September 3, 2007
Power surge | Spanish utility giant Iberdrola makes inroads into Maine with its planned $4.5 billion acquisition of Energy East
By Douglas Rooks
When the merger of Central Maine Power's parent company, Energy East, and Spanish utility Iberdrola was announced June 26, it was accompanied by a deluge of news coverage in the national and international financial press. Since Iberdrola acquired Scottish Power for $23 billion last spring, the cash-rich company was widely expected to make a move into the American market, and that move came in the form of a friendly $4.5 billion acquisition for Energy East. Iberdrola would pay a 20% premium for Energy East shares, or $28.60 a share based on the stock's recent closing price.
Since Augusta-based CMP was sold to New York State Gas & Electric in 2000, the resulting holding company, Energy East, has expanded aggressively under former NYSEG chief Wesley von Schack, becoming a major distribution company in four Northeastern states. (For more on this, see "Regional player," this page.) It serves roughly three million customers in four states, including 564,000 in Maine. Meanwhile, Von Schack, who moved to Maine in 2004 after Energy East established its headquarters in New Gloucester, has largely stayed below the radar. (Neither von Schack nor Energy East officials returned multiple calls seeking comment for this story.)
But gone are the days when Maine's largest utility was a major presence at the State House and where epochal events concerning CMP's management of the Maine Yankee nuclear plant in Wiscasset and its investment in New Hampshire's Seabrook plant were the subject of countless news stories and editorials ˆ not to mention three statewide referendums attempting to close Maine Yankee. (It shut down in 1998 after repairs to its cooling system were judged unaffordable. Recently, Greenwich, Conn.-based National RE/sources has proposed using the site for a $1.5 billion coal gasification plant. For more on this, see "Coal questions," on the cover. )
When proposed in 1999, the sale of CMP to an out-of-state company was a very big deal, but the current prospect of its resale to a huge overseas utility has made barely a ripple so far. Since the merger was announced in June, there has been mostly silence, though behind the scenes analysts, intervenors and advocates have begun to comb through Iberdrola's filings with the U.S. Securities and Exchange Commission, and state regulators have begun to gear up for hearings.
Iberdrola has said it expects approvals to take up to a year, and that schedule seems realistic to Maine Public Advocate Richard Davies, who noted that the Public Utilities Commission currently is reviewing the sale of Verizon to FairPoint Communications Inc., a proceeding expected to take months. "I think we can anticipate a late winter or spring hearing schedule," Davies said. "This is the kind of matter that moves deliberately."
"Cautiously optimistic"
So far, Davies hasn't unearthed any significant consumer issues in Iberdrola's courting of Energy East. But one pleasant part of the process has been the ease of obtaining information from the Spanish company. "European utilities are a lot more transparent than ours," said Davies. "You can find more detailed financial data on the Iberdrola website than you can get with subpoenas and court orders from a lot of American utilities."
Davies' comments seem to echo his former boss, Gov. John Baldacci, who in June said he was "cautiously optimistic" about the acquisition. According to his spokesman, David Farmer, that's still true: "The meetings since then haven't turned up any problems to date," Farmer said.
This doesn't mean that there aren't concerns, though they're not all related to the merger itself. Tony Buxton, an attorney with Preti Flaherty who represents large customers through Preti's Industrial Energy Consumers Group, is one of the intervenors in the PUC case; others include Maine Public Service Company, the state's last electric utility both distributing and generating power, and several unions representing CMP employees.
Buxton wonders w hether the merger will do anything about Maine's high electric rates, which he said have been an unsatisfactory outcome of the 1995 deregulation law that led to the sale of CMP's and Bangor Hydro's generating assets and the sale of the resulting distribution companies out of state. "In return for paying their stranded costs, we were supposed to get competitive, fair electric rates, and that hasn't happened," he said.
Buxton said he will be particularly interested in Iberdrola's attitude toward ISO New England, the power pool arrangement that Buxton ˆ along with Baldacci, Davis and PUC Chairman Kurt Adams ˆ blames for inflating Maine electric rates by subsidizing construction in Connecticut and other southern New England states.
