The parent company of Central Maine Power stands to earn roughly $60 million a year in net income from building a high-voltage transmission line through Maine to bring power from Quebec to Massachusetts.
Two stock analysts who cover Avangrid Inc. made independent estimates last week for how the $950 million New England Clean Energy Connect project could contribute to future earnings, part of assessing the performance of the publicly traded company as it announced its first-quarter financial results. The earnings would be generated each year for the 20-year life of the contract, according to the analysts’ estimates.
The projections are noteworthy, because they provide some measure of what’s at stake for CMP/Avangrid, as the company tries to gain a key approval this year at the Maine Public Utilities Commission.
A spokesman for Avangrid, however, cautioned that the estimates were just projections by stock analysts. John Carroll noted that the company has yet to incorporate the project in its long-term financial outlook, because a final contract for the power line hasn’t been filed yet with Massachusetts regulators.
Carroll also declined to characterize how important the project is financially to Avangrid, except to say it is expected to have a positive impact on the company’s bottom line.
“It is also valuable to us as a demonstration of the company’s capacity to provide regional energy solutions in a competitive environment,” he said.
Carroll also said that the project is a fixed-price contract in which Massachusetts customers ultimately pay the entire cost. But Maine regulators must find that NECEC will benefit Maine residents, even though none of its electricity will be sold in Maine. Additionally, the project’s direct-current design restricts instate generators — such as wind or solar farms — from hooking up to the line.
IMPACT ON RATEPAYERS, INVESTORS
CMP has said the project will save Maine ratepayers roughly $40 million a year by lowering wholesale electricity costs in New England. Communities along the 145-mile transmission corridor will share $18 million a year in new tax revenue and nearly 1,700 direct and indirect jobs will be created during construction, CMP says.
But opponents, which include national energy companies that own competing power plants, say the project could force their plants offline, costing jobs, tax revenue and the ability to build new wind and solar projects in Maine. Their testimony is due at the PUC by the end of the day Monday. Public hearings are set for Aug. 6-8, and staff recommendations to the commissioners are scheduled for Sept. 11.
The project also needs approval in Maine from the Department of Environmental Protection. Opposition may form because of certain impacts, such as the line crossing a scenic gorge on the Kennebec River.
In March, Massachusetts announced that it had chosen the NECEC project over a rival project in New Hampshire that had failed to get a go-ahead from a state agency. Massachusetts is in the midst of picking proposals to supply vast quanities of offshore wind and land-based renewable energy, to reduce dependence on fossil fuels and cut emissions linked to climate change. Pending contracts are worth billions of dollars.
But the same sort of regulatory hurdles and generator opposition that doomed the project in New Hampshire, called Northern Pass, also presents a risk for Avangrid’s project in Maine, according to Paul Patterson, an analyst who follows Avangrid at Glenrock Associates.
“I think the two substantial areas of opposition to proposals such as NECEC are likely to be somewhat similar to those associated with Northern Pass,” Patterson said.
Those factors, he said, are efforts by existing plant owners to limit the level of competition coming from Canadian hydro power, combined with the general “NIMBY issues” related to large infrastructure projects in New England.
The NECEC project would be rated at 1,200 megawatts and send power from existing hydroelectric dams in Quebec to Massachusetts. The load could power roughly 1 million homes. Avangrid is partnering with Hydro Quebec, the provincial utility, in a 20-year contract with Massachusetts utilities. Hydro Quebec has called it the biggest export contract in its history, worth $10 billion Canadian dollars ($7.8 billion USD). The project would go online in 2022.
Against this backdrop, Avangrid has been promoting the project in a positive light for investors.
Discussing earnings results last week during a conference call, Avangrid’s CEO, James Torgerson, said the company was excited about being selected by Massachusetts.
“We are executing on our strategy that will drive continued earnings growth,” he said.
Afterwards, a research analyst for Bank of America-Merrill Lynch, Julien Dumoulin-Smith, downplayed pending conflicts in a written summary for investors. He indicated that recent concerns about the project causing congestion on the grid seemed overstated, and that settlements between power generators, environmental groups and Avangrid seemed possible. He estimated the project would contribute 19 cents a share to earnings by 2022, which based on a count of Avangrid shares, would result in a net income of $59 million a year. Earnings per share were in the $1.23 range in 2017.
A senior utility analyst at Wolfe Research, Steve Fleishman, wrote that the project was moving forward and that Avangrid management was confident it would get Maine permits this year and federal permits next year. He saw the potential for earnings growth of 20 cents a share, which works out to roughly $62 million a year in net income.
Neither Dumoulin-Smith nor Fleishman would return calls from the Portland Press Herald.
FEDERAL PERMITS, APPROVALS NEEDED
Underlying these estimates is the double-digit rate of return that the Federal Energy Regulatory Commission, which oversees interstate energy projects, allows for transmission-line investment.
“With generation being located so far from load, they want to encourage transmission,” said Gordon Weil, a former Maine energy office director and public advocate who worked for years representing large energy users in Canada. “So FERC has adopted policies that provide a pretty generous return on equity.”
Both Weil and Rich Silkman, a founding partner of Competitive Energy Services in Portland and an economist who consultants nationally on utility issues, estimated the return on equity in the 12-percent range, which is typical for transmission projects. If the project costs $950 million to build and it was financed equally by borrowing half the money and using available equity for the other half, annual net income would be roughly $60 million. That would be in line with last week’s estimates by the two stock analysts.
New England Clean Energy Connect would be smaller than CMP’s $1.4 billion upgrade to its transmission system completed three years ago. The Maine Power Reliability Project was the largest transmission job in state history.
Carroll said it’s not accurate to compare earnings projections for the two projects because NECEC is a fixed-price contract not included in CMP’s rate base and will be treated differently by FERC in its tariff-setting process. He noted that the initial return on equity set by FERC for the Reliability Project was 12.98 percent, but that the agency subsequently established a cap and the earnings benchmark was reset to 11.74 percent.
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