ML20154L784
| ML20154L784 | |
| Person / Time | |
|---|---|
| Site: | Farley  |
| Issue date: | 05/17/1988 |
| From: | Huneke J ALABAMA POWER CO., MORGAN STANLEY & CO., INC. |
| To: | |
| Shared Package | |
| ML20154L726 | List: |
| References | |
| NUDOCS 8806010062 | |
| Download: ML20154L784 (13) | |
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MORGAN STANLEY & CO. INCORPORATED i
l NEW YORK COUNTY NEW YORK, NEW YORK 1
AFFIDAVIT IN SUPPORT OF ALABAMA POWER COMPANY JOHN H. HUNEKE being duly sworn, deposes and states:
I am a Principal in the Public Utility Group of Morgan Stanley & Co. Incorporated ("Morgan Stanley"), a leading invest-ment banking firm which is involved in the financing of public i utilities throughout the United States. Since 1935, the year Morgan Stanley was founded, the firm has managed or co-managed a total of over $300 billion in public offerings and private placements of new issues of securities, of which over $35 billion has been for investor-owned electric and gas utilities. Morgan Stanley buys equity and fixed-income securities from, and sells 1 such securities to, over 1500 major banks, insurance companies, pension and trust funds and other financial institutions in the United States and throughout the world.
As an investment banker, I am very familiar with the rights of lenders, the obligations of borrowers, and the need for appropriate conditions in financial transactions to assure these rights and obligations. With regard to the Farley transaction between APCO and Alabama Electric Cooperative (AEC), I firmly believe that AEC has the obligation to bear its full share of 8806010062 880524 PDR ADOCK 05000348 M PDR
ownership including the cost of future capital improvements, l l
decommissioning, and unforeseen contingent developments. As a j
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result, I fully support APCO's request for AEC's member companies to provide their own guarantee that APCO will be paid for AEC's I l
full share of Farley ownership costs.
Until recently, it was considered a near impossibility i that public power entities would elect the alternative of bankruptcy proceedings in response to financial difficulties. ,
1 With the bankruptcy filings of groups such as Wabash Valley Power i Association, Washington-St. Tammany, and numerous other I cooperative association near bankruptcies, it is clear that this is a real likelihood.
In the case of AEC, this cooperative has a very leveraged position with less than $7 million or 2% of its December 31, 1987 total capitalization provided by equity from its member companies. As a result, AEC's members would have little financial interest in the continued viability of AEC if the alternative were a significant financial commitment by them 1
to meet unforeseen capital requirements which do not directly increase their revenue-producing assets. In such event, there is I
a substantial possibility that AEC would be dissolved.
Given this possibility, it appears that APCO is requesting in this proceeding what any prudent investor would l l
require -- reasonable protection and assurance that ownership I 1
obligations will be met by the provision of a guarantee by the 1 1
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member companies of AEC. Through sale of ownership in the Farley unit, APCO is giving up the benefits of this economic generating station. It is inequitable that APCO should assume the risks associated with AEC's ownership in this plant in the event of unforeseen future financial requirements.
In this proceeding, AEC has argued that provision of such a guarantee by its member companies would harm their future capital raising capacity. I would maintain that these members already have a "potential" liability, whether explicit or implicit, by virtue of their participation in AEC. Astute lenders, in considering the creditworthiness of these companies, would take this into account as they make decisions about future financial commitments to them. The fact that there is a formal guarantee to APCO in the event of currently unforeseen financial requirements should not affect the ability of these companies to finance in the future.
Even if such a guarantee were to impact the financial position of the member companies, this would not change my view on the appropriateness of APCO being granted such a guarantee.
It seems only equitable that APCO be in a position to protect itself from having to pay costs for which AEC is, in fact, obligated. APCO should be given reasonable assurance that AEC, by way of its members, will fully share in the ownership risks relating to the Farley unit. AEC's member companies have considerably more equity support than AEC itself, totaling over
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$95 million at December 31, 1987, which represents 30-50% of each of their total capitalizations. It makes financial sense for those members to put their equity behind their obligations, just I
j as APCO does.
