National Grid Doubles U.S. Presence with Niagara Purchase

Doubling its presence in the U.S. utility market, the United Kingdom's National Grid Group Plc agreed last week to buy Niagara Mohawk Holdings Inc. for $8.9 billion in cash, stock and assumed debt. The U.K. power producer plans to merge Niagara with two Massachusetts utilities acquired earlier this year, boosting its U.S. customer base to more than 3.2 million.

National Grid agreed to pay $19 per share for the Syracuse, N.Y.-based utility, about 47% more than its closing price Aug. 31. The deal includes $1 billion in cash, $2 billion in stock and the assumption of about $5.9 billion in debt. The total price is about three times Niagara's book value, and shareholders will receive cash and shares in New National Grid, which was formed solely to acquire Niagara.

Because National Grid expects a lengthy regulatory review, it does not expect to close on the deal before the middle of 2001. Along with regulatory approvals, shareholders from both companies also will vote on the acquisition.

The U.K. power producer, with holdings in England and Wales, bought the New England Electric System of Westborough, MA for $4.7 billion in cash and assumed debt last March. In April, it paid $1.03 billion in cash and assumed debt for Eastern Utilities Associates of Boston.

The two New England utilities supply electricity and gas to customers in Massachusetts, Rhode Island and New Hampshire. Niagara is the second-largest electricity transmission and supply company in New York, with 1.6 million electricity customers and 540,000 gas customers.

Up to 700 jobs would be lost from Niagara when it is merged with the other two U.S. utilities to create the ninth-largest electric utility in the United States, according to National Grid CFO Michael Jesanis.

Niagara nearly declared bankruptcy in 1997 because of contracts mandated by the State of New York that forced the utility to buy electricity from independent power producers above market rates. New York regulators then allowed Niagara to refinance or buy out nearly $6 billion of the contracts in 1998 and the company was restructured. Niagara has been selling its power plants to concentrate on delivering electricity through its 24,000-square-mile transmission network, which is the largest in the State of New York (see NGI, June 7, 1999).

National Grid CEO David Jones said that he's aware of Niagara's underwhelming performance compared with other utilities, and blamed it on the problems with the power purchase contracts three years ago. However, he said that now that the contracts have been renegotiated, Niagara has a "stable future." He called the buyout's timing "ideal."

National Grid was formed in 1990 as part of the U.K. government's plans to sell the electricity industry to the public. It owns and operates overhead lines and underground cables in England and Wales. Earlier this year, it had expressed an interest in buying GPU, the U.S. utility being wooed by FirstEnergy of Ohio (see NGI, Aug. 14). However, analysts said that National Grid was not interested in GPU's overseas assets.

Carolyn Davis, Houston

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