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A marriage stalled: NStar has the money, NU has that growing transmission project queue, but they may have trouble getting to the altar by April 16, 2012. Will their current attraction to one another still be there in 18 months?

03 Aug

NU/NStar merger may be slowed, but not stopped

By Brad Kane
bkane@HartfordBusiness.com
08/01/11

Even a possible lengthy delay imposed by the state of Massachusetts won’t stop Northeast Utilities and NStar from forming New England’s largest utility company.

“Nothing has changed about how the two companies feel about each other and the benefits of a merger,” said Al Lara, spokesman for Northeast Utilities.

But the sound economics behind the deal must overcome some tough obstacles along the way — from a further two-year delay and new rate scrutiny to an effort to force the companies to buy expensive wind energy.

Since Hartford-based Northeast Utilities and Boston-based NStar first announced the deal on Oct. 16, the merger was seen as a strong marriage between NStar’s healthy balance sheet and Northeast Utilities’ long string of proposed transmission projects, which will help the newly formed company grow its revenue well into the future.

Now in the merger’s critical phase, the two companies may have to re-assess their commitment to each other as the most important regulatory approval may not come until 2013.

On July 28, the Massachusetts Department of Public Utilities finished its public hearings on the proposed $4.7 billion merger with a cross-examination of the companies’ two chief financial officers: Northeast Utilities’s David McHale and NStar’s James Judge.

Approval from Massachusetts DPU is one of two the companies still need to finalize their merger. Convincing the DPU will be much harder than getting a signoff from the Nuclear Regulatory Commission. The companies’ shareholders, the U.S. Securities and Exchange Commission and the Federal Energy Regulatory Commission approved the deal earlier this year.

Connecticut’s Department of Public Utility Control ruled it doesn’t have the authority to regulate the merger.

Before Massachusetts DPU rules on the merger, it must consider a motion from the Massachusetts Department of Energy Resources to delay approval until the companies, particularly NStar, submit to a full review of current and future rates, as well as a commitment to sustainability and renewable energy.

If that DOER request is granted, the review won’t be complete until late 2012 or 2013. The delay will push the merger past the self-imposed 18-month deadline the two companies put on each other to get the deal done.

Going past that April 16 deadline would force Northeast Utilities and NStar to start the whole process over, including re-evaluating each company’s worth.

“If the committee rules favorably on the motion to stay, that would likely push the regulatory approval past April 2012 and effectively kill this merger, which is really not in the best interest of the two companies and the ratepayers,” said Maurice May, an equity analyst from New York financial company Ticonderoga Securities.

If the merger process starts over, Northeast Utilities and NStar will have to re-examine what the true benefits are.

The merger will create the largest utility holding company in New England with 3.5 million customers and four electric and two natural gas subsidiaries in Connecticut, Massachusetts and New Hampshire, including Berlin-based Yankee Gas and Connecticut Light & Power.

Despite the uncertainty from the DPU merger ruling, the stock for Northeast Utilities and NStar were trading near their all-time highs in July, at $35 per share for Northeast and $45 for NStar.

If the merger doesn’t happen soon, that positive outlook won’t stay for both companies, May said.

“NStar has had its best years, and it needs the merger more than Northeast,” May said. “Northeast is a much more viable standalone company.”

Northeast Utilities’ stock is good because the company has that queue for transmission projects that will continue to grow the company’s revenue for the foreseeable future, May said.

NStar has been one of the most attractive utility stocks in the nation for the past six years because of a 2005 rate case that made the company extremely profitable. NStar will have another rate case in the next year, and the outcome probably won’t be as good, May said.

“I don’t think lightning will strike twice,” May said.

Speculation abounds on the motives of the propsed Bay State delay.

Coming from the administration of Massachusetts Gov. Deval Patrick — who appoints the members of both DOER and DPU — the request to delay the utility merger could be an effort to force NStar to buy power from the proposed Cape Wind renewable energy project, which would financially hurt the NStar electric subsidiary.

“This is quite likely a form of pressure to buy into part of that Cape Wind output,” May said.

Half of the power from the proposed Cape Wind project — which would put wind turbines on Cape Cod — already has been purchased by the Massachusetts electric subsidiary of National Grid at a cost of 19 cents per kilowatt hour with an annual increase of 3.5 cents. That cost is more than three times the market price of power and double the cost of buying renewable power from other wind projects.

“The price of Cape Wind power is ridiculously high, and the developer is trying to hit a grand slam for his own pocketbook,” May said.

Northeast Utilities already has contracted for 109 megawatts of wind power from sources other than Cape Wind, which is about half of what the company needs to meet its obligations under the Massachusetts Green Communities Act of 2008.

Northeast Utilities has no need for the Cape Wind power, Lara said.

To convince the DPU to approve the merger without any Cape Wind purchase, Northeast Utilities and NStar said ratepayers will realize $784 million in operational savings in the first 10 years following the merger.

The companies on July 21 also formally opposed the DOER request for a delay in the merger approval, calling the request factually inaccurate with no legal justification.

“We have presented a very strong case for the merger,” NStar spokeswoman Caroline Allen said.

The DPU has no statutory limit on how long it can debate the merits of a utility merger, and the department has no timeline for a ruling on the Northeast Utilities/NStar proposal, said Lisa Capone, DPU spokeswoman.

The critical question is whether the requested DOER delay pushes the approval past April 16.

“A lot can change over 18 months, so we would really have to start the whole process over again,” Lara said. “But nothing has changed about our desire to be one company.”

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