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STATE OF NEW YORK NEW YORK COUNTY John H. Huneke, being first duly sworn, deposes and says that he has read the Affidavit of John H. Huneke and that the matters and things set forth therein are true and correct to the best of his knowledge, information and belief.
John H. Huneke Subscribed and sworn to before me this the il N ay of May, 1988.
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" ~/ Notary Public LENORE BELL My Commission expires: peryPghc;,sj.j,.g,N+=*
Ovatified in Queens Courty W iS8'Oh M '** 1l
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-- w UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF INDIANA INDIANAPOLIS DIVISION 1 l
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l In Re: WABASH VALLEY )
POWER ASSOCIATION, INC, ) Case No. IP85-2238RA S Debtor. )
TRANSCRIPT OF PROCEEDINGS I taken in the above matter on March 20, 1987, before the Honorable Nicholas Sufana, at the U. S. Courthouse, i E 46 East Ohio Street, Indianapolis, Marion
{ County, Indiana, before Notary Public Carol A. Karen, RPR/CP.
l 8
r VOLUME V 2
8 u
h r
g ACCURATE REPORTING OF INDIANA 6 William F. Daniels, RPR/CP, CM, Prep.
7033 Central Avenue Indianapolis, Indiana 46220 (317) 253-6753 1
i APPEARANCES: '
!\
i i For CFC ' '
l l
Mr. Wilbur Foster Mr. Thomas Titsworth For Government i ,
Mr. George Kielman l Mr. Tim Brown
\
Mr. Frank Clover For WVPA 1
Mr. David Kleiman 1 :
i 1
Mr. Mel Daniel
, Mr. Don Morton i l
For Fruit Belt, I
l Ms. Margaret Morris i i
i i For Members. Committee g
w Mr. Steven Ancel I .
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- 3 1 10:00 A.M., E.S.T.
0 s g 2 March 20, 1987 3
l 4 THE COURT: This is a continued 5 hearing in the matter of Wabash Valley Power l 6 Association, Inc. under cause number IP 7 85-2238RA S. We're now hearing the debtor's
\ 8 side of the valuation hearing. Are,you ;
9 ready with the first witness?
10 MR. KLEIMAN: Yes, your Honor. We
)
11 ,
would call Mr. Paul Kovich.
12 S. PAUL KOVICE, called upon 13 to testify on behalf of WVPA, having been first l
14 duly sworn, testified as follows:
15 DIRECT EXAMINATION, 16 QUESTIONS BY MR. KLEIMAN:
17 Q. State your name, please.
r g ,-
g 18 A. S. Paul Kovich, K-O-V-I-C-H.
l 19 .
Q. And your address, Mr. Kovich?
I 20 A. 245 East 87th Street, New York City.
I l 21 Q. And where are you currently employed, Mr.
5 22 Kovich? _
. . _ _ _ . _ _ . l
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! 23 A. Senior vice-president with Shearson-Lehman
! 24 Brothers. .
I 25 Q. Beginning with your graduation from high !
i i
i
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l 4
1 school, would you tell the court your
- 2 educational background? j 3 A. I attended high school in New Jersey, I 4 attended college in New Jersey, Drew 5 University where I received a Bachelor's in 6 economics, and I attended Columbia Graduate ;
7 School of Business, where I received an
'\ 8 M.B.A. with a specialization in accounting.
9 Q. Would you also tell the court what your 10 professional experience has been since you 11 ,
graduated from Drew University?
12 A. After Drew University I worked for two years 13 as'an accountant with a company that makes 14 air pollution control. equipment, Research .
15 , Control. ,
I l 16 After Columbia Business School I i
{ '
17 ,.
worked,for two years with Arthur Andersen 8
- e 18 and Company as a public accountant in the 5
y 19 -
regulated industries division. Following 2
( 20 that, I joined Bache, Allis, Drew & Shields k
l 21 (phonetic), an investment bank and brokerage 22 firm where I worked in the public utilities k 23 group providing investment banking services s .
E 24 to electric utilities, gas companies, i 25 telephone utilities.
