PowerGen set to reward investors with share buyback

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The Independent Online
PowerGen is today expected to announce plans to reward investors with a share buyback following the pounds 353m disposal yesterday of its 21 per cent stake in Midlands Electricity to the two US utilities buying the company.

The generator, whose own bid for Midlands was controversially blocked by the President of the Board of Trade, Ian Lang, three weeks ago, is also expected to confirm that it has decided not to seek a judicial review of the decision.

PowerGen has the authority to buy back up to 10 per cent of its share capital - a move that would cost just under pounds 400m. The market had been expecting the company to set out how it planned to benefit shareholders following the collapse of the bid for Midlands and had pencilled in a buyback, special dividend or accelerated dividend policy.

Today's announcement is also expected to contain news of an acceleration in PowerGen's dividend policy and will coincide with the publication of the company's 1995 results which have been brought forward by a week.

The market is looking for pre-tax profits of between pounds 580m and pounds 605m and a further cut in dividend cover. Last year the dividend was covered 3.3 times by earnings and PowerGen said its intention was to reduce cover to between 2.5 and 2.7 times "in the coming years". Analysts are hopeful that PowerGen will be able to reduce cover at a quicker rate than indicated.

The timing and size of a share buyback will depend on market conditions and price, and is not expected to take place immediately.

The sale of the Midlands stake will net PowerGen a profit of pounds 69m and raise the holding of Avon Energy Partners - a joint venture between General Public Utilities and Cinergy - to just under 29 per cent.

This removes the threat of a rival stepping in and buying up PowerGen's stake to mount a contested bid. A spokesman for the two US utilities welcomed the move which makes it almost certain that the pounds 1.7bn offer - which is already agreed - will go through successfully.

PowerGen's legal advice appears to have been that it had a strong and credible but not overwhelming case for a judicial review of the Lang decision. However, when the American bid materialised at a price which PowerGen would not have been prepared to match even if the courts had ruled in its favour, it felt it had little option but to sell its stake.

Proceeding with a judicial review in those circumstances would, it appears, have stretched credibility. There is unlikely to be any firm news today, however, on whether or not PowerGen will go ahead with the pounds 370m sale of two power stations to the Hanson-owned Eastern Energy.

PowerGen put the plant disposal on hold when its bid for Midlands was blocked, fearing that otherwise it would be facing increased competition in the generating market at the same time as being held back from competing in supply.

Ed Wallis, PowerGen's chairman, is expected to argue that it does not yet have the regulatory certainty it would like in return for disposing of the plant - a move that would reduce earnings by 2 to 3 per cent.

The electricity regulator, Professor Stephen Littlechild, has warned that he may refer PowerGen to the Monopolies and Merger Commission if the plant disposal does not go ahead.

National Power, whose bid for Southern Electric was also blocked by Mr Lang, is expected to announce a shareholder incentive package when it produces its annual results later this month.

There had been speculation that it could reward investors with a package of special dividends, share-buy backs and enhanced dividends worth up to pounds 2bn.

However, the decision of Mr Lang to retain the Government's golden shares in the two generators, making them bid-proof, has reduced the need to maintain shareholder loyalty with exorbitant payouts.