National Grid in US buying spree

NATIONAL GRID yesterday joined the takeover trail in the United States, paying pounds 2.7bn for a New England-based electricity company and indicating that it planned further US acquisitions.

The deal follows last week's $7bn takeover of PacifiCorp by Scottish Power and is likely to be followed by further bolt-on acquisitions by National Grid worth up to pounds 500m.

National Grid, the operator of the UK's high-voltage electricity transmission network, is paying pounds 1.9bn cash for New England Electric System (NEES) - a 25 per cent premium to last Friday's closing price - and assuming a further pounds 800m of debt. Nees has 1.3 million customers in Massachusetts, Rhode Island and New Hampshire and operates both the transmission grid and distribution system in the region.

There is a poison pill clause in the agreement requiring either party to pay the other a $100m penalty fee if they withdraw from the deal, which is expected to receive final regulatory clearance in early 2000.

David Jones, National Grid's chief executive, said there was scope for cost-cutting at Nees but would not be drawn on how much it hoped to save or what the impact would be on the 3,200-strong workforce.

Since National Grid was privatised in 1990, it has halved its workforce - reducing the headcount by nearly 3,000 - and slashed costs by pounds 220m.

But NEES is regarded as one of the more efficient US utilities, ranking 26th in the league table of 150 electricity suppliers based on costs per customer.

National Grid said that the deal, which is being financed entirely from borrowings, would be earnings enhancing from day one before taking into account a goodwill write-off of pounds 1bn.

By year three it would be earnings enhancing after amortisation of goodwill of about pounds 50m a year. NEES is profit capped like other US utilities and is allowed to earn a return on equity of 11 per cent in its distribution business and 10.25 per cent in transmission.

But the North-east region of the US is in the vanguard of moves towards incentive-based regulation, which would allow National Grid to retain more of the efficiency savings it achieves. At present, any profits NEES earns above and beyond its permitted rate of return are shared evenly between customers and shareholders.

Mr Jones said that NEES should move to an incentive-based regulatory system, where prices rather than profits are capped through an RPI-X style formula, as soon as 2000.

Rick Sergel, chief executive of NEES, will remain in that role and will make around $920,000 from his stake in the company. National Grid will send two senior directors over to New England to help run the business and push through the cost-cutting measures.

NEES recently sold its generation division - consisting of 4,000 megawatts of power plant - to Pacific Gas and Electric for $1.6bn. It still has minority stakes in six nuclear power stations, three of which are operating. But Mr Sergel said the liabilities relating to these stations were largely covered under its regulatory formula. At worst, Nees' exposure was in the order of $6m-$7m.

National Grid said the plan to dispose of its pounds 2.7bn stake in the telecoms operator Energis remained unchanged.

Outlook, page 15