The Duluth Steam Cooperative soon could be privatized.
On Monday, the Duluth City Council will be asked to sign off on a letter of intent to sell the local steamworks to Veolia Energy, a French-based energy services company with 53,000 employees working in 41 countries around the world.
The company operates steam and chiller networks in 19 U.S. cities including St. Louis, Houston and Grand Rapids, Mich.
The Duluth deal has yet to be finalized and is unlikely to close before September or October, providing Veolia time to meet its due diligence standards. Assuming it goes through as planned, the sale of the steam cooperative's assets is expected to net the city a little more than $7 million -- essentially enough to pay off all outstanding debts related to the steam system, said Dave Montgomery, the city of Duluth's chief administrative officer.
Retiring that debt could help strengthen Duluth's credit rating and boost its ability to borrow money for other purposes, Montgomery said.
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Duluth began exploring a possible sale of its steam cooperative last summer, when it hired a consultant to help shop the system around. Montgomery said the cooperative drew the interest of seven suitors, but that list was gradually narrowed down to Veolia, the company that appeared to be the best fit for Duluth.
"We didn't want some private equity firm to come in, buy the cooperative, juice the profits and then flip the property. We asked for a long-term commitment," Montgomery said.
If the city were purely concerned about getting top dollar for the steam cooperative, it could have simply offered the system to the highest bidder. But Montgomery said the city administration did its best to balance the financial interests of the city with those of steam customers. The cooperative serves about 220 properties, mostly downtown and in Canal Park.
"We have not thrown customers overboard in this deal," said Montgomery.
Yet the general manager of the Duluth Steam Cooperative, Gerry Pelofske, said "the cooperative is against it, because people feel it will result in higher rates."
Montgomery agreed that higher rates likely do lie ahead for the cooperative's customers. But he said "that's not necessarily because of the sale but because of investments that will have to be made."
He pointed out that rising fuel prices and stricter environmental standards, including possible carbon controls, all loom as price drivers.
That may be so, but Pelofske said the steamworks' current cooperative structure ensures customers have a voice in how to deal with changing conditions.
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"Most of our co-op members feel that they would rather determine when costs should go up and by how much, rather than someone from out of state making the call," he said.
Keith Oldewurtel, vice president and general manager of Veolia Energy Grand Rapids LLC, which oversees the company's holdings in the central states of the U.S., contends that the cities Veolia serves benefit from the company's purchasing power and its experience operating steam plants around the world. He also stressed the company's interest in building lasting relationships with its customers
"Veolia is interested in long-term investments, and we like to sign long-term contracts with our customers," he said.
As for the 19 people the Duluth Steam Cooperative currently employs, Oldewurtel said Veolia generally doesn't make a practice of cleaning house when it acquires a new operation.
"Typically, the existing work force is given an opportunity to join our operation," he said. "They (the incumbent employees) have a lot of valuable institutional knowledge that we don't want to lose."
The Duluth Steam Cooperative has been operating in the red the past few years, forcing the city to chip in a total of around $200,000, according to Montgomery. He said these losses have been offset in part by about $120,000 in pilot fees the cooperative pays to the city each year.
Similar revenues are expected to continue to flow to the city in the form of a franchise fee if the steamworks are sold, according to Montgomery and Jeffrey Levy, Veolia's senior counsel.
