Island Light & Power Co. v. Sara Golvinveaux McGinnes

Block Island Power Co. (BIPCO), founded in1925, was purchased in the 1980s by five individuals. By 2015, there were three shareholders: two doctors and the respondent, in this case, the Sara Golvinveaux McGinnes 2011 Trust. On Nov.11, 2016, the two doctors sold their shares in BIPCO to New Shoreham. The Trust did not sell its shares. The General Assembly established the matter of  Block Island Utility District (BIUD) in 2017. On Dec.3, 2018, the Town voted to sell the assets of BIPCO to BIUD, under objection from the Trust on Nov.30, 2018. “From the sale proceeds, the Trust received the sum of $900,000 for its one-third interest.” The Trust disagreed that this is the fair value of its one-third interest. 

The trial was heard as a bench trial. Petitioner presented Glenn Walker as its valuation expert, while “[t]he Trust presented as witnesses its valuation expert, Dylan D’Ascendis, [and] its real estate expert, Peter Scotti.”

Analysis

The parties agreed that the dissenting shareholders were entitled to their shares’ fair value on the day before the corporate action was authorized. There should be no discounts for either marketability or lack of control. “The real objective is to ascertain the actual worth of that which the dissenter loses because of his unwillingness to go along with the controlling stockholders, that is, to repay him.”

Petitioner engaged Glenn Walker to value BIPCO in anticipation of the sale of assets to BIUD. He concluded that BIPCO had a value of $5 million. In July 2020, the petitioner engaged Walker to value BIPCO as of Dec.2, 2018. “He concluded that, as of December 2, 2018, the going concern value of BIPCO was $5,500,000, and the fair value of the Trust’s shares in BIPCO was $810,000.”

The Trust engaged Dylan D’Ascendis to value BIPCO and the Trust’s interest. He issued his report concluding a value, as of Jan.31, 2018, of $8,676,526. He stated that his value would not change as of Dec.2, 2018, and, if anything, would be higher. 

The Court’s Task in a Battle of Experts

The experts’ reports differed by over $2.1 million. In such a proceeding, each side had the burden of proving their respective valuation positions. “In discharging its statutory mandate, the [Court] selects one of the parties’ valuation models as its general framework or to fashion its own.” Just as atrial justice may pick and choose among the evidence presented by laypersons, he or she may do the same when dealing with evidence of experts.” The trial justice can also select his methodology. The Court decided to create its value and to use the three approaches the experts for both sides adopted: the cost (asset) approach, the market approach, and the income approach.

Cost Approach

Physical assets: In analyzing the second Walker report with asset values of $26,888,000, the Court determined that Walker used too high a depreciation factor and reduced the depreciation rate from Walker’s 60% to 50%. Walker did apply an obsolescence factor of 66%. The Court determined that Walker used the wrong base (NOI instead of EBITDA) to determine his 66% factor. Since Walker had already depreciated the assets on arriving at his value, applying his obsolescence factor meant that he, in essence, declined the assets twice.

Adjusted economic obsolescence factor: Using the adjusted economic obsolescence factor of 50%, Walker’s cost approach would result in a value of $8,873,000.

Mr. D’Ascendis calculated the replacement cost differently, using the Handy-Whitman Index to determine the current reproduction value of BIPCO’s assets. “He took the asset classes from BIPCO’s books. He used a ratio of the index today to the index when the asset was put in service and multiplied that ratio by the original cost to determine the replacement cost. He then applied BIPCO’s depreciation rate to the asset to determine its current value.” D’Ascendis’value was $6,627,553.

Land, cell tower, and rights of way: Completing the cost approach requires adding the value of the approximately 24 acres of land BIPCOowned. Walker valued the land at $1,500,000, while the Trust’s real estate expert, Scotti, valued it $1,875,000. Walker used a sales comparison method, while Scotti used a discounted cash flow method to develop the property for seven house lots. In developing his strategy, Walker “did not adjust for the fact that his comparable was two years old nor did he articulate any understanding of the local Block Island real estate market.” The Court found Scotti’s method more credible. Scotti also believed that the value should include the value of a cell tower and rights of way for the distribution system. 