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1 Following throo years with Bacho, 2 I joined Shearson-Lehman Brothers, at that I
3 time it was Lehman Brothers, where I have 4 been employed.now for about four and a half l
5 years, again doing work with the public ;
1 6 utility industry, primarily electric l 7 companies, providing investment banking l l
8 services to those companies. , j 9 Q. Mr. Kovich, the people in the back may have 10 trouble hearing you, so you' might want to 3
11 ,
speak up a little louder.
12 A. Okay, thank you.
13 Q. Wifi you tell the court what kind of a 14 business Shearson-Lehman Brothers' is?
15 A. ,Shearson-Lehman Brothers is an investment 16 bank and brokerage firm. It's a i 17 . , ,
wholly, owned subsidiary of American Express g 18 Company. It provides financial services to f 19 -
corporations, governments, municipal i
( 20 entities, private companies, public y 21 companies. It also provides investment -
l 22 services to retail and institutional 1
l 23 investors. We provide sales and trading 24 capabilities to those investors for their ;
25 securities, and the area that I specialize i . . . .
~ .
l s 1 in is the invostmont banking side, ard that 2 does involve providing financial services to i
3 corporations and governments, entities of !
4 that nature. ,
5 Q. Is Bache, the firm that you formerly worked l
6 for, also an investment banking firm? :
i 7 A. Yes, they provide basically the same
\ 8 services that Shearson-Lehman does.,
9 Q. Will you tell us briefly the kind of work l 1
10 that you performed at Bache? ,
3 11 A. There I was -- at that time I was a more i
12 junior member of the invo;tment banking ,
13 department. I worked with senior bankers ;
14 providing financial services to public 15 , utilities. We helped arrange financings.
16 We provided advisory services on things like
- 17 ,
dividend policy, credit ratings, capital l 18 structure; but primarily, the main focus of j 19 .
the business there was raising money through t
20 debt offerings and equity offerings.
l 4
g 21 Q. Can you tell the court some of the e
i 22 representative clients in the electric 9
l 23 utilities industries that are served by 24 Shearson-Lehman Brothers?
25 A. Yes. We work with Long Island Lighting m
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1 Company, Contral Maino Power, New York State l . .
. 2 Electric & Gas, Baltimore Gas & Electric, ;
3 Cleveland Electric Illuminating, Union 4 Electric Company, Indianapolis Power & '
5 Light, Toledo Edison, in the past we have 6 also done work with So. Cal. Edison, Duke 7 Power, quite a few more utilities we can
\ 8 keep going through, if you want.
9 Q. That's adequate.
10 A. Okay.
\
We also do work with rural electric 11 co-ops and also with municipal power 12 systems, too.
2 ,
13 Q. Can you tell the court some of the rural 14 electric co-ops and other companies in that 15 , industry for which Shearson-Lehman Brothers
! 16 performs services? '
i 17 A.
s
~- -
Certainly.
- We are the lead banker to 18
- National Rural Utilities Cooperative Finance I j 19 .
Company.
a l 20 Q. CFC?
Ig 21 A. CFC. We provide extensive--advisory services 22 to CFC. We are the lead banker for most of l 23 their public debt off6 rings. We ~adv'ise them 24 when they are providing financing services i 25 to their members, such as leverage pollution l I
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control financings.
2
. We also work directly with many of ,
3 the large generation and transmission 4
cooperatives, for instance, Wabash Valley, .
5 we provided financial services to them in 6
the past, Arkansas Electric, Buckeye Power, -
7 Cajun, Deseret, most of the major G&T's, 8 Seminole.
y We have extensive experience with 9 these companies.
10 .
Q. Do you have clients for which you are t
' 11 personally responsible?
12 A. Yes. ,
13 Q. Would you tell the court some of those that '
14 are your personal clients?
15 A. Long Island Lighting Company, on the i 16 investor-owned utility side, Long Island 17 Lighting Company.
j 18 .
Q.
Does Long Island Lighting Company have a 19 nuclear plant?
