Ann de Rouffignac
OGJ Online
As expected, National Grid Group PLC Tuesday increased its stake in the US electric utility business by agreeing to buy Niagara Mohawk Holdings Inc. in a cash and stock deal valued at $3 billion. National Grid will also assume Niagara�s $5.9 billion debt.
In mid-day trading Niagara's stock was up 12% on volume of 3.8 million.
The acquisition is the third American purchase for the British company. National Grid had already bought New England Electric System and Eastern Utilities Associates earlier this year and had signaled clearly to the investment community that another purchase of a US company was in store.
The acquisition of Niagara Mohawk will push National Grid to be the ninth largest utility in the US with about 3.3 million electric and gas distribution customers in New York State and New England.
Analysts surmised that the acquisition hinted at by National Grid would be a transmission and distribution utility that operates in a northeastern state where the path of deregulation is clear.
National Grid�s choices were narrowed down to GPU Inc. and Niagara Mohawk, says Gerald Keenan, partner with PriceWaterhouseCoopers, Chicago. FirstEnergy Corp. reported in August it will buy GPU Inc., Morristown, NJ.
National Grid intends to leverage its British experience operating a transmission and distribution utility within a competitive deregulated industry to get additional value and cost savings from its US operations, analysts say. National Grid expects to cut costs by 10%,or $90 million, across all of its operations in New England and New York once the Niagara Mohawk merger is complete.
The company expects to complete the merger by late 2001. The first $45 million of savings will help the bottom line in the first full financial year following the close of the merger.
British utilities are buying US utilities because specific policy in the UK prevents them from expanding in Britain and that market has stagnated, experts say. Conversely, greater opportunities in the US have lured them over, says Keenan. ScottishPower PLC acquired PacifiCorp in November 1999 and PowerGen PLC said in February it will acquire LG&E Energy Corp.
�They (British utilities) see a market 10 times the size of the UK. They see a lot of consolidation still to come and a rapidly growing market,� says Keenan.
Under terms of the transaction, Niagara shareholders will get $19/share. Niagara shares closed at $13.84 the last trading day before the announcement. The deal is subject to a collar. If National Grid shares fall below $32 each, then the exchange ratio for each Niagara share will decrease by two-thirds of the percentage decrease in value.
If the shares go above $51, shareholders will get an additional two-thirds of the percentage increase in value. Niagara shareholders can exchange their shares for cash or any combination of stock and cash.
Niagara won�t be subject to the same market volatility that has plagued other companies which have sold generation and retained transmission and distribution a la Sempra Energy's San Diego Gas & Electric Co., says Keenan. The California utility's customers, the first in the US to experience the full impact of deregulation, have seen their bills double this summer.
Contracts retained
Niagara retained some power contracts with the buyers of its generation as a result of deregulation agreements with New York regulators. Conversely, most of the old above-market power purchase contracts have been settled, Rick Sergel, National Grid USA president and CEO, said in a statement.
The merger is conditioned on approvals from both company�s shareholders and the sale of Niagara Mohawk�s nuclear facilities. Niagara owns Nine Mile Point 1 and 2 nuclear generating plants which being auctioned in a process overseen by the New York Public Service Commission. State and federal government approvals are also required.
Consumer advocates say that the concentration of transmission and distribution assets in fewer hands will become a strong challenge for regulators.
�Their power to limit competitors like distributed generation and try and increase their own throughput will challenge regulators,� says Ashok Gupta, senior energy economist with the Natural Resources Defense Council in New York. �This may not be a problem if regulators do their job right. But that�s a big 'if'. The economic clout of these large players could overwhelm regulators.�
Gupta said he is especially concerned that large transmission and distribution utilities will try to discourage the installation of distributed generation units such as microturbines, fuel cells, and solar panels. Distributed generation could avoid transmission charges and many utilities are already trying to actively discourage its use, he says.
