National Grid May Sell Upstate Operations

National Grid is considering selling its upstate New York gas and electric operations and has even hired two investment banks to oversee the deal, London's The Mail on Sunday newspaper reported over the weekend. Analysts and media both in the United Kingdom and the United States have been speculating for months now that the London-based utility has been seeking to sell or spin off its U.S. operations after a disastrous 12 months in which the company became embroiled in an accounting snafu amid lackluster financial returns. National Grid entered the upstate New York market in 2001 with the $3 billion acquisition of Niagara Mohawk Power Corp. of Syracuse. The Mail's story, which used unnamed sources, says Barclays Capital and Merrill Lynch are advising National Grid on a strategic review and that the sale of the former Niagara Mohawk could generate more than $1.6 billion.

"A sale of Niagara... would meet some shareholders' hopes that National Grid will withdraw from America where it has struggled," the Sunday tabloid wrote. National Grid denied the rumors again Monday as it has consistently done after each story and analyst report. Last week, an analyst with Nomura Equity Research said National Grid would likely seek a sale of its U.S. subsidiaries -- but not until the spring of 2012. "We are committed to our U.S. business and do not comment on market speculation," National Grid spokesman Patrick Stella said Monday.

New York has been a flash point for National Grid's woes in the U.S. because the company was unsuccessful earlier this year in getting regulatory approval for a $360 million electric rate hike for its upstate operations. That case, which was reviewed by the state Public Service Commission for 12 months, uncovered serious issues with the utility's accounting practices, where lavish expenses by senior executives had been unwittingly passed onto ratepayers, including private school tuition, veterinarian bills, political junkets and even the shipment of a wine collection overseas.

The PSC is currently undergoing a major investigation into National Grid's accounting program and how it allocates costs between subsidiaries in its different jurisdictions where it provides gas and electric services. Ultimately, the PSC only approved a $119 million rate hike, with nearly half being set as "temporary" in case consumers are due refunds. Although Niagara Mohawk originally sold for $3 billion in cash and stock, the utility was at that time in the process of shedding major assets such as nuclear power plants that may make National Grid's upstate New York operations much less valuable today.

The Nomura report says it's possible that a potential buyer would value the utility at roughly 35 percent of its regulated rate base, although other factors would also have an impact.

National Grid collects roughly $5 billion in annual revenue from its gas and electric delivery operations in upstate New York, which would give it a potential price tag of $1.75 billion.