UK electricity network company, National Grid today announced improved savings associated with its acquisition of US utility Niagara Mohawk. The $190m of savings to be made over the first four years following the deal were detailed in the company’s statement concerning its ten-year negotiated rate settlement with the New York Public Service Commission.
This filing is the next key step in the completion of National Grid’s proposed $3bn acquisition of Niagara Mohawk and provides, among other things, a framework for how the merger savings are proposed to be shared between Niagara Mohawk’s customers and National Grid’s investors.
National Grid has been pursuing an expansion policy in the US to offset tighter regulatory conditions in the UK where it is the monopoly high-voltage transmission line operator.
Niagara Mohawk customers will see an eight per cent reduction in the cost of delivery – worth $160m a year. National Grid has agreed to fix these rates for ten years and to deliver improved services and reliability under a new service agreement.
For National Grid shareholders, the key benefits are an allowed 10.6 per cent post tax return on equity after equal sharing of the merger savings attributable to New York and retention of 100 per cent of outperformance up to a post tax return on equity of 11.75 per cent (after which further savings will be shared with customers). Full commodity cost charges will be able to be passed on to customers.
Roger Urwin, chief executive of National Grid Group said, “This plan is good news for Niagara Mohawk customers and good news for National Grid investors. It gives customers lower prices and improved quality of service. It gives National Grid shareholders regulatory stability and the opportunity for enhanced returns and it also gives us confidence that we will meet our target of a 10.5 per cent pre-tax return on investment for our enlarged US business by March 2005.”
The agreement is based on the assumption of total annual savings of $190m. Of this, $60m a year is carried forward from Niagara Mohawk’s existing PowerChoice agreement, which reflected efficiency gains following divestiture of its generating business.
The remaining $130m a year arises from merger-related savings which is an increase from the annual savings of $90m estimated when the acquisition was first announced and represents 13 per cent of the enlarged US business controllable cost base.
Some $80m a year of these merger-related savings are assumed to be achieved in Niagara Mohawk’s New York operations, with the balance of $50m to be achieved in National Grid’s existing New England operations.
Urwin said the additional savings would be made by increasing the number of job losses from 750 to “between 800 and 900” from a total workforce of about 10 000.
The rate agreement has to be approved by the full New York Public Service Commission as well as the US Securities and Exchange Commission. Assuming these approvals are received, the National Grid acquisition of Niagara Mohawk remains on track for completion early in 2002.
Following the merger, the enlarged company will have the largest transmission network and distribution business in the New York/New England market, and will be the ninth largest electricity utility in the US. The US operation will control 12 000 circuit miles of transmission lines, 150 000 circuit miles of distribution lines and serve over three million customers.