I '
f, 20 A. Yes. Currently involved in the Shoreham i
y 21 Nuclear Power Station. That plant is -
22 complete but LILCO, which is the acronym for
! 23 Long Island Lighting Company, is having ~
24 considerable difficulty in getting a final i 25 operating license for that plant. They have i
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. _ . o 1 beon having that difficulty now for ;
2 approximately two years over a disagreement 3 with the State of New York about the !
1 i
4 adequacy of evacuation plans. -
5 Q. You're consulting with them about these l l
6 types of interests?
7 A. We have been financial advisor to LILCO
\, 8 since 1983. We have been a banker to them 9 for much longer than that, but financial 10 advisor during this period advising ther. on 11 their financial condition relative to the l
. I 12 problems created by not getting this plant 13 in service.
14 When you have that much of your 15 assets tied up with a non-productive entity, .
! 16 it can wreak havoc on your financial i 17 condition.
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Q. What are some of the other clients you 19 , personally worked with?
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20 New York State Electric & Gas, it's also l A.
ig 21 involved in a large nuclear project, Nine 22 Mile Pt. 2 project _in,n.orthern New_. York... _.
l 23 It's a co-tenant with other utilities in i I 24 that project. It owns 18%. They are i
25 currently experiencing difficulties with ;l e
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1 that plant, too.
' 1
. 2 I work with Baltimore Gas & l l
3 Electric, Pennsylvania Power & Light, !
4 Rochester Gas & Electric. 1 5 In the past I have done -- been 6 intimately involved with Central Maine. q 7 Over the past year I have done less work
\ 8 with them, but that was a primary ,
j 9 relationship at one point.
10 On the rural electric 3
11 cooperative -- with the cooperatives I'm one 12 of the two people that spend an awful lot of 13 tim'e with CFC. I do work with a managing 14 director a't Shearson-Lehman Brothers on that 15 , account, but we function equally and almost T.
16 independently at times because the demands '
17 of that. client relationship are so great U 1 g 18 '
and, of course, doing the work here at 19 , Wabash in this case.
2 i
20 Q. That's the valuation work?
l I 21 A. The valuation -work-here.
g .
22 Q. Generally, what types of services do you i f
h 23 provide to your clients?
! 24 A. We help them raise money. That's a very l I
25 important function. We help them raise l
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~j M P '" ._. ---_ ___ _ , _ _
1 1 __
1 aoney in tho debt and oquity Darkota, but we
, 2 also provide advice to them, financial i i
3 advice, advice on mergers and acquisitions, I 4
whether they are planning on buying a -
l 5
company or they are afraid they may be 6 bought by another company.
7 We provide guidance on setting l
\ 8 dividend policy, advice often establishing a ;
9 credit policy, their own credit, trying to 10 maybe.take a weakc; credit and help them
\ >
11 turn it into a better credit over time.
. We 12 provide advice on capital structure. Just i 13 general financial strategic planning is a '
14 major area we provide a lot of advice to.
15 Q. ,Do you provide any services on take-over ,
16 defense?
j !
17 s-A.,
~-
[es, take-over defense is part of the
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valuation. Work we do in mergers and j.
19 acquisitions, take-over defense is a portion t' i
I 20 of that business.
- Ig 21 Q' . What ic take-over defense?
a :
2 22 A. Take-ovet defense is--- in the utility ;
9
$ 23 industry the prospects for hostile takeovers 24 where a company tries to come in and take 25 over another company really against the
.m. c . _____
l no I wishes of management is a fairly recent phenomenon.
2 It's much more common to
, l l
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- 3 corporate America in general. It's ,
1 4 something that's been around now for 10 or -
5 20 years, but for utilities it's a fairly 6 new threat, and we provide advice to 7 corporations to position themselves so they 4
8 are not such an easy target for takeovers. !
9 That involves some valuation work, and it 10 also involves advice on restructuring 3
. 11 charters, Articles of Incorporation, putting 12 in various take-over defense methods.
13 Q. The various types of work that you 14 identified, do any of these involve 15 valuations?
? .
! 16 A. Most of them involve valuations in one form i 17
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or another.
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18 Q. Can you just generally describe how that l
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19 occurs?
