National Grid plc has made a last-minute bid for approval from the New York Public Service Commission (NYPSC), which is scheduled to vote Wednesday on its $11.8 billion buyout of KeySpan Corp., offering ratepayer protections for the 100% debt-financed transaction last week after the commission staff came down hard on the financial risk involved.
Recognizing that given the state of financial markets, right now is not the best time to be defending a highly leveraged buyout of a regulated entity, National Grid readily acceded to extra protections suggested by the NYPSC staff at a final hearing last week. The approval of the New York regulators is the last one required for the merger to go through (see Daily GPI, July 17).
The staff had suggested the extra protections, but even with these “we cannot assure that this transaction is without financial risk. We just can’t do it,” Charles Dickson, director of utility rates for the PSC, said during the eleventh-hour hearing. “There’s a lack of clarity on how Grid will finance the transaction.” One of the last minute concessions is for the United Kingdom-based company to file consolidated financial statements in accordance with U.S. GAAP.
National Grid also agreed there would be:
National Grid also agreed to strengthen a condition for restricting payment of dividends in the event of a ratings downgrade below investment grade for KEDNY, KEDLI or the consolidated company. Also, costs to achieve the merger will be excluded from goodwill.
While the commission staff had proposed specific protections for the regulated entities in the event of the parent’s bankruptcy, National Grid suggested there are several ways to go about that. The company said it would abide by the outcome of a generic investigation by the commission into the issues associated with bankruptcy protection.
In addition, the new financial protections would be extended to affiliate Niagara Mohawk on a prospective basis following a separate proceeding to assure consistency with the other provisions in the Niagara Mohawk rate plan and merger agreement.
National Grid also made a number of concessions with regard to vertical market power, pledging that the energy contract for an interim period would be subject to review by the commission rather than the staff. There also would be limits on capacity bidding from the Ravenswood plant until its divestiture and elimination of the option for a cost of service cap as an alternative to a bidding process, among other things.
National Grid also proposed to include in the KeySpan agreement a commitment to invest $1.4 billion over five years in a reliability enhancement plan for Niagara Mohawk.
At last week’s hearing NYPSC Administrative Law Judge Gerald L. Lynch outlined the benefits and risks of the proposed transaction, noting that according to the proposals submitted by the merger partners the state could benefit by somewhere around $700 million, depending on what assets are retained. But the risk, Lynch said, centers on the proposal for 100% debt financing “with the total amount of capital that would be invested including a significant amount of goodwill that’s beyond the value of the assets that will be generating income.
“Additional risk is created because of the difficulty of obtaining public information about the financial standing of National Grid USA and its various subsidiaries…these risks are the one reason why you might want to disapprove the proposed transaction,” Lynch told the commissioners. The judge also said more financial information also should be made available from the international holding company, National Grid plc. The financial information available is on an international financial reporting standards basis, which he said was inadequate in the regulated utility environment.
NYPSC staff members said they were concerned about the amount of goodwill included in the transaction, noting that goodwill is irrelevant in setting utility rates in New York State. Therefore, the impact of goodwill on the balance sheets of regulated utilities is a substantial risk. To balance that risk the staff report called for the additional protections for the utilities in the event the parent company could not meet its obligations.
Through a series of acquisitions starting in 2000 National Grid has developed an eastern U.S. conglomerate that distributes electricity to approximately 3.4 million customers in Massachusetts, New Hampshire, New York and Rhode Island and natural gas to approximately 814,000 customers in New York and Rhode Island. The company also owns and operates the high-voltage electricity transmission network and the high-pressure gas transmission system in Great Britain.
In September 2000 the company announced a deal to acquire Niagara Mohawk Holdings for $8.9 billion in cash (see Daily GPI, Sept. 6, 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 (see Daily GPI, March 23, 2000 ) and its $1.03 billion cash and assumed debt acquisition of Eastern Utilities Associates of Boston.
If the merger goes through, the UK firm’s grid will include KeySpan’s Boston Gas and the old Brooklyn Union Gas, and New England Gas. KeySpan has been on its own acquisition campaign since before the turn of the century, adding major eastern utilities such as Boston Gas and Long Island Lighting (see Daily GPI, Feb. 5, 1998; Nov. 5, 1999).
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.
KeySpan also owns 20.4% of Iroquois Gas Transmission, 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.
If the transaction is completed, KeySpan will become a wholly owned subsidiary of National Grid and will continue to operate as KeySpan.
KeySpan Corp. is the largest distributor of natural gas in the Northeast United States, serving 2.6 million gas customers. It also is the largest electric generator in New York state, owning approximately 6,650 MW of generating capacity, providing power to 1.1 million customers on Long Island and supplying approximately 25% of New York City’s capacity needs.
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