A potential $67 billion merger of Avangrid with Pennsylvania-based PPL Corp. could shore up earnings at Central Maine Power’s domestic parent company, but a small state like Maine could lose even more influence over the operations of what would be one of the largest energy companies in the United States, utility experts said. 

Some analysts also said the deal could give more oxygen to a pending push for public power in Maine. 

The merger talks were first reported this month by the Financial Times, citing sources close to the discussions, but neither company has confirmed the news. If both companies combined all of their operations, it would create one of the largest energy companies in the United States and further consolidate utility ownership in New England and the mid-Atlantic. 

The Financial Times report said it was unclear whether a potential deal would include investment from Iberdrola, the Spanish company that owns about 80 percent of Avangrid. But any deal involving Avangrid would have to be negotiated with its Spanish corporate parent. 

“We do not comment on rumors or speculation,” Zsoka McDonald, Avangrid’s vice president for corporate communications, said on Wednesday. Ryan Hill, director of corporate communications for PPL, also declined to comment. 

Any merger would be of great interest in Maine. CMP is the subject of ongoing investigations at the Public Utilities Commission over the rates it charges as well as accusations of faulty billing practices, following the rollout of new billing software that coincided with widespread power outages following a violent storm in October 2017. About 97,000 customers received bills that were much higher than normal in the months following the launch. A Press Herald investigation found that CMP mismanaged the rollout and misled the public, a controversy that continues to dog the utility. 

CMP’s website, a sore point for customers during the 2017 outage, again failed to provide accurate information in the wake of last week’s powerful storm. 

CMP also is pursuing a $1 billion project to build a transmission line through western Maine to bring hydroelectric power from Quebec to Massachusetts. It has drawn opposition from many communities on its route and currently is the target of a petition drive to force a citizens initiative to block the project. 

In July, Avangrid adjusted its earnings outlook downward, citing lower production from its onshore wind farms and costs associated with recent storms. 

In a report for investors last week, analysts in the United States and the United Kingdom, where PPL also does business, said the deal could be a “merger of equals,” rather than a clear acquisition by one party. They said it also could temper likely reductions in Avangrid’s long-term earnings growth. 

Earnings have been damaged by delays at the Vineyard Wind offshore project in Massachusetts, in which Avangrid Renewables is a major partner. In Avangrid’s July earnings report, CEO James P. Torgerson acknowledged earnings were off. 

“We are disappointed with the continued lack of wind resources that impacted much of the U.S.,” he said. “Earnings for the quarter and first half of 2019 were below our expectations due to the lower wind, and higher non-deferrable minor storms and staging costs.” 

Rate cases in New York and Maine, plus transmission permitting, also are affecting earnings. 

“We see this as a bit of defensive move, given the shifting (earnings per share) guidance and pending succession plans,” the analysts, Julien Domoulin-Smith at Bank of America Merrill Lynch and Harry Wyburd at Merrill Lynch International, wrote in the report. 

Beyond the earnings pressures on Avangrid, the merger could address succession issues at both companies, where top management has shifted titles or announced transitions, Domoulin-Smith and Wyburd said. 

“Bottom line,” they concluded, “the social issues in transition would appear to prove amenable to a possible deal.” 

 

WHAT IS PPL? 

PPL Corp. is headquartered in Allentown, Pennsylvania, and is the parent company to seven regulated utility companies in the U.K., Pennsylvania, Kentucky, Virginia and Tennessee. It also delivers natural gas and generates electricity in Kentucky. A subsidiary, Safari Energy LLC, provides solar power solutions to commercial customers. 

PPL Corp. is set to release consolidated third-quarter 2019 earnings results on Nov. 5. It is on track to record earnings of nearly $8 billion this year. Avangrid, meanwhile, is expected to report revenues of $6.4 billion. 

In recent filings, PPL said it plans to invest about $15 billion in infrastructure over the next five years to build a more secure, cleaner energy grid. The company employs about 12,500 people globally. 

In Maine, Avangrid and CMP have pledged to spend $29 million over the next two years to harden CMP’s distribution system against more-powerful storms, a proposal currently under review at the PUC. 

Avangrid itself is a product of mergers that swept up CMP, beginning in 1999, when the Maine utility became part of New York-based Energy East. In 2008, Iberdrola S.A. of Spain purchased Energy East. In 2015, Iberdrola merged with UIL Holdings Corp. in Connecticut to become Avangrid. Iberdrola remains Avangrid’s lead shareholder. Avangrid employs about 6,500 people. 

Any merger of Avangrid and PPL would need approvals by agencies that include state regulators in the United States and the Office of Gas and Electricity Markets in Great Britain. In Maine, recently amended language in the the PUC’s statute clarifies that any acquisitions above a certain size must benefit ratepayers, not just do them no harm. 

That test should focus on the basics, said David Littell, a former PUC commissioner who works as an energy and environmental attorney in Portland. CMP had enjoyed a good rate of return, but its compensation now is being scrutinized in light of performance questions surrounding the rollout of its SmartCare billing system. 

“From my perspective,” Littell said, “they need to do well on their core electricity utility business to deserve those high returns they got when they were letting their basic utility functions slip.” 

Consideration of a merger by state regulators, Littell said, would give Maine an opportunity to push for better service and more local resources as a condition of approval. 

“As companies get bigger,” he said, “they are more focused on billion-dollar-plus items that move stock prices.” 

There are also dangers that customers in small population states like Maine would not have the sway of customers in larger, more affluent power markets. 

But size and financial resources also can be beneficial, said Tony Buxton, a Portland lawyer who represents large businesses in energy matters. The trend to shift heating and transportation from petroleum to electricity to fight climate change will require investments in the electric grid, he said. 

“The question,” he said, “is what kind of utility structure will make that happen?” 

That decision should lead regulators to take a comprehensive overview of Maine’s future economy and customer needs, and which structure would best serve it, said Scott Hempling, a lawyer in Silver Springs, Maryland, who has been involved with dozens of utility mergers and is writing a book on the topic. 

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