And Buxton raises another question about the deregulation law that separated electric generation and transmission: Could Iberdrola, a major generator of all forms of electricity, including wind power, wind up owning generating assets in Maine?
The answer, Davies said, is yes. "The law doesn't say that utilities can't own generation, too, but they have to erect a Chinese wall so that the subsidiaries don't influence each other's decisions," he said.
CMP and Bangor Hydro weren't willing to do that at the time, preferring to sell. And Davies noted that CMP proposed a bill, carried over to next year, that would allow it to re-enter the generating business with fewer restrictions.
Iberdrola already has an interest in Maine, Davies said, in the form of indirect investments in the Mars Hill wind farm that is the first utility-grade producer in New England. Indeed, it is the connection with renewable energy that earned praise from Baldacci in his initial statement on the merger. Nationally, Iberdrola is the second-largest single investor in wind power projects, which so far have mostly been built in California and the Midwest.
The payout
The connection between generation and transmission may be another reason Iberdrola is pursuing Energy East, which at this point is only a transmission company. Analysts who noted the generous premium Iberdrola plans to pay Energy East stockholders also point out that, as a non-American investor in wind power, it could only make use of the federal tax credits offered for wind if it has American revenues sufficient enough to offset the credit. The cash flow of Energy East would certainly provide that income, they say. (Energy East had revenues of $5.23 billion in 2006, with net income of nearly $260 million.)
If Iberdrola does face regulatory hurdles, it probably won't come from Washington, where the Federal Energy Regulatory Commission has been notably merger-friendly, but from New York State, where regulators take their jobs quite seriously.
Taking note of difficulties that followed the English utility National Grid's purchase of Syracuse, N.Y.-based Niagara Mohawk in 2002, Sen. Charles Schumer (D-New York) fired a shot across Iberdrola's bow, saying that the company should publicly guarantee reliable service and reasonable rates. He said in June that National Grid left Niagara Mohawk customers "suffering from recent power outages and soaring utility bills." (The company has been ordered by the New York PUC to improve its reliability.) Iberdrola, while not responding directly to Schumer, had cited its record of decreasing outages and investing in transmission improvements elsewhere.
So far, there are few signs that Iberdrola will face significant resistance to the CMP portion of its acquisitions. President Sara Burns, in announcing the deal to customers, sounded giddy, saying she was doing so "with excitement and anticipation."
At Energy East headquarters, von Schack was more sober, at the time of the announcement saying, "The energy industry is at a major inflection point," which he said involves making "significant investments in our energy infrastructure." He said that Iberdrola has the financial resources to make improvements possible, and allows its subsidiaries to be managed locally. While Iberdrola has not made any specific guarantees to employees, von Schack said it intended to offer competitive wages and benefits.
Though the merger's effect on CMP customers may not be clear yet, von Schack himself would be one of the beneficiaries of the deal. According to its SEC filings, Iberdrola would offer von Schack a two-year employment contract. His first year salary would be $900,000 with a possible performance bonus of $1.8 million. In addition, Iberdrola proposed a lump sum payment to von Schack of $21.8 million for accrued retirement pay and benefits. He also would be encouraged to close the deal by July 1, 2008. Based on Energy East's current share price, von Schack would be paid $3.6 million at closing; if the deal closes during the following year, he would earn $2.4 million. (In 2006, von Schack's salary was $900,000, according to Securities and Exchange Commission filings.)
The prospect of a major global energy company owning Maine's largest utility still seems a little abstract, although Davies notes that the PUC review could bring up more concrete concerns as it proceeds. Many Mainers will like the idea of greater financial support for alternative energy projects, which are generally far more advanced in Europe than they are here. Rising fuel prices, in the view of most analysts, make the United States one of the big emerging markets for renewable energy such as wind and solar.