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I 20 A. Sure. Whenever you're raising money for a I
- 21 company it implies. valuation. For instance, l
22 . if you're doing a bond offering, the debt of
$ 23 a company has a value just like the equity 24 of a company, and that debt is a function of i i'
25 those credit ratings in the capital markets i
r,-
l ot tho timo, so in a real sonso you're l
2 providing valuation for the senior
. l 3 securities of that company. Certainly the l 4 same is true in equity offerings, also when ',
5 you're providing work in relation to mergers 6 and acquisitions in take-over defense.
7 The large part of that job l
g 8 involves establishing values for company, ;
i t
9 either the companies you're trying to buy or 10 establishing a value for yourself in your '
1 l
'- 11 defense of your company if someone is trying !
. I 12 to take you over. j 13 , We also take on valuation I i
14 assignments. This is certainly one.
15 Another one we're involved in right now is .
- , j 16 providing advice to the government of New l I .
17 realand to restructure and provide a i
8 .- .. .
j j 18 . valuation for the generation and ;
o j
19 ,
transmission power supply system for that I 20 country, and that is first and foremost a i ig 21 valuation, and after we_ establish..a valu_e_,, _ _ ,
22 it will be up to us to propose an i' i
- f. !
l 23 appropriate capital structure, r' ate setting 24 methodology, things o'f that nature.
25 Q. Who is your client in that situation?
1 1 ~---m.a-- s.' . .
id
. i i 1 A. It is the government of Now tecland. We're l 1
, 2 working with the treasury department. I I
3 Q. Is that at this time a not-for-profit 4 entity? !.l t
5 A. It's a not-for-profit, and very often a loss .
6 entity, as many government-owned i i
7 organizations can be. We are trying to ,
i 8 structure it as really as a quasi-public l 1 l company.
9 Where you have a government-owned l
10 entity, very often there are other ;
11 objectives you're trying to meet besides 12 just making a profit or satisfying your debt 13 servicing. We are restructuring it as a !
14 quasi-public agency, and we would expect ;
15 that sometime in the future it will, indeed, i 16 go public.
17 Q. A're there other people involved in that g .. . .
g 18 -
valuation process and restructuring process? !
f 19 ,
A. Sure. In a valuation many times there is t
! 20 the need to hire experts on particular l 1 21 areas. We happen to be using R. W. Beck.
g 22 We hired Beck to provide engineering f
h 23 expertise on this particular assignment, and l
24 we selected Beck because they have a very ,
25 good reputation in the industry for this
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typo of work, ongineering and consulting
. '2 work, and we have done business with them i 3
numerous times in the past on the municipal '
4 finance side. ,-
5 We also hired an economic consulting l 6 firm from Putman & Hayes to provide ;
7 consulting work on a variety of regulation 8 and economic matters.
?- It's common to hire .
1 9
extra consultants in a situation like that.
I
! i 10 Q. So it would be common to work with a 11 consulting engineer in a valuation project?
12 !
, A. Very much so, especially in a valuation !
13 pro. ject that depends upon a real 14 understanding of technical engineering !
, 15 matters. !
i :
- 16 Q. The valuation that you did for Wabash !
l 1 17 8
n.
Valley, was that done in the manner that you 18 '
{ .
would normally do in these other valuations f 19
- that you have generally referred to in your t
I, 20 prior testimony?
g 21 A. Yes, e !
22 Q. Would you tell the court generally the l
$ 23 s methodology that you employed in d' oing the a i 24 valuation for Wabash Valley? -
l 25 A. Certainly. I :
The method we used is a method '
i I 1
1
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^
l is 1
that's common to most valuation exercises 2
done by people from Wall Street. We tend to l
3 rely on the market very heavily to guide us 4
in determining what value should be placed 5
upon enterprises. That's the area of 6
expertise that we have. We trust the l j 7
market. We believe it' works efficiently and 8 !
\ we believe it helps to resolve a lot of the i !
9 !
subjective points involving valuation. .
! i 10 Q. What is the market? '
11 A. :
The market, the market is public capital -
12
- markets for debt and equity securities.
j 13 It',s a huge auction process that goes on !
