National Grid's (NG.) fiscal-year 2010-11 performance remains in line with our expectations for flat year-over-year earnings per share based on management's interim earnings statement January 31. We are reaffirming our 640p fair value estimate. Management also reaffirmed its commitment to raise its dividend 8% this year. But the company's U.S. operations continue to face near-term challenges leading to earned returns on equity below what we consider fair for shareholders.
Management's announcement that it plans to cut 1,200 U.S. management jobs and save $200 million (roughly £130 million) by 2012 in a broad reorganisation of its U.S. business offsets the recent negative regulatory outcome at its largest utility, Niagara Mohawk (NiMo). Management's projected cost cuts and $388 million of recent rate increases could add 240 basis points to its earned ROE in the U.S. This could boost earned ROEs above 9% but still leaves earned returns short of the 10% level we consider fair.
New York regulators ruled January 20 that NiMo could raise rates $112.7 million starting February 1 but must defer about $100 million in regulatory asset recovery until 2012 to keep customer rates flat in 2011. The rate increase was just 31% of National Grid's requested rate increase and 75% of our anticipated rate increase. Given that NiMo represents just 8% of National Grid's consolidated regulatory asset base, the difference between our projections and the ruling does not have a material effect on our consolidated earnings projections for 2011. Incorporating management's reduced capital investment projection and operating cost cuts in the U.S. offset the 20 pence per share ($1 per ADR share) negative impact the lower-than-expected rate increase had on our fair value estimate.
In the ruling, regulators cut the utility's allowed return on equity from 10.6% to 9.1%, one of the lowest allowed ROEs among electric utilities in the U.S. NiMo has the chance to earn an extra 20 basis points of ROE and an extra $6 million of revenue if it agrees to keep rates fixed through 2012. We think shareholders will benefit most if National Grid chooses this option. We also like that NiMo will decouple rates starting this year, helping ensure it earns its allowed ROE instead of the 6% ROE it is currently earning. This means the rate decision actually should boost NiMo earnings significantly, albeit less than we expected.
