Power Plant Acquisitons: Workforce Management from the Buyer's Perspective

Fortnightly Magazine - December 1998

How to survive in a seller's market.

Divesting power plants today may look very much like a seller's market. Buyers may believe they lack the necessary leverage to take an aggressive position on workforce transition.

In fact, to secure union support, and thereby restrict buyer flexibility, several recent plant sales have imposed all or some of the following conditions:

• Buyer must recognize the union as the authorized bargaining agent;

• Buyer must adopt the collective bargaining agreement for the existing term, which may have been recently extended in anticipation of the sale;

• Buyer must provide "equivalent" or otherwise duplicate existing pension and welfare benefit plans, providing full credit for service, vesting and eligibility purposes; and

• Buyer must offer comparable employment to all current plant employees, including those on long-term disability.

Such conditions have been imposed in part or whole in the Commonwealth Edison State Line sale, the Central Maine Power sale, the Boston Edison sale and the New England Electric System sale. They also have been required of bidders by Montana Power Company and New York State Electric and Gas, to name just a few.

In practice, it appears that the seller can nearly always reduce the critical labor-related issues to just a few and render them immune to buyer influence. Operating non-union is almost never an option for the buyer, since the seller typically has gained workforce and community support by requiring a union-friendly transaction. Moreover, the buyer's influence over the how and extent of workforce reduction has often been constrained by the seller's promises to its employees and bidding restrictions. Similarly, the buyer's ability to implement immediate change is restricted by the existence of long-term collective bargaining agreements, which at the very least establish a baseline of future expectations.

Nevertheless, many of the assets now for sale are relatively old. Often they are poorly maintained, in need of repowering or retrofitting. Their value lies in how they can be operated (em not how they are operated now. Buyers must not lose sight of that in pricing a potential acquisition or in pushing sellers on the process of workforce transition.

In fact, the buyer probably wants to operate differently from the seller, often with greater workforce flexibility, lower per-hour costs, and a more competitive labor cost structure. More than likely, the buyer envisions different objectives, such as:

(1) Staffing for baseload operation, using overtime and contractors for peaks and outages;

(2) High reliability and availability, but as a low-cost provider;

(3) Greater sensitivity to customers, without being overly solicitous or compromising.

The buyer also may hold certain key cultural values, such as a willingness to adjust labor strategy to local political or business environments. By contrast, the seller may want nothing more than a minimum of grief from the union, the employees, local politicians and the media.

Prospective buyers will find that they can influence labor matters (em before and during the bidding process, and during the closing of a power generation acquisition. They should approach each acquisition with a well-defined sense of what they need to succeed, and not hesitate to insist upon change. To do so, however, will require a comprehensive labor relations strategy.

Due Diligence:

Assessing Labor Practices

The phrase "due diligence" is a favorite buzz word in today's electric utility industry, where mergers and acquisitions have made it second nature to business development professionals to investigate prospective partners. The notion of due diligence might not often occur in the context of workforce management issues in power plant acquisition. The flawed premise here is that simply because staffing, compensation, and labor agreements have succeeded in the past, they will continue to work. Of course, nothing could be further from the truth.

Each buyer must assess key practices in human resources and labor relations. For example, will the labor agreements drafted for a single bargaining unit within a vertically integrated utility still make sense for a company that only generates electricity? Will employment agreements now prove necessary (though never used before) to minimize turnover among key managers during the transition period? If staffing is tailored to baseload operation, can subcontracting accommodate peaking needs? Notwithstanding such questions, what legal or contractual obstacles might stand in the way?

Accordingly, due diligence for power plant acquisition should consider at a minimum (1) the buyer's successorship status, (2) the total compensation package for the plant's workforce, recognizing the importance of workforce productivity, and (3) strategies for restructuring the union organization.

Successorship Status. Today many companies looking to sell power generation assets are requiring successful bidders to accept labor agreements and unionized workforces in their entirety. While the seller often has powerful and rational political and financial reasons for such mandated successorship, this approach may not help meet the potential buyer's long-term operating objectives.

