The United Kingdom's National Grid will make major strides in its near-dominance of major utilities in the New York-New England section of the United States with its plan to acquire KeySpan Corp., rumored last week and announced early Monday. National Grid will pay $42 per share in cash in a transaction valued at approximately $7.3 billion, with an enterprise value of $11.8 billion. The boards of both companies unanimously approved the acquisition.
The transaction, National Grid's fifth U.S. acquisition, creates the third largest energy delivery utility in the United States, with electricity and gas businesses serving nearly eight million customers in the New York State and New England regions.
When recently announced transactions are completed the UK firm's grid will include Boston Gas, the old Brooklyn Union Gas, Niagara Mohawk, New England Electric & Eastern Utilities and New England Gas. With the acquisition of KeySpan's 6,000 MW of power generation in the New York area, the combined company also will serve the power needs of the Long Island Power Authority (LIPA).
"KeySpan is an excellent operational and geographic fit and a natural extension of our business and our strategy," said Roger Urwin, National Grid Group CEO. "KeySpan is an acquisition which makes sense at every level."
KeySpan is the fifth largest distributor of natural gas in the United States and the largest in the Northeast, operating regulated gas utilities in New York, Massachusetts, and New Hampshire that serve 2.6 million customers. The company also is the largest electric generator in New York State, serving the 1.1 million LIPA customers and operating LIPA's transmission and distribution system under contract. KeySpan serves about 25% of the power needs of New York City.
KeySpan also owns 20.4% of the Iroquois Pipeline, has a 50% interest in the proposed Islander East pipeline and owns a 20% interest in Millennium Pipeline. It also has interests in New York area gas storage facilities.
Michael E. Jesanis will remain CEO of National Grid USA. Robert B. Catell, KeySpan chairman and CEO, will become executive chairman of National Grid USA and deputy chairman of National Grid plc.
"This transaction will deliver significant value to shareholders and customers of both companies. KeySpan will become an important part of one of the largest and most efficient energy delivery companies in the world, and have access to additional financial resources to invest in our energy infrastructure and growth opportunities," Catell said.
One very large customer, however, wasn't so sure. LIPA Chairman Richard M. Kessel first issued a strident message on the day the proposed merger was announced, but toned it down after meeting with executives of the two companies.
LIPA "has no intention of selling its transmission and distribution system to National Grid or any private entity at this time," Kessel said. He later issued a joint message with the two companies saying all "will work cooperatively to address issues of importance to the authority related to National Grid's acquisition of KeySpan."
In his earlier message Kessel said "as part of its recently concluded long-term strategic review, LIPA determined that it would not be prudent to privatize its T&D system now, given the significantly higher capital and tax costs of a private entity." He noted that since the 1998 takeover of Long Island Lighting, LIPA and KeySpan have been working together in a unique public-private partnership under which KeySpan operates and maintains LIPA's extensive transmission and distribution (T&D) system and supplies LIPA with a substantial portion of its electric power needs. KeySpan has over 4,300 employees -- from senior managers, to linemen, to customer service personnel, to plant operators -- dedicated to LIPA's operations.
In January, LIPA and KeySpan entered into a new set of agreements that would amend and restructure the agreements by which KeySpan operates LIPA's T&D system, give LIPA the option to buy two KeySpan generating stations and also settle a number of outstanding contract disputes.
"We approved and signed these new agreements -- which we then submitted to the state comptroller and attorney general for their approvals -- after conducting an 18-month study of our strategic options, concluding that a continuation of our partnership with KeySpan was in our customers' best interests," Kessel said.
"National Grid's acquisition of KeySpan does, however, present LIPA and its customers with a fundamentally different situation from that which we have had with KeySpan since 1998 and have just now renegotiated," Kessel said. LIPA's "overriding concern is that our customers continue to receive the high level of reliable, safe and economic electric service to which they have been accustomed and that service be provided at the lowest possible cost to LIPA's customers."
Kessel said that at this early date, "we have not yet had the opportunity to assess National Grid's capabilities, operating experience or resources or to discuss with National Grid and KeySpan the possible impacts of the acquisition on LIPA and its customers or their plans to carry out KeySpan's commitments under our agreements. We have many questions to which we will want answers in this regard, including the future organizational, management and administrative structure of the combined companies, employee impact, National Grid's commitment to Long Island and particularly to high-quality service, and the effect on LIPA's ability to control rates charged to our customers." LIPA also expects to participate in state and federal regulatory proceedings regarding requests for approval of the proposed acquisition "to ensure that the interests of our customers are adequately protected."
Upon completion of the transaction, KeySpan will become a wholly owned subsidiary of National Grid and will continue to operate as KeySpan. National Grid will continue to have customer-focused operations throughout its four-state service territory (Massachusetts, New Hampshire, New York and Rhode Island) and will maintain a significant corporate presence in Massachusetts, Brooklyn, NY and Upstate New York, as well as an operations center in Hicksville, NY.
The transaction is subject to customary closing conditions, including the approval of the shareholders of both companies, certain federal and state regulatory approvals and clearance under the Hart-Scott-Rodino Act. The transaction is targeted to close by early 2007.
Rothschild is serving as financial advisor to National Grid. Skadden, Arps, Slate, Meagher & Flom LLP is serving as legal advisor to National Grid. Lazard and Simpson Thacher & Bartlett LLP served as financial and legal advisors, respectively, to KeySpan.
National Grid said earlier in February that it will acquire the Rhode Island natural gas business of New England Gas Co. from Southern Union Co. for $575 million and assumed debt of $77 million (see NGI, Feb. 20).
In September 2000 the company announced a deal to acquire Niagara Mohawk Holdings for $8.9 billion in cash (see NGI, Sept. 11, 2000). That deal was later consummated and it followed National Grid's acquisition of the New England Electric System of Westborough, MA for $4.7 billion in cash and assumed debt and its $1.03 billion cash and assumed debt acquisition of Eastern Utilities Associates of Boston.
National Grid, which was formed in 1990 as part of UK electricity privatization, owns the high-voltage electricity transmission network in England and Wales and operates the system across Great Britain. It also owns and operates the high-pressure gas transmission system in Britain and, through its natural gas distribution business serves over 11 million meters in homes and businesses in Britain. In addition, it has a number of businesses operating in related areas such as LNG importation, wireless infrastructure for broadcast and telecommunications, property, metering and interconnectors.
Standard & Poor's Ratings Services said Monday it had revised the CreditWatch implications for its 'A/A-1' corporate credit rating on KeySpan Corp. and its subsidiaries to negative from developing. The agency's ultimate assessment will be "primarily be driven by how National Grid finances the transaction and the effect on the consolidated financial profile after the merger," said Standard & Poor's credit analyst Dimitri Nikas. KeySpan had about $4.2 billion of debt outstanding as of Sept. 30, 2005.
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