THE LONG AWAITED NEWS:

Keyspan announces $7.3B buyout deal

London-based energy company will take over Long Island’s main heating utility with few changes planned in the short term, sources say

BY TOM MCGINTY AND MARK HARRINGTON
STAFF WRITERS

February 27, 2006, 10:42 AM EST

KeySpan Corp. announced Monday that it has agreed to a buyout by London-based National Grid in an all-cash deal valued at $7.3 billion that will create the country's third-largest utility company, with just under 8 million customers, according to sources close to the deal.

The $42-per-share deal was approved by KeySpan's board of trustees over the weekend. Spokespersons at both companies didn't return phone calls Sunday seeking comment.

Brooklyn-based KeySpan said the transaction, which is subject to regulatory and other approvals, will be seamless to Long Island and New York customers.

The company will retain the KeySpan name, its regional workforce and related operations, and chairman and chief executive Robert Catell is expected to continue in a role that has yet to be defined, according to people familiar with the deal.

"Local operations in the city and Long Island will be managed and operated by the same people," a source said.

KeySpan is the largest power generator in New York State, with plants on Long Island and in Queens, and the company manages the Long Island Power Authority's electric grid.

While analysts have suggested that National Grid likely would sell KeySpan's power plants once a deal was completed, a source close to the deal disputed that. "They happen to like these generation assets," the source said.

The sale would bolster National Grid's considerable holdings in the Northeast United States, which include upstate utility Niagara Mohawk, based in Syracuse, which the company bought in 2002. The company's electric distribution businesses serve 3.3 million customers in New York, Massachusetts, Rhode Island and New Hampshire, while its natural gas affiliates serve 565,000 customers in central and eastern New York.

KeySpan has 2.6 million gas customers on Long Island and in New York City, Massachusetts and New Hampshire, and plenty of room to grow because a large number of homeowners within its service territories still heat with oil. Its Long Island power plants have long-term contracts with LIPA; its other generators provide roughly a quarter of New York City's electricity.

The sale effectively surrounds Manhattan-based energy giant Con Edison, whose periodic interest in KeySpan was reported to have been ignited anew by the talks with National Grid. ConEd approached KeySpan with all-stock offers that were less attractive than National Grid's cash, sources said.

Newsday and other media outlets broke the news of KeySpan's potential sale on Feb. 18. KeySpan confirmed that day that it was talking with potential buyers. Over the ensuing week, its stock price climbed 14 percent, boosting the company's market capitalization by $912 million. Its share price closed Friday at $41.41.

LIPA has already indicated it does not expect to sit idly by while KeySpan is sold. The authority's contract with KeySpan gives it the authority to cancel the pact if KeySpan is sold, and Kessel has a team of lawyers examining the sale and LIPA's options. He has alerted regulatory authorities that a sale could change its recent agreement to extend the management contract five years, to 2013.

"Should KeySpan be acquired, LIPA may be presented with a fundamentally different situation," Kessel wrote. "It will be necessary, in this event, for LIPA to conduct a comprehensive and detailed diligence review of any new owner to assess, among other things, its resources, capabilities, labor relations, experience and commitment."