In an elegant converted hotel, National Grid FD Steve Lucas enjoys a rather
cosy spot on one of London’s most expensive stretches of real estate from which
to muse about how safe his company is.
And it has been largely true for some time. Analysts and market observers
alike have called National Grid boring because quarter after quarter, year after
year, profits are up, shareholders are satisfied, competitive threats at home
are nil, and the company has until recently had a good relationship with
regulators Ofgem soured somewhat by the recent £41m fine over its
‘anti-competitive’ gas metering contracts that the company is vigorously
The stock is an anchor of some of the UK’s largest income funds, including
Invesco’s, and following its interim statement at the end of January in which
it announced it was increasing dividends for 2008 by 15%, promising 8% annual
increases for shareholders every year until 2012 was rated a unanimous ‘buy’
by both the UK and US financial media.
This, despite a gross debt pile of £16bn and some less than perfect debt
ratings (Moody’s placed all 16 of the company’s credit ratings on negative
outlook at the end of January, though it retains BBB+ or better from all three
credit rating agencies, and stable outlooks from S&P and Fitch).
Life seems pretty sweet running the finances of the 22nd largest constituent
in the FTSE 100, as its FD readily admits it has no competitors or competitive
pressures in its home market, where it owns and operates the one grid through
which the entire country receives all its gas and electricity.
Lucas laughs at the mention of his employer’s anodyne reputation. ‘I agree
with you,’ he says. ‘We move electricity and gas from A to B. How interesting
can it be?’
But the story doesn’t end here. In fact, his employer may be headed for great
change over the next couple of decades, not in a way necessarily favouring the
company, or its currently pleasant financial situation.
After our interview with Lucas, his chief executive Steve Holliday was quoted
in a newspaper arguing against the government’s decision to tender out its huge
renewables connection project, in which wind farms, mostly offshored in
Scotland, are to be wired up to the grid by 2020 to meet the targets of 40%
The operator of the grid would seem the natural choice for the job, with its
engineering might, grid knowledge and financial power it has committed to
investing £16bn in gas and electricity infrastructure in the UK and the US by
2012 but it is at odds with the government over the feasibility of emissions
targets and stands to lose out if another company wins the tender, which will
likely be a 10, 15 or 20-year deal supported politically by Ofgem.
Introducing another layer of operators working on connecting wind farms to
the grid, instead of handing the contract to Ol’ Faithful, Holliday argues, will
only cause confusion on a project that is already sprawling and technically
complex while the cost to other players of securing the requisite finance
would be higher and ultimately passed on to British taxpayers.
For Lucas the project is the sort of reliable, long-term deal he likes to
grab with both hands, but for the first time may now have to pitch for it.
‘National Grid only runs big wires in the UK, so the sort of projects we get
involved in are very big, such as the Thames Array, projects that are too big
for local networks to handle, so we connect them directly,’ he explains. ‘In
terms of the opportunities for us from the renewables drive, it wouldn’t be the
lion’s share of our investments over the coming years more a large minority.
But it is a growing share.’
He is focused on the figures underpinning the Grid’s drive to increase its
infrastructure in the UK. The company will grow its asset base in the UK by 35%
in the next four years and around 25% in the US for the same period. National
Grid is currently split 50/50 between both sides of the Atlantic, though the
markets are quite different in their opportunities.
In the UK, growth will be mostly organic, extending the network and preparing
for nuclear and renewable connections, adding to its gas pipelines, as gas will
drive the business in the coming years, Lucas believes.
In the US, however, Lucas sees the firm’s future as anything but dull. A
mature regulatory system belies a very fragmented utilities scene in the US
where at least 400 utilities operate. National Grid is currently the
second-largest player in the country by customer numbers, and largest player in
the Northeast in both electricity and gas transmission following last year’s
£4.2bn acquisition of KeySpan. But Lucas is sure that market consolidation is on
the cards and he is clearly hankering after some wellpriced acquisitions to
develop the asset base quickly. In the US, Lucas says, regulation smooths the
way to revenues.
‘In contrast to Europe, there is long-established and clear regulation there,
and there is no impediment to us acquiring whatever company we want, provided it
fits our strategy and we get it at the right price,’ he says. ‘Whereas in
Europe, it’s hardly the case that we can simply write a cheque and buy anybody
we want to buy’.’
The potential can be illustrated by the numbers. In a US population of about
300 million, the Grid is the second largest player, but serves just eight
million households and corporate customers. ‘A tiny fraction of the market,’
says Lucas. ‘So there is still huge opportunity for consolidation and we believe
some of those opportunities will come our way.’
Far from regulation on either side of the Atlantic inhibiting the monopoly,
Lucas champions it. ‘In the UK and the US we have our investment profile wired
into future revenues. So it isn’t really a matter of me hoping that I will get
our money back I know I will get the money back,’ says Lucas. ‘Because so much
of our business is regulated, it’s almost like a bond proxy in terms of the
bankability of revenues going forward.’
But the regulatory environment in euroland is still a barrier to meaningful
investment. Germany for example only gained a dedicated energy regulator in
2007. ‘There are too many structural impediments to foreign ownership of
strategic assets in Europe,’ Lucas says.
‘In terms of any other markets, we need to be confident that we can make
money there for a very long time because we don’t tend to get very high returns,
even in emerging markets though there are some big exciting markets evolving,
like India and China but we have more than enough opportunity in our core
markets for us to not have to worry at all about having to go elsewhere.’
Feeling the crunch
If ‘safe’ turns some analysts off in this age of exhilarating, never-ending
financial crisis, National Grid can offset its bland reputation with a couple of
success stories in pulling off important deals, both as buyer and vendor, amid
the credit crunch. Lucas cites the KeySpan acquisition as one such achievement,
completing late last August as the credit crunch dawned on financial markets.
‘I remember that August was a really bad time to complete any dealÉ really
bad,’ Lucas says.
‘The headlines were full of companies whose deals were failing because they
couldn’t get the money together. We wrote a cheque for $7.5bn (£3.8bn) in August
to buy KeySpan because we took the decision in mid-2006 that we would pre-fund
the deal,’ he reveals. ‘For one, we knew debt rates were uniquely low at that
point, so this was not a big risk in terms of whether we would end up raising
finance that would end up being more expensive than it needed to be.
‘Second, between myself and my treasurer we had lived through at least three
“crises” – Asian, Russian and the hedge funds – and in each of those occasions
it was challenging to raise finance. So we thought, if we were able to capture
the benefits of low rates and minimise risk we will pre-fund the deal. That’s
opposed to how companies normally do it, going to their investment banker,
paying them a huge commitment fee and the banker coughing up the money on the
day you complete the deal, followed by you spending the next two to three years
terming out the debt facility. Can you imagine what it would be like doing that
now?’ he says.
‘Pre-financing our deal saved our shareholders between $300m and $500m in
July. If I calculated the savings now, it would be a heap more.’ Lucas says he
will go back into the debt markets in 2008 for finance.
He is unrepentant about his company being perceived as rather grey. The
market it inhabits is on the cusp of unprecedented upheaval from the shift to
cleaner energy and what that means for how the Grid does business, and that
change contains many more vibrant challenges and opportunities. But as FD of the
company, he remains close to his core aim of financial stability, which, in this
latest crisis, is valuable.
This interview first appeared in the March edition of
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