14 ,
every day where individual investors, i 15 institutional investors, buy and sell
! 16 l
' securities, debt and equity securities.
i 17 i
8 In the process of doing that, they e 18 '
- "are con'inually t
revaluing the valuations of l 19 publicly owned companies.
i
. Values are being
{, 20 '
set every day by that market. There are I
g 21 t
enough people doing it that we have a lot of 22 faith in that auction process. It gives a k 23 very good estimate of value. '
24 The process that we undertake, 25 which we will call the market valuation !
l l
17 ,
1 approach, really begins with getting a rec 1 ,
2
- understanding of the business you're trying 3 to value. !
Any approach is going to require i 4 that. You have to feel certain that you -
5 understand the risks of that business, that .
6 you understand the history of that business, 7 ' '
where it is today, where it's going in the i
i 8 future, what the projections of its j 9 financial condition are and why they are 10 that way; but primarily, making sure you 11 really have a good understanding of the ;
i 12 risks associated with that future stream of 13 earnings, thos<1 future streams of cash flow I 14 that you hope to value. ,
15 Q. In the case of Wabash Valley, did you r -
! 16 examine into the risks associated with this i 17 company?
g ..
g 18 -
A. Yes. - '
e ;
19 Q. Would you explain that to the court?
I 20 A.
l Certainly. During the past year and a half 21 we have had considerable opportunity to get 22 familiar with the business of Wabash Valley ' '
l 23 and understanding the risks with Wabash --
24 Valley. At one level it's complicated, 25 every business faces a number of risks, but !
1R 1
it's also at another lovel fcirly simple.
2 Wabash Valley is a generation and 3
transmission utility that supplies bulk i 4 power. Bulk power supply is one of the most .
5 competitive aspects to the public utility 6 business. Wabash Valley happens to operate 7
in a very competitive bulk power supply i
g 8 market. There are a lot of utilities, l 9
investor-owned utilities and otherwise 'l 10 l around here that have excess capacity, and l I
' i 11 will have excess capacity for quite a lor.g l i
12 time. -
13 .
Wabash Valley then is faced with a 14 competitive threat to its market. It has 15 e .
real pricing considerations, just as in many
- 1
! 16 instances almost'like an industrial company i 17 would have. To the degree that its rates 8 m. "
18 lC .
are subject to regulation differentiates it j j 19 a little from an industrial company, but the t
! 20 ultimate determiner in my opinion, after i 21 g
this year and~a half of study, is going to
- 22 be the market.
l This is a competitive power k 23 supply market and that is a major risk.
24 Q. Before going on, why are risks so important l 25 to the investment banker?
-.____.-.__._.______.--__..____-.~..--u_______ . . _
19
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1 A. Well, risks aro important to the investment 2 banker because they are important to the j
3 investor. You can't determine what return 4
you require on an investment unless you ,
5 really have a good understanding of what the 6 risks are. You can go out and buy a 7 long-term government gecurity at 7 1/2%
g 8 yield and fewl that that might be a very low 9 yield but, on the other hand, there is a
~
i 10 very low risk inherent in that investment. '
11 The other side of the extreme, 12 staying with the debt as an example, would j 13 be,what's commonly referred to as junk '
14 bonds, bonds that have less than' investment 15 grade credit ratings, bonds that have an 1 j
16 l inordinate amount of risk as sched to i l
n 17 investing. Today, as I said, 1 '-ttrm 8 .. ,. .
18 government securities have yields or about
[ .
i i 19 7 1/2%, junk bonds easily have yields of
,( 20 13 1/2 to 14%. Those are significant risk g 21 premiums associated with making investments 22 in significantly ristier investment
! 23 alternatives so, until you have a good I
r 24 i understanding of what that risk is, you l 25 can't really know what the return should be.
1 l
l
. _ - _ _ _ _ _ _._: _ ;-~ -- _.
~ _
' so_
1 Q.
Does tho risk issue have an importance as it 2
relates to disclosure?
3 A. Very much so.
4 Q.
Would you explain what disclosure is and how -
5 risk relates to that?
