UK electricity generator and retailer Innogy announced on Monday that it is to swap its interest in Yorkshire electricity distribution business and associated debt for Northern Electric’s energy supply business. Northern Electric, the Newcastle-upon-Tyne based power and gas business, will pay £5 million ($7.15 million) to Innogy, subject to adjustments, for the interests which were part of the recent acquisition of Yorkshire Power Group.

Northern Electric’s Supply Business comprises approximately 1.57 million customers and will take Innogy’s total customer base to approximately seven million. Innogy has agreed to pay £257 million for Northern Electric’s Supply Business including a power purchase agreement, implying a cost per customer of approximately £275.

Commenting on the transaction Ross Sayers, Innogy’s Executive Chairman, said, “This transaction establishes Innogy as the number one electricity supplier to households and businesses in the UK and the number two supplier in gas, by volume. Selling Yorkshire’s regulated asset based distribution business and reinvesting in supply is consistent with our strategy to become a leading customer focused integrated energy company.”

Brian Count, Innogy’s CEO Designate said the combination of Northern Electric Supply Business with the existing supply businesses of Innogy was expected to deliver savings of at least £25 million per annum by 2004. This together with the targeted savings from the integration of the Yorkshire supply business is expected to bring the total operational savings of Innogy’s supply operations to at least £60 million per annum within four years. Count said, “Our focus is now on delivery of the cost savings and further development of the npower brand. Together we believe that these will create real value for our shareholders.”

Npower is the name under which Innogy’s supply operations trade-The group said the brand would be gradually extended across the Yorkshire and Northern supply areas.

Under the proposed terms of the transaction, Northern Electric has agreed to acquire 94.75 per cent of Yorkshire which consists of Yorkshire’s regulated electricity distribution operations and Yorkshire’s external connections and contracting business.

Northern Electric will also assume net debt of £742 million, comprising all of Yorkshire’s current debt securities with the exception of the $350 million, 6.15 per cent 2003 Yorkshire Power Finance Limited and the £150 million, 8.63 per cent 2005 Yorkshire Electricity Group plc securities which will be redeemed prior to completion.

Innogy is acquiring the Northern Electric Supply Business for a consideration of £257 million. Innogy will not be assuming any net debt. The Northern Electric Supply Business includes:

* 1.11 million electricity and 0.46 million gas domestic and SME customers;

* Northern Electric’s industrial and commercial contracts and trading operations; and

* Northern Electric’s metering services business.

In addition, Innogy is to assume Northern Electric’s power purchase agreement with Teesside Power under which Teesside agreed to supply power to Northern Electric until 2008. The resultant net payment is £5 million in cash to Innogy. This will be adjusted for net working capital at completion, together with an adjustment for the presence of the minority interests in Yorkshire.

The transaction is subject to a number of conditions, including European Commission approval of Northern Electric’s acquisition of Yorkshire, and is expected to complete within 3 months. There is a break fee of up to £20 million.

The transaction will not require the approval of Innogy shareholders.