A J.P. Morgan Chase-tied investment fund is paying too much for El Paso Electric, and that puts the utility and its customers at risk of possible future financial problems, a consultant for El Paso concludes.

Daniel Lawton, an Austin economist, attorney, and  consultant specializing in electric utility issues, estimated that Infrastructure Investments Fund (IIF) is paying almost $562 million more than El Paso Electric's market value to buy the 117-year-old utility, in testimony filed with the Public Utility Commission (PUC) of Texas. The commission must approve the proposed $4.3 billion sale along with other regulatory agencies.

For that and other reasons, Lawton recommended that the Texas PUC not approve the sale because it’s not in the public interest — a requirement of PUC approval.

His recommendation as the city's hired consultant to study the sale is important because El Paso City Council also must approve the deal.

Also, two other consultants for a group of El Paso-area school districts and a Texas industrial group are recommending the proposed sale not be approved unless certain requirements are added to make the deal better for customers, they said in testimonies  filed Oct. 28 with the PUC.

"Applicants propose to pay a substantial premium for El Paso Electric shares, pay substantial closing and transaction costs, make numerous (financial) commitments (some of which include additional out-of-pocket costs), not change any El Paso Electric operations and the result will be everybody benefits," Lawton said.

The claims do not seem to be realistic while IIF at the same time needs to earn a "reasonable return" on its investment, Lawton said.

“Current El Paso customers are more likely to be worse off under the transaction versus the status quo (as a publicly traded company). In other words, the risks in terms of increased rates, increased EPE costs, and increased risks to EPE customers outweigh the claimed benefits of the transaction,” Lawton said in his testimony filed Oct. 28. 

Texas PUC hearing on sale to be held in November in Austin

Officials for El Paso Electric and IIF said in a statement that they read the consultants' testimonies and "remain confident that this agreement is in the public interest, particularly given the significant benefits for our customers, employees, community and El Paso Electric." 

The officials said they "respect the regulatory review process." 

El Paso Electric plans to rebut the consultants' testimonies with company testimony to be filed with the PUC on Nov. 13, a company official reported.

IIF agreed in June to buy the utility. IIF is a New York-based, $12.2 billion retirees' investment fund, which, according to IIF and El Paso Electric regulatory filings, is advised by a group within J.P. Morgan Investment Management Inc.

If the sale is approved, the utility, which has been a publicly traded company for more than 70 years, would leave the New York Stock Exchange and become a privately held company.

The utility has about 429,000 customers in the El Paso and Las Cruces areas. It's one of El Paso's largest employers with about 1,100 employees.

The PUC is scheduled to hold a hearing on the proposed sale Nov. 20-22 in Austin to help it determine if the sale should be approved, modified, or denied. It's scheduled to make a ruling Feb. 10. New Mexico and federal regulators also must approve the deal. El Paso Electric shareholders approved the deal in September.

The utility's shareholders, board members, and executives, who would receive multiple millions of dollars in stock payouts, would ultimately be the big winners of the sale, said Lawton, the city's consultant. 

All costs need to be evaluated to see if deal makes sense 

Officials representing Infrastructure Investments Fund US Holding 2, which would be the new owner of the utility, “understate the acquisition cost of the transaction and overstate the potential returns on this investment,” Lawton said in his testimony.

IIF US 2 is one of three partnerships that make up the entire Infrastructure Investments Fund, according to PUC filings by IIF and El Paso Electric.

When all of IIF's out-of-pocket payouts to acquire El Paso Electric are added together, including $50 million in sale closing costs, it would be paying $2.95 billion, or $71.98 per share, which is 151 percent above the company's $1.2 billion book value of its assets; and 24 percent above the company's market value of $2.37 billion, or $58.20 per share (the utility's stock price the day before the sale agreement was made on June 1)," Lawton calculated.

Those costs do not include $1.56 billion in El Paso Electric debt, which IIF has agreed to assume.

That makes the total acquisition cost $4.3 billion.

"All costs of the purchase must be evaluated," not just the $2.8 billion, or $68.25 per share, IIF has agreed to pay El Paso Electric shareholders, Lawton said.

"The commission must determine whether the proposed transaction has an opportunity for future success or will the case be back at the commission because of investment failure or even bankruptcy," he said.

$700 million in loans to finance deal worries consultant 

Charles Griffey, a Houston-area engineer and energy-industry consultant hired by the Texas Industrial Energy Consumers, an association of industrial consumers of electricity, said in filed testimony that the sale should not be approved as proposed.

The $700 million loan and revolving line of credit that IIF plans to use to help fund the sale increases financial risk for El Paso Electric because that debt is to be repaid with profit dividends from the utility, Griffey said.

The proposed sale also could allow IIF to place additional debt in the complicated ownership chain in the future, which also could add more financial risks and possibly increase costs at the utility, Griffey said.

He recommended the sale not be approved unless several conditions are added, including that dividends from El Paso Electric be stopped if the utility's credit rating falls to a certain level, and requiring the company to have a governing board with members independent from the owners of the utility. 

$87.3 million rate credit needed, school districts' consultant says 

James Daniel, manager of the Austin office of GDS Associates, a national engineering and consulting firm hired by the Rate 41 Group of El Paso-area school districts for the El Paso Electric sale case, said the sale should not be approved because it’s not in the public interest. Several conditions to protect the utility and its customers should be added if the PUC is to approve the deal, he said. 

He argued that IIF's proposed rate credit of $21 million for customers is too low in comparison to money being paid to shareholders and to El Paso Electric officials. Instead, ratepayers should get an $87.3 million rate credit, he said.

The utility's board members, and the company's executives are to receive almost $21 million in payouts for stock shares they own and stock awards they have received, and for job-retention payments, Daniel reported.

The proposed sale "will transform El Paso Electric from a public equity to a private equity business," which Daniel argued, "will result in additional risks to both the investors and its captive monopoly utility ratepayers while also resulting in a loss of PUC jurisdiction over" the ultimate owners in a long chain of ownership, Daniel said.

IIF and its appointed El Paso Electric board "could potentially push for high cash payouts" from the utility to IIF's holding company, "hurting EPE credit ratings and risking higher cost of debt and ratepayer cost of service," Daniel said.