6 A. Certainly.
In an initial public offering, ,
7 i or in any public offering of securities, an ,
\ 8 initial public offering is particularly 9
important in this case because that was one .
10 of the major subjects we made in approaching l 3 .
11
, this valuation process. :
12 1 We have assumed that we would be 13 taking Wabash Valley public in an initial 14 f offering.- The disclosure requirements '
15
, established by the Securities and Exchange 16 Commission are demanding, and they are i 17 I
g ..
_ p'articularly demanding for initial offerings t 18 - ;
$ for companies that haven't been publicly !
19 owned in the past that are being offered for
{, 20 the first time to the public. '
21 There are a whole host-of -
22 disclosure requirements. By "disclosure," I '
h 23 mean information mdst be presented in'the 24 prospectus that's used to sell these 25 l
securities, a prospectur that's delivered to '
S1 6
1 the public at the tormination of their solo, 2
and the requirements for disclosure for '
3
, those prospectuses require that you provide '
4 a very detailed outline of what the business -
5 is, what the historical financial condition 6
of the company has been, what the business 7 risks that company faces are, and
- 8 particularly in an initial public offering a 9
business risk section is considered to be so 10 important it always comes first, and to the :
11 extent that you have particular business t
12 risks that may present extreme risks to an 13 investor, you very often put them on the 14 front of the prospectus.
15 t - The investor needs to know what
! 16 these risks are before he can agree to buy i 17 '
8 at those price,s that you set or not buy at
, ~. -
g 18 those prices that you have set, and force
[ 19 i 2
you in your offering of those securities to j 20 even lower the prices. So he has to know 21 what those risks are, and'you face 22 considerable legal liability as an l 23 underwriter if you haven't adequately 24 disclosed those risks because you haven't 25 told the whole story. !
. i l 1
. ~ :, .
n i "5-1 !
We're required to diligently ;
'2 examine the underlying business that creates l!
3 those numbers that we are disclosing. I 4 Q. The investigation you have described, is .!
5 that what's known as due diligence?
6 A. That's what's referred to as due diligence, 7 yes.
i 8 Q. Your investigation of the business of 9
Wabash, was that in the nature of a due 10 diligence exercise?
, 11 A. 'Most certainly, most certainly. In this ;
12 i case it might be called something different, ,
13 but we went through the same things we would 14 do if we were performing a due diligence 15 review of a company for initial public
! 16 offering.
17 8
Q. Is regulation an item that has to be
.. s. .
18 discussed in the disclosure document?
[ 19 t
A. Certainly, when you're dealing with a l 20 utility regulation must be discussed. ,
Ig 21 Competition is discussed, even for utilities 22 that are integrated, may face less l 23 competition than the wholesale bulk power 24 supplier does. But competition, regulation, i 25 those things that are fundamental to a I l
,--~-' ~ " '"**'~ ~"
91 business are always disclosed and discussed I
at length.
l Q.
Would you be required in the prospectus to set forth the current regulatory regulations .
as they relate to the company that was going public?
A. Certainly. We would describe state regulation, and to the extent there was any federal regulation, we would discuss to what degree the federal regulation affects those
. revenues, what percentages regulated at the FERC level. Yes, two or three pages might be.on regulation.
Q.
And would the same be true for competition?
A. That certainly would be true. Competition disclosure requirements are directly dealt s.
with in disclosure regulations for prospectuses.
You have to talk about major suppliers, major customers. Those are requirements.
But in addition, you have-to deal with the competition in the market that you're selling your products into, who your competitors might be, what competitive i i
pressures your business might face. If you i
l ._ .
e ?d_
1 didn't discuss those you would run a real
, 2 risk of facing considerable legal liability 3
if the valuation you place on those 4
securities at the time of the offering !
5 j 6
turned out not to be the valuation that they really could withstand given those 7
competitive pressures.
8 Q.
Are you aware of the wholesale power supply 9 -
contracts between Wabash Valley and its .
10 principal customers, being its members?
3 11 A. Certainly. It's very similar to the 12
- contracts throughout the rural electric 13 industry. .
