NY agency does not support Fortis-Central Hudson merger as proposed

The New York Department of Public Service (DPS) said that, absent “substantial modifications,” the proposed merger between Fortis and Central Hudson Energy Group (NYSE:CHG) does not meet the criteria for the state Public Service Commission (PSC) to approve the transaction.

In its Nov. 5 testimony, DPS outlined how the conditions of the merger could be modified to warrant a PSC approval.

Those modifications include increasing the public benefit adjustment (PBA) associated with the merger from the proposed $10m to $85m.

Fortis, the largest investor-owned utility in Canada, agreed in February to purchase CHG for US$1.5bn.

CHG subsidiary Central Hudson Gas & Electric is a regulated utility with nearly 700 miles of bulk power lines serving New York’s Hudson River Valley.

As part of the merger, the parties have agreed to continue CHG’s participation in the New York State Transmission Assessment and Reliability Study as well as the state Energy Highway development initiative.

Fortis and CHG proposed that two PBAs be included in the merger transaction.

The first PBA provides for the write off of $5m in previously deferred storm-related expenses that would otherwise be for the account of customers. The second PBA provides a one-time shareholder funding of $5m for community purposes, such as energy efficiency and low-income programs.

In its testimony, DPS proposed allocating an additional $80m to the write off of storm-related expenses.

CHG has filed two petitions to defer significant expenses related to Hurricane Irene and the snow storm of October 2011.

DPS suggested as conditions for the merger that CHG follow proposed updated standards of conduct, file estimated payroll expenses for merger-related work, and comply with the Sarbanes-Oxley Act as if still required by law.

Upon approval of the merger, CHG would become a subsidiary of a Canadian company and would no longer be subject to Sarbanes-Oxley requirements.

DPS expressed concern that Fortis did not plan to provide for an annual audit of CHG internal controls and would rely instead on its own rigorous management monitoring strategies for identifying fraud. Fortis told DPS that this approach saved money on external audit fees, and those savings are passed along to customers.

CHG is reviewing the DPS testimony and preparing comments, which it will file by the end of the month, a company spokesperson told TransmissionHub on Nov. 14.

The merger transaction received CHG shareholder approval in June and FERC approval in July. The waiting period under the Hart-Scott-Rodino Antitrust Improvements Act expired in October, and the merger now is subject to PSC approval.