June 21, 2019 • EPE Related News

David Leeper spells out who profits from the sale of El Paso Electric: not the ratepayers

David Leeper spells out who profits from the sale of El Paso Electric: not the ratepayers

Over the past several weeks, El Paso Electric has spent a lot of money trying to convince us that its proposed sale to a New York investment firm is best for the El Paso community. 

Many readers are not so sure this is true, so I thought I would share some of their concerns that are not being addressed in all of El Paso Electric's expensive advertising.   

1. Who profits from the El Paso Electric sale? 

We know that management profits. Apparently, millions of dollars will be paid to the officers and directors in cash and stock. The news media is reporting the company’s president alone will benefit to the tune of nearly $8 million (others have pegged her share at nearly $15 million) and the board of directors, as a group, will also receive millions of dollars. So, we can see why management is so enthusiastic about this sale. 

We also know that the selling stockholders will receive a huge windfall. Apparently, the buyer is going to pay about 30% more for the stock than what it recently had been selling for on the New York Stock Exchange. This is a $4 billion deal, so this is a ton of extra money to the stockholders. Further, reports are that 80% of the stock is owned by other large investment firms. So, it looks like large investment firms and their stockholders are going to make hundreds of millions of dollars on this deal as well.   

What about the buyer? Well, the buyer is a New York investment firm. It is paying a huge premium to buy El Paso Electric's stock. I think it would be safe to assume that the buyer believes that the company is undervalued and it is getting the stock at a bargain. 

2. What about El Paso Electric ratepayers? 

The only group that doesn’t seem to be making a lot of money on this deal appears to be El Paso Electric ratepayers. So, exactly what is in it for El Paso Electric customers? The expensive advertising by El Paso Electric tells us that we are going to get a $21 million credit to reduce our electric bills over three years, that certain charitable contributions will be made, that other benefits such as money will be spent to benefit our community over the next 20 years and that most of the workers will get to keep their jobs. 

3. The real story is the monopoly is for sale

But let’s look at this in a little more detail. 

To me, the most interesting analysis came from Larry Francis (our former mayor).  He is quoted as saying the City Council should simply condemn the assets or otherwise take over El Paso Electric.   

I examined the company’s balance sheet and, sure enough, the book value of the assets is small in comparison to the huge proposed sale price. 

So, exactly what is being sold that has so much value — maybe $2 BILLION more than the possible value of the assets? Why is the buyer so interested? 

Folks, the answer is obvious. The real value of El Paso Electric is the agreement with the city of El Paso granting it a monopoly for providing electricity to our community, and even worse, a guaranteed rate of return on its assets. The New York investment firm is buying, and the management and the shareholders are selling, the right to that monopoly and to that guaranteed profit. That’s why so much is being paid to so many different people to make this deal go through. That is where the real value is.  

4. What should be done? 

Francis is saying that both the monopoly value and the guaranteed profit value should be used to benefit the customers in our community. It should not be used to enrich New York investment firms and management.  

So, how do we do that? 

One possibility may be for El Paso Electric to be taken over by the city of El Paso. Remember, Austin and San Antonio both own their own electric utilities. Another possibility may be to open up this area to competition. 

Whatever the various possibilities, people tell me they are concerned that some of our City Council members might lack the ability to understand the complexity of this transaction, and that the others might not be given the necessary information to prevent this sale from happening. 

But whatever needs to happen, it needs to happen now. If the proposed sale goes through, the monopoly and the guaranteed profit agreements will come up for renewal right away. 

So, don’t be confused. The buyer knows exactly what it is doing. The money that the buyer is promising our El Paso community in the future is chump change compared to the values of that monopoly and that guaranteed profit agreement. And that money is not really being paid by the buyer; it is simply an insignificant portion of the profits the buyer expects to make from future electricity charges to El Paso Electric customers. 

David Leeper is a board certified federal tax attorney with 40 years of experience.  He can be reached at 581-8748, leepertaxlawelpaso@gmail.com and leepertaxlaw.com.