The Court did not believe the value of the cell tower should be included since its revenues inure to the rates paid by the ratepayers and do not inure to the benefit of the shareholders. As to the rights of way, “[t]heburdensto prove that BIPCO paid to acquire these rights of way was on the Trust, and it failed to do so.”

In conclusion, “[t]he Court believes the revised value of Mr. Walker is too high and will use for the cost approach value Mr. D’Ascendis’court adjusted value rounded to $8,500,000.”

Market or Sales Comparison Approach 

Walker compared certain sales of utilities from the Northeast from 2010to2013. He compared sales price to gross revenues, customer sales price, adjusted book value, and sales price to EBITDA. He also included the 2016 sale of the two-thirds interest to the Town and the sale of BIPCO’sassets to BIUD. The Court found that the sale of assets in 2019 is not an arms-length transaction. There were also unanswered questions as to the 2016 sale that the Court noted. It also stated that, even if those questions were answered, Walker did not apply the

Metrics of the sale as he did of the other comparables. Walker produced a value of $5,500,000.The Court had issues with his calculations and choice of ratios and arrived at values of $6,567,000.

D’Ascendis found five sales from around the country at a later time than Walker’s comps. “He then used the sales price per customer and sales price to EBITDA ratio to come up with a mid-point value.” He also looked at publicly traded utilities, compared their market-to-book-value ratio average, and found a midpoint value for BIPCO. He averaged the midpoints of the two standards to arrive at a value of $8,512,492. However, the Court disagreed with his methodology because his comps included companies where customers received gas and electric services. The Court also did not believe that public-company data were valid. 

On April 2, 2017, a small electric utility serving a small island off the coast of Maine was sold to a large Maine utility company. Neither expert “found” this sale, which reflects unfavorably on both appraisers. However, the Court found that there is little known of the sale details and that the Maine Public Utilities Commission might have put pressure on the parties to complete the sale. Therefore, the Court did not feel this could be used for this case. 

While the Court had some reservations about the arm’s-length nature of the 2016 sale, it nevertheless used the metrics from that sale and arrived at a value of $6,400,000 for the market approach. 

Capitalization of the Income Approach

Walker used a direct capitalization method defined as: “Direct capitalization is a method used in the income capitalization approach to convert a single year’s income expectancy into a value indication. This conversion is accomplished in one step, by dividing the net operating income estimate by an appropriate income rate.” He capitalized both EBITDA (10%) and net operating income (0.6%). The Court believed these rates to be reasonable and in line with D’Ascendis’ 7.32% rate. However, Walker used a four-year average for EBITDA and had he used the actual EBITDA for 2018 of $677,000, and his value would have been $6,770,000. Also, hadWalker used the real 2018 income of $549,000, his value would have been $7,224,000. Given equal weight to both approaches (as adjusted by the Court), the value would be $7 million.

D’Ascendis employed a discounted cash flow method to arrive at his income approach value. The Court found his assumptions as to rate, and thus revenue increases, to be speculative because such increases were dependent on the approval of the public utility commission. Therefore, the Court adopted a $7 million value under the income approach. They were applying different weights to their conclusions, and Walker arrived at a $5,500,000 and D’Ascendis a value of $8,676,526. The Court, through its analysis, arrived at a value of $6,900,000.

Liabilities

Walker deducted liabilities of $3,070,000 based on the closing documents for the sale of assets. D’Ascendis did not remove any penalties under the theory that the ratepayers ultimately pay the debts of BIPCO. The Court believed both experts to be wrong. D’Ascendis’position did not consider that the debt was part of an ongoing business’s balance sheet and, therefore, the book value was a deduction in arriving at equity. Likewise, Walker’s approach was incorrect because he deducted too much in liabilities, and the correct amount should be the book value the day before the transaction.

Conclusion

“The Court will deduct the book value of the RUS loan, or $1,768,582.68, from its going concern value of $6,910,000 and finds as fact and concludes as a matter of law that the value of BIPCO’s equity as of December 2, 2018, was $5,141,417.32 rounded to $5,145,000, and thus, the fair value of the Trust’s shares is $1,715,000.”