National Grid goes to New England Westward expansion

Last week, ScottishPower gained the acceptance of the PacifiCorp group board to buy the electricity supplier to six Western states for a total of #4.2bn.

National Grid chief executive David Jones said that the move was part of his strategy of generating at least 30% of earnings from activities apart from the core transmission business in England and Wales.

New England had been chosen as the area for expansion as it is the part of the US which is the most advanced as regards de-regulation.

There were strong parallels to the UK before privatisation.

New England Electric has some 1.3 million customers, most served by the Massachusetts Electric Company while others are in Rhode Island, New Hampshire and on the island of Nantucket.

It rates number 26 in size among the 150 or so US utilities.

The cash offer of $53.75 per share represents a 25% premium over last Friday's closing price for the $3.2bn of equity involved - National Grid is picking up $1.4bn of debt.

The chances of a counter-bid are remote for two reasons.

There is a $100m penalty payable by either party if it is unable to complete its side of the deal.

This also raises the hurdle for another bidder which, in any case, would have to offer perhaps an additional 10% premium over the National Grid price to succeed.

The transaction is expected to be completed in about a year's time.

It will be immediately enhancing as both earnings per share and, more important, will boost cash flow by 20%.

By using cash rather than equity, there will be tax advantages.

Jones added that while the New England Electric deal is going through the formalities, it does not preclude his making another US acquisition of up to #500m.

If the 74% holding in the Energis telecoms subsidiary is included on the balance sheet at its current market worth of #2.7bn, compared with its book value of #250m, and also its fixed assets which carry a surplus of #2bn over book value, then gearing drops from more than 350% to some 40%.

Interest cover will drop briefly below three times but the strong cash flow will soon restore it to target levels.

Jones re-iterated the group policy of increasing dividends by between 4% and 5% annually in real terms.

New England Electric has some 3200 employees in the on-going business as it sold off its power generation activities in September for the equivalent of #1bn.

There are some outstanding liabilities on three inoperative nuclear power stations but these are inconsequential.

Financial cover is such that the maximum liability in the event of an accident is put at #5m.

There is also a 30% interest in three operating nuclear stations but that stake is up for sale.

Under the existing regulatory regime, New England Electric retains all profits earned up to limit of 11% return on equity and thereafter it is shared equally with customers.

But after 2000 it is expected that this restriction will be removed.

The US Federal Regulatory Agency has been in close touch with its counterparts in the UK on de-regulation in recent years.

National Grid has sent over consultants to assist which will help the gaining of necessary approvals.

While Jones would say little as to how much he expected costs would be cut, he pointed to the potential for National Grid which is the world's biggest transmission entity.

Deregulation will result in the building of many more power stations in the US and the company has the expertise to manage the growth in transmission capacity.

City reaction to the announcement was generally favourable with Pat Wild at WestLB Panmure welcoming the acquisition for both its cash generating potential and also because it will enable National Grid to expand more easily into South America from a US base.

The shares eased 10.5p to 488p.

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