Profile: National Grid

While political and regulatory risk in the UK have pegged back its share price of late, National Grid’s strategy of expansion in the US has been vindicated by solid returns. Nigel Hawkins reports.

For over 15 years – amid some scepticism – National Grid has been building up its US operations. In particular, its aggressive acquisition of Keyspan in 2007 represented a step-change to its previous US operations.

It now resembles the old Hanson model “a company from over here that’s doing rather well over there”. Indeed, National Grid’s total market value currently exceeds £31 billion.

Last month, in New York, National Grid held a major investor teach-in on its burgeoning US operations. Clearly, it feels that its US businesses are now placed to thrive, with stable price regulation pivotal.

It is also true that National Grid’s share price performance has been poor of late – its share price was c£12 a year ago; now, it is now around 920p.

The UK remains the company’s most important market – and especially its monopoly electricity transmission business, whose next pricing review will kick in from April 2021.

However, as the US teach-in indicated, the value of the US operations has been rising in recent years, partly due to acquisitions but also through a material annual growth in the allowable rate base.

Indeed, National Grid confirmed that its US business now accounts for 42 per cent of its total assets, with the UK representing 53 per cent. The remaining 5 per cent covers joint ventures and others.

Clearly, National Grid is a major player in the US utilities sector, ranked 6th in terms of its seven million customer base. Its capex ranking is 7th, with Exelon holding first place in both categories. In fact, National Grid is investing around $3 billion a year in its US operations – much of this heavy expenditure is incurred in upgrading energy networks.

Importantly, National Grid’s overall US rate base, at March 2017, was a formidable $19.3 billion, $8.9 billion of which covers gas distribution. The comparable electricity distribution figure is $7.7 billion. Most of the remainder relates to electricity transmission. This rate base is expected to grow quite aggressively, at around 7 per cent per year.

The teach-in also sought to emphasise the importance of New York state to National Grid’s US operations. Chief executive John Pettigrew commented that “our US business is in great shape and the New York jurisdiction is a significant reason for that”.

In fact, New York state accounts for 56 per cent of National Grid’s US rate base. And, not surprisingly, operating there involves two very different scenarios. In upstate New York, National Grid has 1.6 million electricity customers and 600,000 gas customers, spread across a wide supply area. By contrast, in downtown New York, covering Manhattan, there are 1.8 million gas customers within a very dense supply area.

The two other leading suppliers in the New York state energy market are the long-established Consolidated Edison – whose history dates back to the construction at Pearl Street of the world’s first central power plant by the eponymous Thomas Edison himself – and Spain’s leading utility, Iberdrola.

Clearly, securing decent returns on the growing rate base will be a priority for National Grid and especially in New York state itself where rate submissions are at various stages.

In 2016/17, National Grid reported a £1,713 million operating profit from its US operations – a figure that should increase by at least 8 per cent per year, broadly tracking the annual increase in the allowable rate base.

Last year’s US return compared with National Grid’s aggregated operating profits of £2,781 million from its three major UK businesses – electricity transmission, gas distribution and gas transportation: £1,372 million of this total was attributable to the regulated UK electricity transmission business.

Given the apparently healthy US operations, the issue of their possible demerger – in part or in full – inevitably arises: the official line is that there are no present plans to go down this route.

Back in the UK, though, two major issues are to the fore. First, the 2020/21 RIIO T2 price review will be crucial to National Grid’s network operations in the UK. Previous reviews have been widely seen as generous. This time round, the price determination may be tougher. It is clear, too, that many uncertainties will remain, ranging from the impact of smart meters to the infrastructure needed for powering electric vehicles.

Second, the rise of the Labour party to a status, described by its leader, Jeremy Corbyn, as “a government in waiting”, is of abiding concern to the utilities sector, where widespread renationalisation has been proposed. In its last manifesto, the Labour party confirmed it would “ensure that national and regional grid infrastructure is brought into public ownership over time”.

With a fragile minority government and the two leading parties level pegging in the opinion polls, National Grid has undoubtedly become more susceptible to political risk – as its lacklustre share price performance of late underlines. Over there, though, National Grid is doing well, while over here life could get somewhat tougher.

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