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National Grid to acquire US electricity company By Matthew Jones Published: September 4 2000 17:48GMT | Last Updated: September 4 2000 19:58GMT
National Grid, the UK power transmission group, is poised to strengthen its position in the US through the $3bn acquisition of Niagara Mohawk Holdings, a New York state electricity company.
The mixed cash and equity deal, which is expected to be announced as early as Tuesday, will double the size of National Grid's US business in terms of operating profits and customers. It will mean that more than half of the group's operating profits will be derived from New England.
National Grid's shift to the US is part of a two-pronged strategy to offset tightening regulation of its UK transmission business. The other part of this strategy involves developing and selling telecommunications businesses in Brazil and Poland. This follows the success of Energis, the UK telecoms company, in which it has successfully sold all but a 36 per cent stake.
New England is seen by National Grid as the most attractive state for entry into the liberalising US power market because of its early move to incentive-based regulation. The NiMo acquisition follows the group's purchase of New England Electric System and Eastern Utility Associates earlier this year for a combined price of $3.8bn.
A National Grid official refused to confirm that it was in talks with NiMo. However, David Jones, National Grid chief executive, has made no secret of his desire to acquire more businesses in New England. He recently told analysts that the group would announce a major acquisition in the state before the end of the year.
NEES was selected by National Grid as a takeover target because of its position as one of the best performing utilities in the state. National Grid said in May that the integration of NEES was going better than expected and would lead to a 25 per cent increase in the return on its investment.
In contrast, NiMo has underperformed its peers by around 30 per cent this year after being hit by one-off expenses due to problems with its customer service system and stranded costs from entering supply contracts at odds with market rates.
National Grid is expected to argue that the bulk of the problems at NiMo have been resolved by an internal restructuring programme and an agreement with the regulator to recover stranded costs. Executives will hope to demonstrate to the market that they can acheive savings in the company both from synergies with NEES and by lifting the performance of the company in-line with other parts of National Grid's business.
NiMo is focused principally on up-state New York and serves 3.5 million electricity and 1.7 million natural gas customers. In the 12 months to 30 June 2000 it made a loss before tax of $33.6m on turnover of $4.3bn compared with a profit before tax of $21m on turnover of $3.9bn a year earlier.
The US has become increasingly attractive to UK utilities hoping to offset falling revenues at home with unregulated businesses overseas. In the last year Scottish Power, British Energy and PowerGen have all acquired US assets and International Power, the soon to be demerged arm of National Power, has set aside $2bn to spend in the US by 2001.
At close of trading on Monday, shares fell 2.3% at 560p.
-- Martin Thompson (firstname.lastname@example.org), September 04, 2000