As a general rule, employers enjoy substantial flexibility to restructure businesses and transfer capital unhampered by rights and benefits mandated by collective bargaining agreements. However, to protect those rights and benefits, as well as their representational status, unions have generally, but not exclusively, relied upon federal labor law and the doctrine of successorship to force new employers to recognize CBAs or otherwise bargain with employees. The doctrine of successorship determines whether or which obligations of a predecessor unionized employer will be imposed upon a successor purchaser or employer. (See Sidebar, "Dealing With Successorship.")

Several states have passed their own "successorship" statutes, requiring sellers and buyers to enforce and recognize successorship clauses in CBAs. These states include Delaware, Pennsylvania, and Rhode Island. While the state provisions were in effect prior to the recent sell-off of power generation assets, in Commonwealth Edison's sale of the Kincaid Station, the International Brotherhood of Electrical Workers attempted through the federal courts to use the Illinois successorship statute to force the buyer to adopt the existing CBA between Commonwealth Edison and Local 15 of the IBEW. However, the federal district court, relying on a prior decision applying the Minnesota successorship statute, found the Illinois statute to be preempted by federal labor law, and thereby unconstitutional and unenforceable. See Cmwlth Ed. Co. v. IBEW, 961 F.Supp. 1169 (N.D. Ill. 1997).

Rather than become mired in the successorship issue, a number of states addressing deregulation have chosen to focus their legislative efforts on softening the impact of restructuring on electric utility employees. At least six states have laws specifically requiring action by the existing utility to mitigate the effects of restructuring by providing severance, early retirement packages and retraining of employees. These states include Connecticut, Illinois, Maine, Massachusetts, New Jersey, and Nevada. At least four other states were considering such legislation as of fall 1998, including Michigan, New York, Ohio, and Pennsylvania. Several seller utilities were attempting to extend the coverage of such legislation to buyers by instituting bid conditions on the buyer, extending severance and early retirement requirements beyond the closing date of the sale.

Interestingly, the Maine electric utility restructuring legislation augments the employee severance and protection concept with a successorship provision, requiring generation asset purchasers to recognize the union and adopt the collective bargaining agreement "to the extent permitted by federal law." (Sec. 35-A M.R.S.A. § 3216.) In light of the Com Ed decision, federal law likely would preempt the Maine successorship provision.

In addition, at least six states had enacted or were considering legislation to allow utilities to recover employee-related transition costs, such as severance. These states include Arizona, California, Mississippi, Missouri, Pennsylvania, and Virginia. The statutes can facilitate the buyer's willingness to take on employee costs by allowing the seller to reduce the acquisition price.

Compensation, Productivity. Does a power generation facility now exist in a different labor and job market than a power delivery function? Can stand-alone business units continue to afford defined-benefit plans, or will defined-contribution plans prove a competitive necessity?

What about pay structure? Should future income gains come primarily from general increases, or through incentive pay? Can the new organization continue to justify premium or non-statutory overtime pay?

Since the market pricing of energy services will be somewhat volatile, labor agreements that burden employers with payments for fixed benefits will be non-competitive on customer pricing. Plant owners can meet performance standards through outsourcing or targeted contracting. However, a stand-alone power producer cannot spread labor costs across a fully integrated transmission and distribution company. The buyer must link compensation with growth of income.

At the same time, for a unionized facility, labor contracts and work practices may impede productivity. Any restrictions on scheduling of work and training, assignment of work, overtime distribution, and performance evaluations should be viewed as presumptively unacceptable. And where the business unit employs a baseload staffing philosophy, any restrictions on the use of non-union staff or contractors should be unacceptable. Seniority should be eliminated as a controlling factor in assigning call-out work, scheduling emergency work, scheduling relief overtime or making promotion decisions. Union and non-union employees should adhere to comparable work rules and staffing policies.

Union Reorganization. The acquisition process offers magnificent opportunities for in reinventing the union-management relationship. While deregulation offers leverage to the buyer, ignoring union interests also poses risk. The balance to be drawn depends on each buyer's needs.

For the union to be a meaningful contributor to the employer's success (thereby defining the union's ultimate success), it must align itself with the changing structure of the business. For example, to have boiler turbine operators belong to the same local as linemen for a power generation company would not likely support the buyer's business strategy. Notwithstanding union cooperation, the buyer might decide that the role of certain traditional union positions (em such as boiler turbine operators (em have expanded to the point where it no longer makes sense for them to belong to the bargaining unit. A union may not welcome the use of devices such as a unit clarification petition filed with the National Labor Relations Board to remove a whole job classification from union control. However, such institutional sacrifices may be appropriate to better preserve the integrity and value of the remaining unionized workforce.

