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KeySpan is strategic fit for National Grid $7.3 billion acquisition makes National Grid largest utility in Northeast

National Grid executives have long been looking to build its U.S. utility business. The company's $7.3 billion deal to buy KeySpan Corp. announced Monday does just that, turning the British firm into the nation's third-largest utility and the biggest in the Northeast.

"It takes our strategy the next large step forward," said Steven Holliday, who will become National Grid's chief executive at the end of the year, during a meeting with analysts in London.

The deal pushes National Grid into the Long Island and New York City markets, while adding to the company's existing operations in Massachusetts, New Hampshire and Rhode Island. It will roughly double the company's customer base to about 8 million.

While National Grid now gets just 6 percent of its operating profits from its natural gas distribution business, the addition of KeySpan will expand those operations to about a quarter of the company's earnings. It also will roughly balance the earnings power of its British and U.S. businesses, which currently are skewed in favor of its English power distribution operations.

"KeySpan fits perfectly strategically, operationally and geographically," said Roger Urwin, National Grid's chief executive, who plans to retire.

For National Grid's electricity customers in the Buffalo Niagara region, the deal isn't likely to have an immediate impact, but company officials said the merger could put downward pressure on rates in the coming years if the deal reduces costs as expected.

"There will be a positive impact on costs in upstate New York," said Michael E. Jesanis, the chief executive of National Grid USA in an interview.

That could happen if National Grid is able to meet its target of reducing costs by $200 million a year, mainly through combined purchasing and merging information technology and back office operations.

If those savings help boost National Grid's earnings above the targets set in its rate agreement with the state Public Service Commission, those profits must be shared with consumers on a 50-50 basis, which would ease rates, Jesanis said. National Grid's earnings in New York currently are below that cap.

Jesanis said it's too early to say if the consolidation of back office and support functions could eventually have an impact on National Grid's operations in the Buffalo Niagara region, although any change likely would be relatively minor. "I wouldn't expect much change in our operations," he said.

For National Grid, the deal is the second -- and far biggest -- acquisition it has announced in a little more than a week, following its $575 million deal to buy New England Gas, a gas utility in Rhode Island that serves 245,000 customers. National Grid bought Niagara Mohawk in 2002 for $3 billion.

"This acquisition is in line with the National Grid's long-stated strategy to buy further utilities in northeastern U.S.," said Steve Durose, senior director for Fitch Ratings' corporate group, as it affirmed National Grid's debt ratings.

The acquisitions put National Grid in the middle of a growing wave of consolidation that is sweeping over the nation's utility industry since Congress last summer repealed a Depression-era law that limited mergers. Since then, Florida's biggest utility, FPL Group, agreed to buy Constellation Energy Group for $12 billion, while Chicago-based Exelon Corp. is buying Public Service Enterprise Group for $16 billion.

"It puts us in a great position to compete with the other companies around us, which are getting bigger also," said Robert B. Catell, KeySpan's chief executive officer.

"It's much more than simply getting bigger," Jesanis said. "We're a plenty big company. We weren't vulnerable in that regard and we weren't under any pressure to make an acquisition. We could afford to be patient and wait for an acquisition where it would be a win-win for everybody."

While National Grid has focused on delivering electricity and natural gas to its customers in the United States, Jesanis said the company is not looking to sell KeySpan's power plants in Queens and on Long Island. "At this point, we're happy to own them," he said. "They're very well operated, so there's not a lot of risk from their operations."

The purchase price, which also includes the assumption of $4.5 billion in debt, is a 16 percent premium over the closing price of KeySpan's stock on Friday. The deal, which must be approved by shareholders and regulators, is expected to close early next year.


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