The New Hampshire Public Utilities Commission, after much wrangling with parties that led to a delayed sale schedule, on Nov. 10 approved the design of an auction process for certain power plant assets of Public Service Co. of New Hampshire.
The commission approved the auction design and process recommended by its auction advisor, J.P. Morgan (JPM), with certain modifications to further accommodate participation by intervening cities and towns. This docket was established to conduct the sale of the fossil and hydro electric generation facilities (Generation Facilities) owned by Public Service Co. of New Hampshire d/b/a Eversource Energy.
The contract with JPM to conduct the sale of the Generation Assets was approved by the governor and the Executive Council on Sep. 7. On Sept. 12, JPM filed a description of the proposed auction process with the commission. On Oct. 17, JPM filed a modification to the proposed auction process to facilitate municipal participation in the auction.
In its proposed auction design filed on Sept. 12, JPM described a broad two round auction process in which a wide range of potential bidders, after signing confidentiality agreements, would be given access to a confidential information memorandum (CIM) and certain third party engineering and market analyses of the Eversource portfolio of hydro and fossil facilities offered for sale. Such potential bidders would be allowed to submit non-binding indicative bids on single facilities or groups of facilities in Round 1 of the auction. A smaller group of qualified bidders in Round 1 would then be selected to participate in Round 2 in which those potential bidders would be given the opportunity to conduct detailed due diligence on the facilities. Round 2 bidders would then be invited to submit final binding bids at the end of Round 2. From the group of potential bidders that elected to submit such final binding bids, JPM would then select a winning bid, or combination of bids, and begin negotiating final terms of sale.
After receiving the written comments from Berlin, Gorham, Bristol, and New Hampton (the Municipalities) and conducting telephone conferences on Oct. 6 and 13 with the Municipalities, JPM proposed a number of timing and design changes to facilitate the Municipalities’ participation in the auction process.
The amended proposed auction process would allow the Municipalities, once they have signed a confidentiality agreement, access to the electronic data room for their respective hydro facilities, in November 2016. The Municipalities would also be given access to the independent market analysis and the independent engineering analysis for their respective hydro assets as soon as those reports become available, estimated to be in late November 2016. Under the amended process, the auction schedule would be extended approximately two months. As a result, other interested bidders would be qualified to participate in Round 1 in mid-to-late November, and would be given confidentiality agreements in mid-December. A CIM would be circulated to all qualified Round 1 bidders and to the Municipalities in early January 2017. Preliminary non-binding bids would be due in mid-to-late February from all bidders, except the Municipalities, which would not be required to submit preliminary non-binding bids, but would have the option of giving JPM their indication of value for their respective hosted local hydro facilities.
The Municipalities electing to submit indications of value would then receive, on a confidential basis, information from JPM on how their values relate to the range of Round 1 bids on their hosted facilities. Final binding bids would be due from all bidders including the Municipalities in early-to-mid-May 2017. Further, in order to address municipal needs for specific price allocation to their respective hydro facilities, in its amended auction design JPM proposed to require all Round 1 and Round 2 bidders to allocate bid value among any hydro facilities included in their bids.
The hydro facilities hosted by the Municipalities are Smith Hydro in Berlin, Gorham Hydro in Gorham, and Ayers Island Hydro in Bristol and New Hampton.
The Municipalities all voiced concerns with their ability to participate in a non-binding Round 1 bid process, but they accepted the alternative arrangement for Round 1, offered by JPM at the Municipalities’ request. Under that alternative arrangement, at the conclusion of the Round 1 nonbinding bids, the Municipalities would have the option of giving JPM their indication of value for their respective hosted local hydro facility. The Municipalities would then receive, on a confidential basis, information from JPM on how their values relate to the range of Round 1 bids on their hosted facility.
The schedule of the auction as a result of the amended design is:
- The request for qualification process for Round 1 bidders will begin in mid- to late November 2016. Criteria for selection into Round 1 include ownership and operation of similar facilities, expected sources of financing to purchase the facilities, ownership, governance structure, and operations of the bidder.
- Confidentiality agreements will be circulated to qualified Round 1 bidders and finalized in mid-December 2016 to early January 2017.
- A CIM will be circulated to Round 1 bidders in early January 2017.
- Preliminary non-binding offers for the facilities will be due in mid-to-late February 2017.
- Round 2 bidders will be selected in early-to-mid-March, allowed access to detailed due diligence material on the facilities through an electronic data room, and given facility tours and meetings with existing Eversource management.
Selection criteria for Round 2 bidders include: the bid price, the assets bid on, demonstrated commitment to the transaction, ability to get financing, past market behavior or reputation, and their experience owning and operating similar facilities. Round 2 is expected to last approximately eight weeks, which should allow the bidders time to complete due diligence and to mark up the draft purchase agreement prior to submitting their final binding bids.
JPM will then prepare a presentation summarizing such proposals and review the results of the auction with the commission, prior to beginning final negotiations. Depending on the nature of the final proposals received, JPM is likely to recommend that the commission select more than one party for final negotiations of the transaction contract. This is typical in competitive auction processes as it fosters competition among the final parties and can potentially lead one of them to improve their bid (in terms of price or terms) above what they included in their final proposal. This process also helps to ensure that agreement is reached with one party in the event the other party withdraws or ceases to participate in final negotiations.
The Municipalities requested that they be allowed to bid on individual hydro facilities. JPM has designed an auction process which allows the Municipalities and any other bidders to bid on individual assets, therefore the auction design fulfills this request. The Municipalities also suggest that the hydro assets be sold as a separate portfolio. JPM did not recommend selling the hydro facilities separate from the fossil units because JPM does not believe that this approach will maximize value for the portfolio. JPM’s experience is that certain bidders may find purchasing the portfolio has more value than buying part of the portfolio. JPM’s auction design does not force any groupings of assets and instead allows bidders flexibility to bid on all or some of the assets. The winning bidder (or bidders) can then be selected based on whatever combination of proposed transactions maximizes value. “We believe that JPM’s recommendation regarding asset groupings is market based and reasonable,” said the Nov. 10 commission order.
Under the amended auction process, in order to accommodate the Municipalities’ participation, JPM has extended the process so that final binding bids are due in early-to-mid-May 2017. JPM has advised that if the sale date was moved out beyond May 2017, the risk of the financial environment changing increases, and for that reason JPM did not recommend further delay. “Therefore, we will not require additional delay of the auction process, beyond the two months proposed by JPM under the amended auction process, to further accommodate the Municipalities’ requests for more time,” said the commission.
The PSNH power plants subject to this sale process are:
- Merrimack Station, Bow, Coal, 439 MW.
- Newington Station, Newington, oil and/or natural gas, 400 MW.
- Schiller Station, Portsmouth, coal or oil at two units; biomass at one unit, 150 MW total.
Hydroelectric – 69 MW total
- Amoskeag Hydro, Manchester
- Ayers Island, Bristol
- Canaan Hydro, West Stewartstown
- Eastman Falls, Franklin
- Garvins Falls, Bow
- Gorham Hydro, Gorham
- Hooksett Hydro, Hooksett
- Jackman Hydro, Hillsborough
- Smith Hydro, Berlin