Featured letter: Reasons to Purchase BIPCo
The Town has reached an agreement to buy a controlling interest in Block Island Power Co. from two of its three current owners for $1.8 million, plus an indemnification for future environmental liabilities. This is a major step for Block Island, one that requires careful consideration by all the town’s residents and BIPCo ratepayers. The Electric Utilities Task Group and the Town Council have unanimously voted to make this purchase. The next step will be a Special Town Meeting to approve the necessary financing. In order to purchase the stock from the selling shareholders, the Town will need to issue approximately $1.8 million in bonds.
The EUTG is meeting on Monday, July 18 to discuss this and also to learn more about utility co-operatives, one of the potential ways to own and govern BIPCo. At that time, the EUTG will also review and provide to the Town Council for public discussion a more detailed description of the process. We urge everyone to attend.
As we have been working on this purchase, I have tried to think through why I believe going forward is in the best interests of Block Island. My perspective comes from the work I have done with private equity investors over the past 20 years or so. I find their thought process about doing a deal to be helpful. They do not focus first on projecting a “value” and then seeing if they can buy the company for less than that value. They recognize that all deals have flaws. You cannot look for “cheap” deals or flawless deals, because they either do not exist or because you will lose in any bidding process.
Therefore, the investor mindset is:
• Do I want to own this company, meaning does it fit with the things I know how to invest in, and do I have a concept on how to make it better?
• Can I see a plan to justify a price that will win?
• Is there a management team that can carry out that plan or can I build a winning team?
• Do I have the resources to weather the inevitable bumps in the implementation of the plan?
If the investor can see a reasonable path to yes on these four points, then the investor is motivated to do the deal.
In my own mind, I have applied this thought process to the BIPCo purchase:
1. Is it in the interest of ratepayers and local residents for the community to control BIPCo?
• Community control allows the Block Island community to make decisions on investments, operations and restructuring of the company following the cable connection
• Under private ownership, rates will very likely go up for the summer of 2017, the town plans to keep rates the same in that timeframe
• Under private ownership, the town has periodic costs of $50,000 to $100,000 to participate in rate cases in order to protect the community’s interests
2. Is it worth paying $1.8 million for two-thirds of the stock and providing the current owners with an indemnification on past liabilities?
• At a value of $2.7 million for the whole company there will be no impact on rates
• The assessed value for BIPCo would range from $1.0 to $3.3 million depending on valuation method used and assumptions made
• The liability indemnification has minimal risk to ratepayers since they are already responsible for liabilities under standard utility rate rules
• Purchasing BIPCo will have no significant effect on Town debt capacity
• There is no realistic opportunity to renegotiate the price and terms
3. Is there a viable plan to manage BIPCo?
• The Town is proposing to create either a utility district or a co-op to own BIPCo so that ratepayers have direct control of the governance of BIPCo
• The Town is committed to adding a new President for BIPCo with direct utility experience
• Utilities of approximately the same size as BIPCo have strong management structures
• National associations for both utility districts and coops have extensive technical support groups to help provide additional support to new BIPCo management.
4. Should the transaction proceed now rather than wait until all the various uncertainties are resolved?
• Waiting has high probability of the sellers cancelling the deal
• Proceeding may be complicated but there are a variety of contingency plans to overcome likely obstacles.
5. Is it worth proceeding even if it is only possible to buy two-thirds of the shares now?
• The two-thirds are available now and are not likely to be available in the future since the sellers seem to have other options
• With two-thirds, the town will have operational control
• There will be opportunities in the near future to obtain full ownership
On consideration, I believe the answers to all five of these questions are “yes.” The fundamental question is whether Block Island is better off with community control of a core part of the island’s infrastructure or whether it is better to leave it in the hands of private investors, potentially ones from off island. I believe the decisions we face over the future of BIPCo have too many community issues to leave them to others.
Once anyone comes to the decision that the community should control BIPCo, all of the other issues become how best to make it happen. This deal is complicated, but there is a clear plan for how to make it work and to justify the price.
This appears to be a once in a generation opportunity. It is clear that BIPCo is going to be sold soon. The choice before us is whether to step up and buy it or to leave it to another round of private investors.
Please come to the EUTG meeting on Monday, July 18 at Town Hall to learn more.
Everett Shorey is the Vice Chair of the Electric Utilities Task Group.