Judge approves Cobb EMC deal

A 14-month legal war between Marietta electric cooperative Cobb EMC and its customers ended Tuesday, when a judge approved a settlement of the case.

The co-op will spend an estimated $47 million to regain control of the business it turned over to a for-profit affiliate, Cobb Energy, 10 years ago.

In exchange, it will get back the electric meters, linemen and other employees transferred to Cobb Energy in the late 1990s.

The deal ends a 40-year contract that allowed Cobb Energy to charge up to an 11 percent markup for running the nonprofit co-op’s business.

Insiders, including Cobb EMC executives, business partners and some co-op board members, benefited through ownership of dividend-paying stock.

Plaintiffs’ attorneys say the co-op will net $65 million in the deal approved Tuesday. The operating contract’s markup alone was costing the co-op more than $5 million per year.

The co-op did not put its own benefit estimate into the record.

Cobb County Superior Court Judge Stephen Schuster said the settlement had strengthened the co-op, though he understood that some co-op members remained unsatisfied. Some had submitted protests in writing.

“No case is ever a home run for either side,” Schuster said. “When we started, we had directors voting for adders [markups for Cobb Energy] they then benefited from through stock dividends. These kinds of things may have been OK 10 years ago. It’s not OK now.” Because of the lawsuit, “it’s changed.”

Critics were particularly incensed that Dwight Brown, the architect of Cobb Energy, will stay on as the co-op’s CEO through 2010.

Brown is also Cobb Energy’s CEO, although the co-op is buying his contract out.

Among those who wanted Brown to go is Edgar “Bo” Pounds, one of the customers who sued.

“I wanted to go to court,” Pounds said after Tuesday’s ruling. “I wanted Mr. Brown gone.

“But I think this is the best we could do under the circumstances.”

In the days leading up to Tuesday’s hearing, plaintiffs’ lawyer Pitts Carr answered similar complaints by directing co-op members to Georgia law, which he said prevents courts from replacing executives in cases like this one.

Carr also pointed them to two upcoming board elections provided by the settlement.

The co-op’s chief executive serves at its board’s pleasure.

Under the election timeline spelled out in the deal, co-op members could replace a majority of the board in the next nine months.

“To be successful of course,” Carr wrote one customer, “this will require wide member interest and participation in the election process, which sadly has been lacking in recent years.”

Tom Cauthorn, a former judge who represented a committee of co-op board members, spoke at length about the defendants’ efforts to resolve corporate governance issues. He said in court Tuesday that many of the complaints were too late under Georgia law and would not have held up at trial.

He said although the committee found no wrongdoing by anyone at Cobb EMC, the committee members were concerned that “the entire series of events didn’t seem to pass the smells-right test in the current business environment.”

He said the board voluntarily enacted reforms, independent from the settlement.

Cobb EMC is the power provider for about 190,000 customers in five metro Atlanta counties. It’s one of the largest electric cooperatives in both Georgia and the United States.

Customers sued the co-op and Cobb Energy last fall, saying ties between the two had drained assets from the co-op, enriched co-op insiders like Brown and was rife with conflicts of interest, including Brown’s dual role.

The co-op formed Cobb Energy in 1997 as a vehicle for entering new, nonelectric businesses.

The stated intent was to offer bundled services in hopes that co-op customers would stay loyal if Cobb EMC ever had to compete for their business.

In annual reports to members, the co-op had disclosed the formation of the company and described it as a success.

But Brown and Cobb Energy did not disclose Cobb Energy’s financial reports to co-op members or refused to discuss who owned its stock.

The litigation changed that, forcing Cobb Energy to disclose information about its finances and owners.

According to court documents, Brown and his wife acquired $3 million of the company’s stock in 2002, which paid them $265,000 in dividends each year. Brown bought the stock using an interest-free loan from both companies, which was gradually forgiven.

The financial reports showed that most of Cobb Energy’s side businesses lost money, while the company continued to both collect its markup for operating Cobb EMC and pay out dividends to select stockholders.

Co-op lawyers on Tuesday presented the latest report, for the year ended in January, for the first time in court.

The firm’s auditors had refused to sign off on it for months without also including a letter saying it might not be able to continue as a “going concern,” according to court filings.

But the firm finally released an audit with no such letter, “what’s known in the trade as a clean opinion,” said co-op attorney David Flint, circulating the audit in court.

That audit makes it clear that the settlement deal not only ended the lawsuit and gave Cobb EMC its business back, but also bailed out Cobb Energy —- allowing that clean opinion.

In a footnote, the audit said Cobb Energy had experienced a “significant decline in its liquidity” in 2007, had a net loss of $10 million, net capital deficit of $9.6 million, was out of compliance with covenants of a $19.5 million outstanding loan and was named in the Cobb EMC lawsuit.

Renegotiation of the loan and the terms of the settlement with Cobb EMC had addressed Cobb Energy’s liquidity issues, the footnote said.