Co-op would buy Cobb Energy in deal to end suit

A Marietta electric cooperative is poised to buy the for-profit company that operates it, in the hopes of settling a lawsuit brought by its customers.

The co-op would also buy out for-profit Cobb Energy’s preferred stockholders, most of whom are co-op insiders — which has been a source of controversy. That includes stock owned by Dwight Brown, the chief executive of both companies and the architect of the arrangement that prompted co-op customers to sue last year.

The proposed deal, which is still being fine-tuned, is the latest development in a year-long legal battle between Cobb EMC’s customers and the two companies that together supply electricity in five north metro Atlanta counties.

Cobb Energy operates the nonprofit, customer-owned cooperative under a 40-year contract that has allowed it to charge an 11 percent markup on its costs. In the lawsuit, customers said that arrangement siphoned co-op assets and enriched insiders, including Brown, at the co-op’s expense.

Brown bought his dividend-paying stock six years ago, using a $3 million interest-free loan from both the co-op and Cobb Energy, according to court testimony. The loan is gradually being forgiven.

The stock has earned him $265,500 in dividends per year, in addition to the roughly $300,000 he earns from each company.

Under the proposed deal, Brown would remain at the co-op’s helm until his current contract ends in 2012.

Lawyers in the legal battle would not comment on the proposal, which appears to be very close to an agreement.

Details began to emerge this week after Brown sent a letter to 155 preferred stockholders saying that the co-op’s board had signed a letter of intent to buy Cobb Energy and its preferred stock.

The Sept. 30 letter also said preferred stockholders would not get their current quarterly dividend.

“Pursuant to the terms of the letter of intent,” Brown wrote, “Cobb Energy has agreed to refrain from making any distribution of its assets, (including dividends to preferred shareholders or redemptions of stock) until a definitive agreement is reached between the parties.”

People familiar with the deal said that the proposed buyout of Cobb Energy will cost the co-op tens of millions of dollars in the short term, including at least $10 million to buy back the preferred stock.

But they said the deal would likely save the co-op more than its costs over time, and that an independent auditing firm would be hired to verify that.

They also said the deal would be better than some other outcomes, like a feared bankruptcy filing by Cobb Energy.

Under the proposal, the co-op would get back its employees and electric meters, both of which it transferred to Cobb Energy a decade ago.

It would also end its operating contract with Cobb Energy.

That would relieve the co-op of an estimated $6 million annually in fees over the next 30 years, the people familiar with the deal said.

The co-op would keep any profits from the sale of Cobb Energy’s range of largely unprofitable side businesses, which range from mortgages to pest control.

It would keep Cobb Energy’s profitable staffing and call center operation, and retain profits in the future.

It would also get all of a billing software joint venture between the two businesses.

The proposed settlement means Cobb EMC would not receive the $13 million it is owed by Cobb Energy.

This summer, a special litigation committee made up of three co-op board members issued a report that said the co-op was owed that money. Questions about Cobb Energy’s financial health, meanwhile, remain unanswered.

Lawyers for the suing customers suggested last month that the company may be on the verge of bankruptcy.

Cobb Energy’s auditors have yet to sign off on its 2007 financial report. The latest available report is 21 months old.

In court last month, plaintiffs’ attorney David Cohen said that was because auditors were insisting on including a warning that Cobb Energy might not be viable.

As the two sides continue working on the proposed deal, a court-ordered Cobb EMC board election date is looming.

Cobb County Superior Court Judge Stephen Schuster postponed a scheduled early September election for four sitting board members.

He gave the co-op 60 days to come up with a more democratic way to elect officers.

That 60 days expires in three weeks.