December 11, 2012

CMP seeks protection from woes of its parent

State regulators will decide whether to allow a higher equity/debt ratio, which may also shield ratepayers.

By Tux Turkel tturkel@pressherald.com
Staff Writer

Central Maine Power Co. is asking state regulators to approve steps that would protect CMP from the financial problems facing its parent company in Spain, Iberdrola SA, whose credit rating has been reduced to near-junk status by a key agency.

It is unclear how ratepayers might be affected by the situation, but a decline in creditworthiness has the potential to increase business costs for CMP, which is involved in a $1 billion project to improve its transmission line system.

CMP, the state's largest utility, is asking the Maine Public Utilities Commission for permission to increase the ratio it maintains between equity, the money it takes in from investors, and debt, the money that the company borrows for major projects and the like.

The two-part goal is to make it harder for Iberdrola to take cash out of CMP to pay dividends, and to not get whacked by credit rating agencies that recently downgraded the creditworthiness of Iberdrola.

The request was made to the PUC in late October, and the case is ongoing. But it took on greater significance late last month, when Standard & Poor's Rating Services dropped its rating of Iberdrola to a couple notches above "junk" status. The agency noted that Iberdrola gets half its revenue from Spain, which is in a deep recession. It said those conditions threaten the corporation's profitability.

At the same time, Standard & Poor's noted that CMP, and two other Iberdrola subsidiaries in New York, were taking steps to better protect their assets from being transferred to the parent company, a defensive practice called ring fencing. Based on these efforts, Standard & Poor's removed CMP from its "CreditWatch with negative implications."

The agency warned, however, that it could lower CMP's credit rating "if the company is unable to strengthen the current ring-fencing provision."

It's not clear right now how all this could affect customers. The state's Office of Public Advocate and an organization that represents factories and large electricity users in Maine, the Industrial Energy Consumer Group, have intervened in the case seeking answers.

"Our concern is whatever they need to do doesn't result in higher rates," said Drew Landry, a lawyer representing the trade group.

Through Iberdrola's acquisition of New York-based Energy East Corp., CMP became part of Iberdrola in 2008. Documents and data requests filed in the case by Landry's group and the Public Advocate show that, so far, Iberdrola has contributed roughly $100 million to CMP and nearly $9 million to another local subsidary, Maine Natural Gas. Neither local company has paid a dividend to the parent corporation, according to responses in the case from Iberdrola, but without the enhanced ring-fencing measure it could withdraw as much as $125 million in equity from CMP.

CMP had operating income last year of more than $602 million, according to an annual report to the PUC.

As part of the initial approval four years ago of the CMP-Iberdrola merger in Maine, state regulators signed off on a minimum equity ratio of 40 percent. In its filing to the PUC on Oct. 30, CMP is asking to boost the equity level to 47 percent.

In asking the PUC for approval, CMP and Maine Natural Gas wrote in the filing that this change would not only enhance the ratings separation between the regulated utilities and Iberdrola, "but it will also benefit ratepayers by strengthening a financial protection initially put into place to protect ratepayers."

CMP currently is bound by an alternative rate plan approved by the PUC that links rates to service quality and other standards. But Richard Davies, the state's public advocate, said that if CMP's credit rating is cut, it could raise borrowing costs.

That point is being stressed by CMP. Anything that makes it harder for the utility to borrow money could have an impact on customers and capital improvements over time, the company says. In the past two years, it has invested $1 billion in equipment and transmission upgrades, including the ongoing Maine Power Reliability Project.

"The effect would be that we can't make the investments we're making in the system," said John Carroll, a CMP spokesman.

The PUC has yet to schedule deliberations in the case.

In Europe, Iberdrola has been taking steps to cut debt and strengthen its balance sheet, including cutting jobs and selling non-core assets. Monday, it announced that it was selling seven onshore wind farms in Germany.

The corporation's stock price has fallen sharply in the past year, hovering recently at $3.80 a share. 

Staff Writer Tux Turkel can be contacted at 791-6462 or at:

tturkel@mainetoday.com

 

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