National Grid Eyes Northeast Utilities Tie-Up

May 13 (Power Finance & Risk)

U.K. transmission monopoly National Grid has been holding merger discussions with Northeast Utilities for the past few months and is planning to swoop for the U.S. utility toward the end of this year following the completion of its announced tie-up with Lattice, a U.K. monopoly gas pipeline business. A banker close to the negotiations says Northeast Utilities has retained Morgan Stanley to advise on the deal, but he declined to name National Grid's advisor.

Jackie Barry, a spokeswoman at National Grid in Westborough, Mass., declined to comment and James Ross, chairman, did not return phone calls. Deborah Beauchamp, a spokeswoman at Northeast Utilities in Hartford, Conn., and Michael Morris, chairman and ceo, also did not return calls. Bankers at Morgan Stanley declined to comment on the matter.

A tie-up between National Grid/Lattice and Northeast Utilities would create a $21 billion energy concern, given their current market capitalizations of $18.5 billion and $2.7 billion, respectively.

Although unaware of the talks, Jeffrey Gildersleeve, an analyst at Argus Research in New York, says that a merger between the two companies would come as no surprise given there has been a great deal of M&A speculation surrounding them both. He points out that National Grid has been looking to expand further in the U.S. and that Northeast Utilities has been seeking a partner since the recent termination of its merger with Consolidated Edison.

For National Grid, Gildersleeve says, "The acquisition would make perfect sense because Northeast Utilities is geographically close to its other subsidiaries and it has been a solid performer in the utility sector. Also, National Grid's strategy is to become a leader in the region and with [Northeast Utilities] under its belt, it would be a powerhouse in the Northeast."

Regarding Northeast Utilities, Gildersleeve says the recent sale of a major portion of its generation capacity should help pave the way for a merger with National Grid because the latter would not look to acquire a large amount of generation. He notes that last month Northeast Utilities sold its 88.2% stake in the Seabrook nuclear facility to FPL Group for $836.6 million and the Millstone power station to Dominion Resources last March for $1.28 billion.

In the U.S., National Grid owns five electricity distribution companies including Massachusetts Electric, Narragansett Electric, Granite State Electric, Nantucket Electric and Niagara Mohawk. National Grid's recent state-side acquisition of NiMo in January made it the second largest combined electricity and gas utility in New York and doubled the size of National Grid's U.S. business. It also owns New England Power, which operates electricity transmission facilities in Massachusetts, Rhode Island, New Hampshire and Vermont.

Its desire to expand further in the U.S was underscored by its decision to buy Lattice. National Grid said that the deal afforded minimal growth benefits in the U.K., but would enhance its U.S. acquisition firepower.

Northeast Utilities serves more than 1.7 million electric power customers in Connecticut, Massachusetts and New Hampshire. Its electricity subsidiaries are Connecticut Light & Power, Public Service Company of New Hampshire, Western Massachusetts Electric and North Atlantic Energy. Northeast Utilities also owns Yankee Gas Services, its natural gas subsidiary, and some other non-utility companies.