But what about the cost of electricity, which has been rising again over the past two years? "I notice that Iberdrola is being deliberately low-key," said Buxton. "They're not doing the kind of 'meet and greet' that you often see with new companies to Maine."
The real test, said Buxton, is having a utility "that's not oblivious to the high rates we have here. The cost of electricity, for any manufacturer, is just as big an issue as taxes. Maybe bigger."
Since Augusta-based CMP was sold to New York State Gas & Electric in 2000, the resulting holding company, Energy East, has expanded aggressively under former NYSEG chief Wesley von Schack, becoming a major distribution company in four Northeastern states. (For more on this, see "Regional player," this page.) It serves roughly three million customers in four states, including 564,000 in Maine. Meanwhile, Von Schack, who moved to Maine in 2004 after Energy East established its headquarters in New Gloucester, has largely stayed below the radar. (Neither von Schack nor Energy East officials returned multiple calls seeking comment for this story.)
But gone are the days when Maine's largest utility was a major presence at the State House and where epochal events concerning CMP's management of the Maine Yankee nuclear plant in Wiscasset and its investment in New Hampshire's Seabrook plant were the subject of countless news stories and editorials ˆ not to mention three statewide referendums attempting to close Maine Yankee. (It shut down in 1998 after repairs to its cooling system were judged unaffordable. Recently, Greenwich, Conn.-based National RE/sources has proposed using the site for a $1.5 billion coal gasification plant. For more on this, see "Coal questions," on the cover. )
When proposed in 1999, the sale of CMP to an out-of-state company was a very big deal, but the current prospect of its resale to a huge overseas utility has made barely a ripple so far. Since the merger was announced in June, there has been mostly silence, though behind the scenes analysts, intervenors and advocates have begun to comb through Iberdrola's filings with the U.S. Securities and Exchange Commission, and state regulators have begun to gear up for hearings.
Iberdrola has said it expects approvals to take up to a year, and that schedule seems realistic to Maine Public Advocate Richard Davies, who noted that the Public Utilities Commission currently is reviewing the sale of Verizon to FairPoint Communications Inc., a proceeding expected to take months. "I think we can anticipate a late winter or spring hearing schedule," Davies said. "This is the kind of matter that moves deliberately."
"Cautiously optimistic"
So far, Davies hasn't unearthed any significant consumer issues in Iberdrola's courting of Energy East. But one pleasant part of the process has been the ease of obtaining information from the Spanish company. "European utilities are a lot more transparent than ours," said Davies. "You can find more detailed financial data on the Iberdrola website than you can get with subpoenas and court orders from a lot of American utilities."
Davies' comments seem to echo his former boss, Gov. John Baldacci, who in June said he was "cautiously optimistic" about the acquisition. According to his spokesman, David Farmer, that's still true: "The meetings since then haven't turned up any problems to date," Farmer said.
This doesn't mean that there aren't concerns, though they're not all related to the merger itself. Tony Buxton, an attorney with Preti Flaherty who represents large customers through Preti's Industrial Energy Consumers Group, is one of the intervenors in the PUC case; others include Maine Public Service Company, the state's last electric utility both distributing and generating power, and several unions representing CMP employees.
Buxton wonders w hether the merger will do anything about Maine's high electric rates, which he said have been an unsatisfactory outcome of the 1995 deregulation law that led to the sale of CMP's and Bangor Hydro's generating assets and the sale of the resulting distribution companies out of state. "In return for paying their stranded costs, we were supposed to get competitive, fair electric rates, and that hasn't happened," he said.
Buxton said he will be particularly interested in Iberdrola's attitude toward ISO New England, the power pool arrangement that Buxton ˆ along with Baldacci, Davis and PUC Chairman Kurt Adams ˆ blames for inflating Maine electric rates by subsidizing construction in Connecticut and other southern New England states.
And Buxton raises another question about the deregulation law that separated electric generation and transmission: Could Iberdrola, a major generator of all forms of electricity, including wind power, wind up owning generating assets in Maine?