14 Q.
You have seen these types of contracts in 15 t
other situations?
f 16 A. Sure, yes.
1 17 Q.
8 Would there need to be disclosures regarding e 18 -
5 '
" these c'ontracts in a prospectus or an
{ 19 i
offering memorandum?
I g 20 A.
Yes, most certainly.
21 The whole business of Wabash Valley depends on contracts, it l; 22 particularly depends on these contracts.
$ 23 . _ . . _ .
Before entering into an initial public 24 offering where the valuation of the business 25 depends on a series of contracts, and given f
g, e, en a u..
JROM 18EQR508 ggt; nn o v e i -am .. . 3: :M M&S
, I y some of the experiences currently in this 2
3 industry with the enforcement of contracts, ,
just the experience in business in general ,
4 in particular over the past ten years or so S 1
\
6 over the enforcement of contracts or the non-enforceability of contracts in many 7
instances, these contracts would be a major 8
disclosure point and they would also --
9 being an investment banker and trying te 10 i bring this company public, and taking it i i 11 -
\
more from a hypothetical to an actual, if I 12 13 were structuring this deal I would want more ; i than just disclose the nature of the .
14 ,
contracts.,
, 15 i I would ask Wabash, request Wabash 16 ;
i 17 strenuously to go back and try to have those j i 8 !
g 18 -
' contracts either reaffirmed or guaranteed by -
"its members, to do something to bind those l 19
- i 1
I 20 '
distribution members even more tightly to lg1 21 Wabash than is currently evidenced by the
,e contracts that exist.
jj 22 Q.
You testified and mentioned a problem l
, h 23 throughout the industry, can you describe 24 that for the court?
25 A.
It's a fairly recent phenomenon, but it ;
,- - . - - - . . - , . . . - _ . . - . . . - - . - - . _ . _ _ , _ . . . . . , . _ , , . , . ._.\
t eaus eascaem 1
^
=.' -
...-; ;- # % /A ne m te rHut Ma l
. 1 0\U appears to be a sorioua One. There ore a 2
, number of instances in the rural electric 3
industry where these contracts are being 4
challenged.
The situation exists in Alabama 5
right now that's referred to as the cousa 6
Valley case where a distribution member is 7
trying to challenge the validity of a 8
contract.
9 '.
There is another case in the 10 :
Pacific referred to as the Shashone case 11 ,
where the Shashone distribution cooperative 12 i sold its b'Jsiness out to an investor-owned ,
13 utility and took the position that that '
14 voided the contract, and that there were no 15 e
I more liabilities attached under the 16 '
all-requirements contracts once that 17 business was dissolved and sold away.
{ 18 There are numerous instances 19 concerning the Seabrook Nuclear Power Plant
! 20 i involving cooperatives and municipal power '
I 21 suppliers, a
22 Q. What is the Seabrook?
! 23 A.
The Seabrook Nuclear Power Project is one of 24 the many nuclear power' projects that the i 25 electric utility is facing considerable '
__ l 1
n 6, 1 difficulty with. There were two units. The 4
2 first one is basically finished, the second 3
one has been cancelled. Numerous partners '
4 have gotten out of those contracts. .
5 Q. Were there wholesale power supply contracts 6 going out of the Seabrook situation?
7 A. To the extent that there were some G&T's 8 that are the partners of Seabrook, New 9
Hampshire Distribution Co-op involved, '
10 Massachusetts and Maine, I believe there is i
11 a cooperative in Maine involved in the 12 Seabrook project. There has been 13 considerable pressure on those cooperatives 14 to get out of those contracts, break the 15 contracts and extricate themselves from the ,
16 Seabrook mess.
I 17 Q. Were there also investor-owned utilities who 8 . s. -
18 .
had all-requirements contracts with or had ,
j 19 requirement contracts in the Seabrook i
- l, 20- project?
i E
, 21 A. Well, there are two utilities in Maine that 22 had contracts with Public Service of New l 23 Hampshire..to buy power from that project..
24 Q. Were one of those utilities a client of i 25 Shearson-Lehman Brothers? !
l
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