The credit ratings of Connecticut Light & Power and Yankee Gas will improve if state regulators approve the proposed merger of their parent company Northeast Utilities with Boston-based NStar, according to the two major rating firms.
With better credit ratings, the cost of borrowing for the Berlin-based electric and natural gas utilities will decrease, particularly for major projects. These savings will depress rates and ultimately benefit customers.
“We feel very strongly that will be the case, but the final decision will be made by the rating agencies,” said David McHale, NU chief financial officer. “I am anticipating that, but it is not a foregone conclusion.”
NU and NStar began presenting their case for their $4.7 billion merger on Feb. 14 to the Connecticut Public Utilities Regulatory Authority, discussing why combining the Hartford and Boston utility parents will provide a net benefit to ratepayers.
The deal will create the largest New England utility parent company with 3.5 million customers in Connecticut, Massachusetts and New Hampshire spread over six electric and natural gas subsidiaries.
The PURA discussion kicked into high gear Feb. 15 with announced settlements with the Massachusetts governor and attorney general for their blessing in getting that state’s regulatory approval. The deals includes $21 million in rate credits for Massachusetts electric and natural gas customers; rate freezes until 2016; and financial commitment to the Cape Wind offshore renewable energy project.
After the settlement was announced Feb. 15, the prices of NU and NStar’s stock kicked up 3.8 and 3.6 percent, respectively.
“Massachusetts’ settlement provides a useful framework for what can be achieved in Connecticut,” said George Jepsen, Connecticut attorney general. “We want to make sure it at least benefits Connecticut consumers as much as it does in Massachusetts.”
Before a similar deal can be struck in Connecticut, officials from NU and NStar must prove the various benefits that will come from the merger. The companies are touting $784 million in operational savings over 10 years.
Helping achieve that is improved credit scores for CL&P and Yankee Gas.
If the companies merge, the new Northeast Utilities will operate six electric and natural gas subsidiaries, each with its own credit rating. The rating determines the cost of borrowing when the subsidiaries issue bonds or debt.
Major credit rating firms Fitch Ratings and Standard & Poor’s have put CL&P debt on a positive outlook, gearing up to improve from its current BBB+ rating, which is the fourth highest. The positive outlook is based upon the merger with NStar, which has a stronger balance sheet and cash on hand.
S&P put Yankee Gas on a positive outlook to improve its BBB+ rating, for the same merger reasons.
These higher ratings will depress the companies’ expenses in the future, McHale said. Without PURA approving the merger, the ratings are expected to stay the same.
Since the merger first was proposed on Oct. 16, 2010, the deal was considered a strong marriage between NStar’s healthy balance sheet and NU’s experience with major energy projects, particularly transmission.
NU’s projects give NStar a smart place to spend its money. The Boston company was spending on a stock repurchase program to reward shareholders, but expenditure on capital projects with NU makes the company more profitable over the long term, said James Judge, NStar CFO.
These new revenues and cost savings from the merger will be realized over many years, as the companies integrate and implement efficiencies, Judge said.
“Best practices are identifiable on both sides of the fence,” Judge said.
Connecticut ratepayers need to realize these cost savings immediately, Jepsen said. Connecticut will seek rate credits similar to the $21 million rate credit promise Massachusetts achieved for customers of NStar Electric, NStar Gas and NU’s Western Massachusetts Electric Co.
“Upfront rate credits are important because it forces the utilities to put their money where their mouth is,” Jepsen said. “Why should consumers have to wait three or four years until the next rate review to realize the benefits?”
A Connecticut settlement will not be identical to the Massachusetts settlement, Jepsen said. The Cape Wind project was important for Massachusetts, but Connecticut already achieved significant commitment from its utilities for renewable electricity with last year’s energy policy reform law.
Connecticut will focus on issues important to the state, especially service reliability and storm response, which played an important role in the regulatory process.
After spending all of 2011 claiming Connecticut didn’t have the jurisdiction to review the merger, state regulators reversed their position in January. CL&P is under heavy fire from the public and government officials for its response to two widespread power outages caused by storms in August and October, leaving nearly 1 million customers without electricity, some for more than a week.
The state legislature is considering drafting a law around storm response recommendations such as utility performance standards and penalties for not meeting those standards, but a similar charge could be made by PURA in its ruling on the merger.
NU and NStar are willing to deal with Connecticut officials, much as they dealt with Massachusetts officials, said Al Lara, NU spokesman. Customers are meant to receive a portion of the $784 million in operational savings.
“How that happens is exactly what the merger process is about at PURA,” Lara said. “We fully expected the settlement up in Massachusetts to be a major part of the discussion in Connecticut.”
The two companies received all the necessary federal and state regulatory approvals for the merger to proceed, except for PURA and the Massachusetts Department of Public Utilities.
With the settlement in place in Massachusetts, DPU is expected to approve the deals and the merger on or before April 4. Connecticut PURA is expected to issue a draft decision March 26 and make a final ruling on April 2.
If those approvals are granted, the companies only need to work with the New York Stock Exchange to delist NStar (stock symbol NST) and combine it under Northeast Utilities (NU). That process takes about two weeks but can be started — although not finished — before PURA and DPU finalize their approvals.
Then the two companies will be merged.
