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Charlotte Amalie
Sunday, March 3, 2024


The 23rd Legislature released the findings Wednesday of an independent consultant's study of the proposed joint venture between the Virgin Islands government and Southern Energy Inc. that would have SEI acquiring 80 percent of the Water and Power Authority. The consulting firm, Arthur D. Little, outlined advantages and disadvantages based on the proposal, which awaits action by the Senate.
Ten senators attended a briefing the consultant representatives held Wednesday on St. Thomas at the Renaissance Grand Beach Resort: Senate President Vargrave Richards and Sens. Gregory Bennerson, Lorraine Berry, Adelbert Bryan, Donald "Ducks" Cole, Roosevelt David, Violet Anne Golden, David Jones, Almando "Rocky" Liburd and Allie Allison Petrus. Not present were Sens. Adlah "Foncie" Donastorg, Judy Gomez, George Goodwin, Alicia "Chucky" Hansen and Norman Jn-Baptiste.
Richards said the objective of the Arthur D. Little study was to determine whether the government would be getting fair market value for the public utility. "ADL has provided us a comprehensive report that lists a series of advantages and disadvantages," he said in a broadcast interview.
According to Richards, the advantages cited by the consultants are:
– The Southern proposal meets the objectives of privatizing WAPA.
– The joint venture would solve the government's short-term financing problem.
– The amount offered for the 80 percent ownership stake was "reasonable."
– Southern is a financially sound energy company with world expertise in utility operations.
– A majority of the risk associated with future operations and financing of the utility would be transferred to Southern.
– The employee benefits package is generous compared to other privately owned utilities.
– The transaction is "legal and can be done quickly."
As disadvantages of the proposal in its present form, the Arthur D. Little report said:
– A privatization process was not established and agreed to by all major stakeholders prior to consideration of the Southern proposal, leading many to the conclusion that the proposal is not fair.
– An open, competitive bid process was not utilized, thereby limiting the range of options available to the government.
– Going through a bidding process might result in a higher valuation and subsequent transaction.
– Alternative ownership options (e.g. stock offering or employee buyouts) and management structures have not been considered.
– Neither WAPA nor its employees have been given the opportunity to present a comparable proposal that would achieve the same benefits without a transfer of ownership.
– There is significant risk associated with the government's ability to maintain 20 percent ownership in the proposed limited liability company.
The ADL report urged the Legislature to consider the pros and cons associated with the proposed transaction before making a final decision. In its summary report, ADL noted that the analysis by its company and that by PricewaterhouseCoopers, the administration's consultant, demonstrates that the value of WAPA could be as high as $200 million. "As with any privatization effort, the only way to establish the ‘real' value of WAPA is through a competitive bid process," the consultants wrote.
The report also stated that a number of objectives typically included in a utility privatization process have not been addressed in the joint venture proposal. Among them: increased competition, renewable energy, end-use efficiencies, on-site generation and convergence.
No significant legal or liability risks seen
The report reviewed Federal Emergency Management Agency coverage, the tax-exempt bonds, the Hovensa agreement, Industrial Development Commission credits, employee protection and regulatory implications. It concluded that there are no significant legal issues or potential liabilities that could put the proposed transaction at risk.
However, ADL cautioned that the "primary risk is that an attempt to block the transaction will be based on the lack of an open, established process that allowed input from the general public."
The report suggested that WAPA could achieve the benefits of the proposed transaction on a "go-it-alone" basis but said this would require significant changes to WAPA's culture and the industry structure. Assuming that WAPA could implement the same plan as Southern, it said, the joint-venture proposal would result in a lower value to the government in the long term than a "go-it-alone" strategy.
On the other hand, it said, the short-term cash infusion and transfer of risk to SEI are significant benefits to the government under the proposal that would be lost under a "go-it-alone" strategy.
ADL also addressed the risk of bankruptcy associated with the transaction, saying that it primarily centers on "the government's ability to make utility payments and meet capital calls." In a bankruptcy, Southern would most likely assume full ownership of the new company to be created, Virgin Islands Electric and Water (VIEW), it said, although the agreement "does not explicitly address the scenario."
Senate president says hearings are still on
Richards said there was no immediate indication as to whether the Arthur D. Little report had influenced his colleagues. "A number of senators were briefed," he said, and all "had the opportunity to quiz the independent consultant hired by the Legislature."
The Senate is staying with the previously announced schedule to conduct public hearings on the proposal next week, he said – Tuesday on St. Thomas, Wednesday on St. Croix and Thursday on St. John. That timetable also calls for the Senate to meet the following day, Friday, Aug. 11, to debate the issue and then vote the proposal up or down.
There are efforts afoot to delay the hearings on the three main islands for at least 60 days, given the new information in the ADL report. Central Labor Council president Luis "Tito" Morales said Wednesday that the Senate "should allow all parties to be heard – not only the joint venture [partisans] but those that have been working on an employee cooperative option."
WAPA's real worth still in question
Liburd said he has concluded that the Senate should reject the joint-venture proposal. "One of the key things is the difference in the value of WAPA arrived at" by PricewaterhouseCoopers, the administration's consultant, and Arthur D. Little, he said. He also noted that the ADL report repeatedly refers to the proposal as equivalent to a monopoly, a scenario where the true value of WAPA is never determined.
"My concerns have always been over the true value of WAPA," Liburd said. "Until that is known, you cannot enter into a reasonable discussion about the value of the utility." He noted that ADL said the selling price could be much higher than an immediate $148 million.
The proposal, negotiated by a government team, would give the Atlanta-based Southern Energy 80 percent ownership of WAPA in a deal projected to be worth $380 million to $400 million over 25 years. The immediate value of the deal to the government is about $148 million, including the forgiveness of $31 million the government owes WAPA and other indebtedness, Turnbull said Tuesday. SEI would pay the government approximately $105 million in cash up front.
Liburd noted that the report questioned why the sale of WAPA wasn't put out to bid. He said the one way to estimate the real value of the utility would be through the competitive bid process. "Based on the presentation today, we'd be doing the wrong thing if we went forward." he said.
Also Wednesday, PricewaterhouseCoopers consultant Johan Vant'Hof sought to explain the difference in the two consultants' assessments of the value of WAPA.
"The book value of WAPA is about $80
million, and the book value of VIEW after the transaction will be $50 million because of the wipe-off of the government debt to the utility," he said. He said the proposed transaction is valued at 2.7 times book value, "which is higher than the U.S. average of utility acquisition."
Donastorg still against deal, Turnbull still for it
Adlah "Foncie" Donastorg, an opponent of the WAPA deal, said he didn't attend the ADL briefing held Wednesday at the Renaissance Grand Beach Resort because he wasn't given a copy of the report beforehand. He said he didn't want to attend the meeting without having a chance to review the report for himself so he could be prepared to ask questions. He said he stayed in his St. Thomas office until 8 p.m. Tuesday assuming that "it would be protocol to provide each senator a copy of the report."
He questioned why the meeting was held behind closed doors at a resort and not in a government building. But he said the most disturbing aspect was what he termed Richards' efforts to control the release of information contained in the ADL analysis. "I cannot support the orchestrated efforts to manage information," Donastorg said.
Government House spokesman James O'Bryan Jr. said late Wednesday that Gov. Charles W. Turnbull had huddled with his financial advisers after seeing the ADL report. The governor has concluded, based upon the consultant's report, that there is sufficient reason for the proposal to go forward, O'Bryan said.
"It has supported our contention all along that the proposal was legal and that [it] in general supports our objectives," O'Bryan said. He added that the governor's financial team believes the ADL report is "basically fair and generally positive."

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