Grid shares jump on Mohawk settlement

National grid shares rose strongly yesterday after the company announced a favourable settlement with US regulators ahead of completion of its $3bn (£2bn) takeover of the New York-based electricity supplier Niagara Mohawk.

Under the 10-year agreement struck with the New York Public Service Commission, National Grid expects to make savings of $130m by integrating Niagara Mohawk with its existing electricity businesses in New England – some $40m more than it forecast at the time of the acquisition.

Total savings are assumed to be $190m – including the $60m of efficiency gains Niagara Mohawk was already expecting to make following the divestment of its generating business.

National Grid will be allowed to earn a 10.6 per cent post-tax return on its investment after equal sharing of the merger savings attributable to New York – estimated at $80m. If National Grid outperforms its allowed rate of return it will be allowed to keep all the gains up to a post-tax return of 11.75 per cent. Beyond that, gains will be shared with customers.

In return, Niagara Mohawk's customers will receive a $160m reduction in charges – equal to a cut of around 5 per cent in the average bill.

National Grid shares rose 6 per cent on the news to close 27.25p higher at 488.75p. Analysts estimate that the Niagara Mohawk deal, which is due to be completed early next year will add around £170m to National Grid's pre-tax profits in 2002-03. The company is now forecast to make pre-tax profits next year of £740m and earnings per share of 39p.

Roger Urwin, chief executive of National Grid, said: "This plan is good news for Niagara Mohawk customers and good news for National Grid investors. It gives shareholders regulatory stability and the opportunity for enhanced returns."

Once the takeover is complete more than 60 per cent of the group's operating profits will come from the US and National Grid will be the ninth largest electricity utility in America.

The favourable regulatory settlement in the US is a boost for National Grid after the setback it suffered last month when the group warned of difficulties in its South American telecoms operations, which may result in the sale of all its interests in Brazil and Chile.