Pushing the Seller:

Pre-Closing Strategies

Beyond due diligence, a prospective buyer should exercise as much influence as possible on a seller prior to acquisition to minimize the length of any CBA beyond the closing, and minimize commitments to the union on future staffing levels, wages or benefits. The buyer should prevail upon the seller to accomplish as much of any planned workforce reduction as possible prior to the closing, yet retain the core of the skilled workforce. The buyer would not often want the seller to make attractive offers of continued employment in other parts of the seller's business. Very few, if any, buyers can afford a major talent drain from an experienced generation facility workforce.

While having in place a long-term CBA may provide needed stability, the locked-in labor cost and work rule structure may diminish the value of the assets. Also, a buyer forced to "blow up" an entrenched union deal for competitive reasons will likely find it more difficult to quickly establish a cooperative union-management relationship.

At some point in the acquisition process, a buyer is going to bump into the "usual suspects" of workforce transition issues: wages, medical benefits, retirement savings, and leave accrual.

In general, the buyer should not attempt to duplicate the seller's benefit plans. The buyer often does not have a full appreciation for the seller's medical plans to globally adopt them and, in any event, the buyer may be in no position to offer the same range of benefit choices. A buyer will often want to stick with the benefits scheme it knows best. That is particularly true in the pension and savings arena, where attempting to take on a seller's existing qualified pension and 401(k) plans can create costly liability and logistical nightmares. (See T.A. Jorgensen, "Handling Employee Benefits in Mergers and Acquisitions," Employee Benefits In Corporate Transactions, pp. 1-36 1994.)

Where the buyer does not accept transfer of the seller's 401(k) plan and trust, both buyer and seller must work out the fund rollover and loan issues created by the "same desk rule," which can limit transition to a new employer's savings plan. (See K. N. Brown, "Separation from Service and the Same Desk Rule: Distributions from Section 401(k) Plans," Journal of Pension Planning & Compliance, pp. 23-34, Fall, 1995.)

Where a buyer is expected to be a successor employer, it should consider labor negotiation as beginning with its first bid documents and media communications, plus any preliminary discussions with seller's management and local regulatory or legislative representatives. While the buyer may not have the opportunity to renegotiate the CBA until several years after closing, the opportunity to set expectations is never better than during the bid and closing process (em when anxious eyes and ears are focused on the buyer.

Communications:

Controlling the Agenda

The buyer will want to control the communications process with several different audience categories: (1) union leadership, (2) regulators or government officials, and (3) mid-level managers and supervisory employees of the seller.

Until the prospective buyer has received the bid and more firmly understands the likely terms and conditions of the sale, the buyer should resist any formal contacts with union leadership. This forbearance enhances buyer flexibility after the bid approval. It minimizes the risk of misstep or misstatement.

Nevertheless, a buyer may conclude that its leverage is greatest during the period before closing, when union uncertainty remains. Here the buyer should orchestrate the negotiation process to preempt communications coming from the seller's local management or labor relations group. When at all possible, a buyer does not want the seller to speak to the union or employees on the buyer's behalf.

Control over communications can also avoid embarrassment or conflict with local or state legislators and regulators. Here, the buyer should respond to any concerns of government officials about the transition process. The buyer should not necessarily rely on the seller's relationship with such officials. Providing regulators and legislators with even a broad perspective of the buyer's intentions allows those officials to respond confidently to union and employee concerns.

Another broad audience category is first-line supervisors and mid-level management, which may be retained by the buyer. To the extent these individuals are not informed first and best, they can appear to have meaningless and ineffective roles in the restructured environment. Their lack of credibility and institutional respect among the workforce can threaten general support (even generate sabotage) of buyer goals and decisions. Most importantly, it is the management group to which most employees will look to for confirmation and clarification of acquisition communications.

