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Iberdrola’s proposed acquisition of Energy East Corporation may witness a delay in its close due to the on-going administrative litigation proceedings between the Department of Public Service Staff and the buyer, a source familiar with the situation told dealReporter. The staff is part of the New York State Public Service Commission [PSC].
A person close to Iberdrola, however, maintains the company is confident that it will be able to close the deal as targeted in the merger agreement. According to the merger document, the transaction is expected to close in 2Q 2008. ”I think speculating on a delay is really premature when we are right at the beginning of the process. What is happening now was envisioned and factored in the timetable to close the deal,” he added.
In a related transaction between UK-based National Grid and the NY-based KeySpan Corporation, settlement discussions with the staff hit a stumbling block before the deal got a final okay in August 2007. The two companies had announced their merger in February 2006. The person close said drawing similarities in the timeline for approval between Iberdrola-Energy East and KeySpan-National Grid transaction is not accurate as one was synergy deal and the other is not.
A PSC spokesperson said that settlement discussions between the PSC staff fell apart in November 2007 after reviewing the approval application filed, which was filed on 1 August 2007. Efforts were made to reach an agreement which did not pan out and the parties had to move to litigation proceedings. He said litigation proceedings are standard procedure.
On 11 January, the staff submitted a testimony on Iberdrola proceedings. Iberdrola, and other interested parties, are required to present their rebuttal by 31 January.
The PSC spokesperson said according to the staff, the petition did not meet the standards set in New York state and the staff found that the proposed combination did not offer real benefits to rate payers and that the transaction imposed significant costs on the rate payers. The staff has made suggestions to improve the proposal to help it move forward.
The staff has suggested that Energy East subsidiaries in NY, New York State Electric & Gas Corporation and Rochester Gas & Electric Corporation, should be required to establish a “golden share” which establishes a security interest held by a shareholder independent from other investors and the parent. Creating a “golden share,” the staff said, is key on the “ring fencing” and is intended to limit Iberdrola’s or Energy East’s right to commit any voluntary bankruptcy, liquidation or similar proceedings for the subsidiaries without the consent of the holder of the golden share.
“Ring-fencing” is the operational and structural isolation of a regulated utility from its parent and its affiliates. The purpose of such isolation is primarily defensive in that it seeks to protect the utility and its ratepayers from being the impact of negative factors affecting the parent holding company or its affiliates. An example of ring-fencing is the case of Portland General Electric, in which Oregon regulators ordered it ring-fenced from its parent Enron. When Enron’s collapse happened, Portland General came out relatively unscathed despite its debt rating being reduced to below investment grade and difficulties it encountered in raising funds in short-term credit markets.
The testimonies by the staff and the PSC will be presented at an evidentiary hearing tentatively scheduled for 25 February. Rafael A. Epstein is the administrative law judge on the matter. ”After the evidentiary hearing, there will be replies, and replies to those replies,” he added.
Following that, the PSC spokesperson said, one option will be for the judge to issue a recommended decision for the case and the other would be for senior and advisory staff to put forward a joint proposal for the PSC for their consideration.” However, the judge’s decision is not binding. All parties to the litigation get an opportunity to comment on the judge’s recommended decision, and what is decided and discussed is presented to the commission subsequently, said the PSC spokesperson. The commission could reject, accept or modify whatever recommendation is made to it. The commission, the spokesperson said, has not announced a date to rule on the petition. “It is on track to be presented to the commission later this year,” the spokesperson added. The person familiar said any time during the litigation proceedings the staff and the buyer can go back into settlement negotiations and then go back again into litigation.
According to the merger documents, a procedural schedule was established which provided 75 days for settlement negotiations ending 28 November 2007. If the parties reached a settlement, the PSC was expected to issue a final decision in March 2008. If no settlement could be arrived at and the case had to be resolved through a full administrative hearing, the PSC was expected to issue a final decision in May.
Meanwhile, apart from New York, Maine is the other pending state approval left. The person familiar said an agreement with the staff of Maine Public Utilities Commission had been reached and the recommendation will be presented to the commission by the end of this month.
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