.
(Galloway) And IBM - which is GMP's biggest customer - had asked to be heard as well.
For VT Digger, I'm Anne Galloway
And For VPR News, I'm John Dillon.
(Host) You can find the proxy statement, including information on golden parachute payments here.
This story has been modified to reflect a correction on how top executives and directors would be paid if the merger goes through. It also corrects that the payment to former CEO Bob Young is for the shares of stock that he holds.