DEL.ICIO.USThe Atlanta Journal-Constitution
Published on: 05/01/08
A nonprofit Cobb County electric cooperative and its management company awarded their chief executive $3 million in stock that pays $265,500 a year in dividends, according to annual reports and court disclosures.
Dwight Brown obtained 120,000 shares in the management company, Cobb Energy, in 2002 with interest-free loans that he does not have to repay if he meets certain conditions.
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| Dwight Brown, President/CEO, Cobb Electric Membership, Corp. | ||
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Brown's dual role as president of both entities is at the heart of a 2007 lawsuit alleging he enriched himself at the customer-owned utility's expense. The co-op, Cobb EMC, once owned all of Cobb Energy, but later transactions shifted most ownership to investors, including Brown.
Brown's preferred stock has earned at least $796,500 in dividends, records and other financial information show. The co-op, which owns 201,000 shares of common stock in Cobb Energy, has never gotten a dividend, Pitts Carr, a lawyer for co-op members, said in court last week.
"Guess what the EMC gets paid on its stock?" Carr said. "Absolutely nothing."
The loan, dividends and other earnings have increased Brown's combined compensation to $1.5 million a year, Carr said. Cobb Energy, created at Brown's urging in 1997 to run the co-op's business, has fought in court to keep details of Brown's pay secret.
At a hearing last week, Carr said Brown, 62, was rewarded extravagantly and faced little accountability.
Carol Cookerly, a spokeswoman for Cobb EMC and Cobb Energy, said Brown is a visionary leader who has saved the co-op's 190,000 members millions of dollars.
Brown's responsibilities stretched beyond running the co-op, she said. Cobb Energy owns several for-profit subsidiaries that sell services to the co-op, its customers and other electric cooperatives.
"Take a look at any major not-for-profit or for-profit with similar assets, revenues and employee base and you'll see that his compensation, if not much lower, it's in line," she said.
Brown's stock ownership and compensation took center stage last week as attorneys argued in Cobb County Superior Court whether those details should be kept confidential. Senior Judge Michael Stoddard ruled that Brown's description of his pay, contained in a deposition, will be made public this month.
But other court statements and financial records reveal details of Brown's compensation that included rewards that went far beyond his co-op salary.
Brown obtained his Cobb Energy shares through two $1.5 million loans — one each from Cobb EMC and Cobb Energy — when he signed a new six-year employment contract with each entity. Such loan agreements are used in the private sector but are unusual for a nonprofit co-op.
The contract specified Brown would not have to repay either loan if he remained with the companies, Carr said. All Brown had to do, Carr said, was "warm his chair for a period of time."
Lawyers for Brown and Cobb Energy objected to that characterization.
"I did not hear Mr. Brown [say] that he got paid to warm his seat," said Michael Weinstock, representing Cobb Energy.
Cobb EMC has extended Brown's contract to 2011 and written off most of its half of the loans, minutes and tax records show. Records of Cobb Energy have not been made public.
Co-op officials said the arrangement with Cobb Energy has trimmed costs and saved money for its members. The companies agreed Cobb Energy, under its 40-year contract, would charge a 2 percent markup on the payroll cost of running the co-op.
Recently disclosed documents show the companies have since increased that fee more than fivefold — to 11 percent of payroll plus other operating costs — during Brown's tenure.
Last year, the fee added up to several million dollars.
The lawsuit, filed last fall, accuses Brown and the co-op's board of "gross mismanagement" that has siphoned the co-op's assets while enriching Cobb Energy.
The suit alleges the co-op and its members were harmed when its assets, such as employees and equipment, were transferred to the for-profit company.
Brown and both companies have denied the allegations. They say the financial arrangement between Cobb EMC and Cobb Energy was legal, fully disclosed and saved the co-op money.
Brown's deal vs. peers'
Brown's compensation from the EMC and Cobb Energy exceeds that of other co-op presidents, who generally earn a salary only from the utilities they run.
In 2001, Brown's $241,000 salary from the co-op alone was at the high end of his peers' pay. A year earlier, a trade survey found the highest co-op executive salary in the country was $240,000.
Brown's new pay package pushed his combined 2003 compensation to at least $785,000, including the dividends and a portion of the loan. That amount includes his salary from the co-op but not from Cobb Energy.
That total was more than three times the $227,824 paid in 2003 to Randall Pugh, president of Jackson EMC. Jackson, which serves areas northeast of Atlanta, and Cobb are among the nation's four largest electric co-ops.
Brown's 2004 compensation topped $809,000. On average, presidents of the nine other largest co-ops in the country made $375,550 that year.
Brown acknowledged at a 2007 meeting that he held Cobb Energy stock, but he declined to say how much or identify other owners.
"I don't know what kind of CEO wouldn't own stock in a company he's supposed to run," he said.
Most large companies encourage CEOs to own stock so their financial interests are aligned with those of shareholders. But Brown's duty at Cobb EMC — getting the best deal for co-op members — conflicts with his responsibility at Cobb Energy to maximize profits, co-op members allege in their lawsuit.
Making sense of stocks
The co-op owned all of Cobb Energy until 1999.
Then, with the co-op's permission, Cobb Energy sold a new class of stock paying quarterly dividends to its major lender. As a result, Cobb EMC and the lender, National Cooperative Services Corp., each became half-owners of the outstanding stock.
In 2002, NCSC sold 120,000 of its 200,000 shares back to Cobb Energy, which issued new shares to Brown, giving him 51 percent of the company's preferred stock, according to an accounting of ownership.
Later stock transactions left Cobb EMC with a 30 percent share in Cobb Energy as of April 2007. The remaining 70 percent belonged to other investors, including Brown, his wife and an employee stock plan, according to a 2004 filing with the U.S. Securities and Exchange Commission.
Preferred stock pays a quarterly dividend of 55 cents per share and can be sold back to the company for $25 per share, according to incorporation papers.
Cobb Energy paid $464,625 in dividends on Brown's stock in 2002 and 2003, records show.
The company also paid full dividends on preferred stock in 2004 and the first quarter of 2005, said Mike O'Brien, a spokesman for NCSC, which owned preferred stock at that time. State law requires that all holders of the same class and series of stock be treated equally as to dividends.
Dividends on Brown's shares were $331,875 in that portion of 2004 and 2005. Brown has not disclosed whether he has collected dividends since then.
When Cobb Energy was formed, EMC leaders told members that the co-op would receive dividends on its 201,000 shares of common stock. The co-op has not reported a dividend in any annual report since then.
The Cobb Energy board votes on whether to pay either dividend. If the company dissolves, preferred stockholders such as Brown may recoup their money before assets are distributed to common stockholders.
COMPARING DEALS
The five largest U.S. electric co-ops and chief executives' 2004 compensation:
$809,190: Cobb Electric Membership Cooperative (Georgia)*
$725,000: Pedernales Electric Cooperative (Texas)**
$556,105: Withlacoochee River Electric Cooperative (Florida)
$444,755: Clay Electric Cooperative (Florida)
$363,736: Lee County Electric Cooperative (Florida)
*Includes dividends and loan forgiveness but not salary from Cobb Energy.
**Includes $375,000 signing bonus.
Sources: Federal tax returns, legal documents, reporting from individual co-ops.
THE STORY SO FAR
• Previously: Customers sued Cobb EMC and its management company, Cobb Energy, saying the companies' relationship had drained assets of the co-op and its customers.
• The latest: An April 25 court ruling kept Cobb Energy's list of private investors confidential, but will open a deposition detailing its chief executive's compensation.
• What's next: Trial is scheduled for late summer.
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