The goals and objectives for your communications plan should not be a mystery:

• Establish the buyer as the source of credible information;

• Establish middle and first-line management as "insiders" regarding the acquisition;

• Recognize employee dignity; build employee loyalty and trust;

• Emphasize the importance of the union and the employees to facilitate the acquisition (em not merely to salvage jobs.

The communication methods (em whether they be bulletins, presentations, management talks (em should be seen as the regular and expected sources of restructuring information. Resist diffusion of media outlets. Instead, prepare both the union and its employees as articulate and willing spokespersons (em to customers, media, and regulators, and all on your behalf

Attorney Christopher Miller is a partner in the Atlanta office of Troutman Sanders and is a member of the law firm's labor and employment practice group.

Dealing With Successorship Must buyer accept seller's labor agreements?

• Rule. If legal status of "successor" applies, buyer may be required to recognize and bargain with employee union of predecessor employer.

• Test. New employer deemed "successor" if substantial continuity within enterprise (em if a similarity between businesses, customers, products, and production processes. Key questions: Has new employer retained employees of the old employer? Do retained employees view job situation as essentially unaltered? %n1%n

• Obligations. "Successor" must recognize and bargain with employee's union of predecessor employer once successor's workforce is composed of a majority of predecessor's employees in a substantial and representative complement, and once a request is made for recognition.

• Exceptions. "Successor" not bound by terms of predecessor's collective bargaining agreement if arm's-length transaction between parties, and where successor neither explicitly nor implicitly assumes CBA. In general, successorship clauses not enforceable when not agreed to by buyer. %n2%n

• Initial Flexibility. Successor may set initial terms and conditions of employment unilaterally without bargaining with union (em but not where successor intends to hire a majority of its workforce from predecessor's employees; or if successor either (1) misleads employees concerning changes in wages, hours or conditions of employment, or (2) fails to announce intent to set new conditions before inviting former employees to accept employment. %n3%n

• Avoidance Strategy. Where the workforce is drastically reduced or jobs significantly redesigned, successorship may not take affect.

• Mitigation Strategy. Offer "best-efforts" commitment to hire predecessor's employees, to allay concerns over job security, as substitute for mandatory successorship. Note: In Com Ed's State Line sale to Southern Energy, buyer was committed only to hiring as many of existing employees as needed, with those not receiving offers retained by the seller or offered a severance package.

• Reciprocity Strategy. Offer successorship status to union in trade for reciprocal agreements to modify work rules, or compensation delivery and design.

• Practical Advice. Given current prospects for deals and tight labor market, most buyers should expect to carry over the majority of existing plant workforce. In near term, newly purchased plant will operate much as it always has. Since continuation of operations is a material factor, a finding of successorship is generally likely. %n4%n

Labor Relations: A Baseline Strategy

For either union or non-union workforces:

• Don't automatically hire the existing workforce.

• Have seller do the downsizing before closing deal (or concurrently with restaffing decisions).

• Manage facility with the existing senior management team.

• Keep any rehired employees at or near current levels for compensation, retirement, and welfare benefits.

• Set your own welfare benefit plans.

• Merge new employees into your own retirement plan without a transfer of assets.

In a union setting:

• Be willing to recognize a well-established collective bargaining agent;

• Don't adopt existing labor agreement;

• Set initial employment terms, then negotiate new agreement.

• Consider seller's requests; minimize impact of bid requirements; minimize employee transition requirements in asset purchase agreement.

1 See Falls River Dyeing & Finishing Corp. v. NLRB, 482 U.S. 27, 43 (1987); Briggs v. Lumbingware, Inc. v. NLRB, 877 F.2d 1282, 1285 (6th Cir. 1989).

2 See Howard Johnson Co., 417 U.S. at 258, n.3. See also, Boltuch, Workplace Closures and Company Reorganizations: Enforcing N.L.R.B., Contract and Noncontract Claims and Obligations, 7 Labor Law 53, 78 (1991) (characterizing contract claims arising from collective bargaining agreements against a successor as "a total waste of time").

3 See NLRB v. Burns Int'l Security Servs., 406 U.S. 272, 284, 294-95 (1972); Bellingham Frozen Foods, Inc. v. NLRB, 626 F.2d 674, 678-79 (9th Cir. 1980).

4 See Sullivan Industries v. NLRB, 957 F.2d 890, 897 (D.C. Cir. 1992).


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