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Taking financial bids at face value 'a little bit dangerous,' accountant tells inquiry

Accountant said he was surprised an independent financial advisor was not involved in the process
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John Rockx, a chartered professional accountant and valuator, on the stand during the Collingwood Judicial Inquiry.

At least some of the information contained in the bids presented to the town for the 2012 share sale of Collus was based on guesses and required further clarification, according to the accountant charged with summarizing the financial portion of the bids.

This information formed part of the sworn affidavit and testimony of John Rockx, a chartered professional accountant and chartered business valuator and partner at KPMG, the firm hired to do the initial valuation of Collus and later to help with the request for proposal (RFP) process.

Part of his role in the RFP process was to summarize the financial portions of each bid.

It was this role that judicial inquiry counsel, John Mather, focused on during his questioning.

In his work leading up to the Collus sale, Rockx created a chart comparing each financial bid from the four bidders (PowerStream, Horizon, Hydro One, and Veridian).

“I made certain adjustments to the financial bids to approximate an ‘apples to apples’ comparison,” said Rockx in his affidavit. “I also made certain assumptions based on the terms of the financial bids, which included various provisions for purchase price adjustments (and) closing conditions.”

Documents show Hydro One offered Collingwood a deal it said was worth $18.5 million for 50 per cent of the shares of Collus Power. The total amount included $13.6 million in cash, a loan repayment of $1.7 million, and splitting the recapitalization dividend resulting in $3.2 million for the town.

However, Rockx reduced the Hydro One bid to $14.4 million total for the comparison chart, or from $13.6 million in cash for the shares to $9.5 million.

He said the impact of long-term liabilities was unclear to him and he was unsure if the Hydro One bid already included consideration for things like debt.

In the case of PowerStream, where the deal being offered was $7.3 million for the shares, Rockx reduced the amount to $6.2 million. For share price alone, PowerStream had the lowest offer based on Rockx’ Nov. 25 chart.

During his testimony, Rockx stated his chart was based on estimates and guesses, and the numbers could have changed if he had more clarification from the bidders, particularly Hydro One.

“They say the devil is always in the details,” said Rockx. “Just to look at a number and say here’s what we offer without looking at the conditions attached to that offer is … a little bit dangerous.

"Our understanding was that there would be or could be some deductions from the share purchase price and that’s why we went through and tried to get these clarified," he said.

Rockx was using 2010 figures from PowerStream as he had not been provided with a 2011 year-end statement.

The sale was taking place at the end of 2011, and council voted to approve the sale on Jan. 23, 2012, so the final 2011 numbers were not available to use for calculations of items such as working capital and debt levels to come up with the “apples-to-apples” net share purchase price.

He told the inquiry he thought it was unusual for there not to be another financial advisor directly involved in the reviews.

“Typically, if you’re in a situation like this … you would expect maybe somebody not on the [strategic partnership task team] … in a financial capacity with the town or Collus Power would be involved in those reviews,” said Rockx. “I wasn’t aware of anyone, but I would have expected somebody would be.”

Rockx testified he told members of the strategic partnership task team – a group made up of elected town officials and Collus board members charged with selecting a winning bidder for the Collus share sale – further clarification of the financial bids was required, particularly for the amount of liabilities that were assumed to impact the purchase price.

According to Rockx, at that Nov. 25, 2011, meeting, the strategic partnership task team decided to continue to have discussions with PowerStream, who had the highest bid score overall due to the non-financial component of the RFP (which was weighted as 70 per cent of the total score) and to continue to clarify the bid from Hydro One, who had the highest financial bid.

Rockx said he did work with Rick Stevens of Hydro One to clarify their bid. He said he didn’t get answers to all of his questions, and Stevens said Hydro One would provide further clarification if Collus Power signed an exclusivity agreement.

Such an agreement would mean Collus would have to end its discussions with other bidders.

However, Stevens agreed to look over a summary of the adjustments Rockx thought was necessary based on liabilities - without an exclusivity agreement.

But Rockx said he reached out to Ed Houghton, president and CEO of Collus, to report his discussion with Stevens and to seek instructions on whether to send his adjustment summary to Hydro One.

An email between Rockx and Houghton shows Houghton telling Rockx to “leave as is for now.”

Rockx testified he did not receive further instruction from Houghton on the matter, and did not provide the adjustment summary to Hydro One for clarification.

Based on the clarification he did receive, Rockx updated the comparison chart to state the net share sale price from Hydro One was $11 million after he made two deductions, and he indicated that number required further clarification.

Kristina Gaspar, who was the manager of strategy and risk at Hydro One in 2011 and participated in the preparation of Hydro One's bid in the Collus sale, was on the witness stand on May 29, 2019. At that time, she took exception to the adjustments made by Rockx.

She said the bid submitted by Hydro One was based on all information available to them, which included the 2010 Collus financial statements.

“I think [the deduction] goes beyond just what’s in the financial statements,” said Gaspar during her testimony. “But if all of the data information were reflective of what was presented to us and our assumptions that were built into the bid, there would be no adjustment.”

In the meantime, at the request of the strategic partnership task team, PowerStream agreed to increase its share purchase price (before deductions) from $7.3 million to $8 million.

Rockx said he attended a joint meeting of the Collus board and the strategic partnership task team, where he made a presentation with updated comparison of the four financial offers.

He said his presentation included “comments that Hydro One had the best financial offer and that certain assumptions still needed to be clarified.”

At the meeting, the board and team chose PowerStream as the winning bidder and opted to pass that recommendation on to council.

Prior to the Collus sale, KPMG was contracted by the town to undertake a valuation of Collus.

Rockx was part of the valuation process as a chartered business valuator.

Rockx concluded the value of 100 per cent of Collus shares between $14 and $16 million; he did not issue the final valuation to Collus or the town.

According to his affidavit, he was waiting for a copy of the audited 2010 financial statements of Collus power, and would also have required a letter from Collus management to complete the valuation.

There was a draft valuation given to Collus.

The valuation was one of the early steps toward pursuing a sale of Collus shares, and was meant to provide the town and Collus with an idea of the worth of the utility in dollars.

Rockx said his calculation of value was not as detailed as other types of valuations, but thought it gave a “fair sense” of the potential value of Collus Power.

However, Rockx was asked to value Collus Power, and though the RFP for the sale sought bidders interested in purchasing up to 50 per cent of the shares of Collus Power, it was the shares in the holding company, Collingwood Utility Services, that were eventually sold to PowerStream.

Rockx said his valuation of Collus Power did not consider details such as in-kind services that Collus Power and Collus Solutions provided to the town, but he did note those services could be significant in an email to his KMPG colleague, Jonathan Erling, on May 24, 2011.

Part one of the Collingwood Judicial Inquiry continues this week with hearings on Wednesday (June 26), Thursday and Friday at the Collingwood Town Hall. The plan is to conclude hearings for part one on Friday, June 28. Part one is the investigation into the details leading up to and during the 50 per cent of Collus to PowerStream in 2012. Part two deals with how the proceeds were spent, and hearings will begin for the second phase in September.