This is the next key step in the completion of National Grid's proposed $3 billion (£2 billion) 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.
The plan is the first of this duration to be agreed by the New York regulatory staff and offers a decade of regulatory stability with incentives to outperform.
The major benefits for Niagara Mohawk customers are:
- An eight per cent reduction in delivery rates upon completion of the acquisition (equivalent to $160 million a year)
- Delivery rates then fixed for 10 years, subject to limited adjustments
- Commitment to an agreed service plan, ensuring improved customer service and reliability
For National Grid shareholders, the key benefits are:
- An allowed 10.6% post tax return on equity after equal sharing of the merger savings attributable to New York
- Retention of 100% of outperformance up to a post tax return on equity of 11.75%
- Sharing with customers of further savings above 11.75%
- Continuation of full pass through of commodity cost charges 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. This rate plan very much underscores the benefits of our acquisition of Niagara Mohawk which will enhance Group earnings per share after goodwill amortisation but before exceptionals in the first full year of ownership. It also gives us confidence that we will meet our target of a 10.5% 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 $190 million. Of this, $60 million a year is carried forward from Niagara Mohawk's existing PowerChoice agreement which reflected efficiency gains following divestiture of its generating business.
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The remaining $130 million a year arises from merger-related savings. This is an increase from the annual savings of $90 million estimated when the acquisition was first announced and represents 13% of the enlarged US business controllable cost base. Some $80 million a year of these merger-related savings are assumed to be achieved in Niagara Mohawk's New York operations, with the balance of $50 million to be achieved in National Grid's existing New England operations. The agreement assumes that the savings are achieved within four years of completion with half of these savings anticipated in the first year.
The customer rate reductions are achieved both by sharing the merger and efficiency savings attributable to New York operations and through extending the period during which Niagara Mohawk's stranded costs are recovered.
The agreement also extends Niagara Mohawk's current gas rate settlement by 16 months until the end of December 2004.
The rate settlement is supported by the Staff of the NYPSC, a number of State agencies, and consumer, business, and environmental groups and is now subject to review and approval by the full NYPSC and the Securities and Exchange Commission. When these approvals are received, the National Grid acquisition of Niagara Mohawk will remain on track for completion early in the New Year.
National Grid and Niagara Mohawk announced on 5 September 2000, the signing of a $3 billion Merger Agreement under which National Grid will acquire all of the outstanding shares of Niagara Mohawk. Upon completion, more than 60% of National Grid's operating profits will come from the US. 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.