The answer, Davies said, is yes. "The law doesn't say that utilities can't own generation, too, but they have to erect a Chinese wall so that the subsidiaries don't influence each other's decisions," he said.
CMP and Bangor Hydro weren't willing to do that at the time, preferring to sell. And Davies noted that CMP proposed a bill, carried over to next year, that would allow it to re-enter the generating business with fewer restrictions.
Iberdrola already has an interest in Maine, Davies said, in the form of indirect investments in the Mars Hill wind farm that is the first utility-grade producer in New England. Indeed, it is the connection with renewable energy that earned praise from Baldacci in his initial statement on the merger. Nationally, Iberdrola is the second-largest single investor in wind power projects, which so far have mostly been built in California and the Midwest.
The payout
The connection between generation and transmission may be another reason Iberdrola is pursuing Energy East, which at this point is only a transmission company. Analysts who noted the generous premium Iberdrola plans to pay Energy East stockholders also point out that, as a non-American investor in wind power, it could only make use of the federal tax credits offered for wind if it has American revenues sufficient enough to offset the credit. The cash flow of Energy East would certainly provide that income, they say. (Energy East had revenues of $5.23 billion in 2006, with net income of nearly $260 million.)
If Iberdrola does face regulatory hurdles, it probably won't come from Washington, where the Federal Energy Regulatory Commission has been notably merger-friendly, but from New York State, where regulators take their jobs quite seriously.
Taking note of difficulties that followed the English utility National Grid's purchase of Syracuse, N.Y.-based Niagara Mohawk in 2002, Sen. Charles Schumer (D-New York) fired a shot across Iberdrola's bow, saying that the company should publicly guarantee reliable service and reasonable rates. He said in June that National Grid left Niagara Mohawk customers "suffering from recent power outages and soaring utility bills." (The company has been ordered by the New York PUC to improve its reliability.) Iberdrola, while not responding directly to Schumer, had cited its record of decreasing outages and investing in transmission improvements elsewhere.
So far, there are few signs that Iberdrola will face significant resistance to the CMP portion of its acquisitions. President Sara Burns, in announcing the deal to customers, sounded giddy, saying she was doing so "with excitement and anticipation."
At Energy East headquarters, von Schack was more sober, at the time of the announcement saying, "The energy industry is at a major inflection point," which he said involves making "significant investments in our energy infrastructure." He said that Iberdrola has the financial resources to make improvements possible, and allows its subsidiaries to be managed locally. While Iberdrola has not made any specific guarantees to employees, von Schack said it intended to offer competitive wages and benefits.
Though the merger's effect on CMP customers may not be clear yet, von Schack himself would be one of the beneficiaries of the deal. According to its SEC filings, Iberdrola would offer von Schack a two-year employment contract. His first year salary would be $900,000 with a possible performance bonus of $1.8 million. In addition, Iberdrola proposed a lump sum payment to von Schack of $21.8 million for accrued retirement pay and benefits. He also would be encouraged to close the deal by July 1, 2008. Based on Energy East's current share price, von Schack would be paid $3.6 million at closing; if the deal closes during the following year, he would earn $2.4 million. (In 2006, von Schack's salary was $900,000, according to Securities and Exchange Commission filings.)
The prospect of a major global energy company owning Maine's largest utility still seems a little abstract, although Davies notes that the PUC review could bring up more concrete concerns as it proceeds. Many Mainers will like the idea of greater financial support for alternative energy projects, which are generally far more advanced in Europe than they are here. Rising fuel prices, in the view of most analysts, make the United States one of the big emerging markets for renewable energy such as wind and solar.
But what about the cost of electricity, which has been rising again over the past two years? "I notice that Iberdrola is being deliberately low-key," said Buxton. "They're not doing the kind of 'meet and greet' that you often see with new companies to Maine."
The real test, said Buxton, is having a utility "that's not oblivious to the high rates we have here. The cost of electricity, for any manufacturer, is just as big an issue as taxes. Maybe bigger."
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