The group is negotiating to buy Norweb's 50 per cent stake in the Keadby power station in Scunthorpe in a deal which is likely to cost it around pounds 240m-pounds 250m.
Hydro-Electric already owns the other half of the station and has been selected as preferred bidder for the Norweb stake which is being disposed of by United Utilities, the group formed out of North West Water's acquisition of the regional electricity company.
The Keadby deal will increase the amount of electricity Hydro is generating for England and Wales to 2,000 megawatts. By 1999 when the Seabank gas- fired plant in Bristol is on stream, more than half of Hydro's output will be sold in England and Wales.
The Keadby acquisition, together with payment for Seabank, which is jointly owned with British Gas, will raise Hydro's gearing to 65 per cent.
But its chief executive Roger Young, nevertheless estimated that Hydro will still have the capacity to return about pounds 200m of its capital to shareholders. This is more than enough to fund a buyback of 10 per cent of its shares. Alternately, Hydro could reward shareholders with a 50p special dividend.
Mr Young said that the company would wait until the end of the financial year to decide whether to seek further investment opportunities or return cash to shareholders. Another area it is actively looking at is setting up deals to sell electricity direct to domestic customers once the market in England and Wales is opened up in 1998.
Hydro is examining so called "affinity partnerships" whereby it would supply the electricity for sale through a well known brand such as a supermarket chain or bank. "We would like to enter the domestic market and I am beginning to think this is the best means of doing so," said Mr Young.
He was speaking as Hydro unveiled flat half-year profits of pounds 61.3m, due to the abnormally low level of rainfall in the six months to the end of September. This forced Hydro to buy in extra quantities of coal to meet demand from its Scottish customers. Without the extra coal burn, profits would have been pounds 6m higher than last year's pounds 61.7m.
The strong underlying performance of the business, driven by further development of its interests south of the border, encouraged Hydro to increase its payout at the interim stage by 11 per cent to 5.3p. Previously it had set a target of growing dividends by 6 per cent in real terms.
The Keadby and Seabank power stations generate 1,400 megawatts of electricity and form the central part of Hydro's expansion plans outside Scotland.
It had planned to enter the retail power market in a big way by buying British Gas's North of England and Scottish supply business but the deal was scrapped after BG decided it could not negotiate this deal and demerge its pipeline and supply businesses at the same time.