Steve Lucas is not a person who likes to change his mind, which is
understandable considering he is responsible for billions of pounds of
investment. Incorrect decisions can be costly, very costly.
Lucas is the group finance director of the
National Grid, the
Anglo-American gas and electricity infrastructure group. The company has a
market capitalisation of £19bn and is planning to pump £12bn into new
infrastructure over the next five years. This infrastructure will be expected to
last for four to five decades. There are no quick fixes if you get it wrong.
‘Utilities is a very asset intensive industry and you have to make
investments that last for twenty, thirty, or in our case forty or even fifty
years, so you have to live with your decisions for a long time. We put a lot of
thought into how we plan and put capital into the business,’ Lucas says.
Intensive planning of long term investments is something Lucas, who qualified
with Robson Rhodes, is no stranger to. He has built up a reputation in the City
for specialising in massive, long term investments.
‘Steve Lucas is a calm, clear thinker. He is very good at looking at the long
term picture and then making good decisions based on that,’ one analyst says.
This ability is one that has been developed over 25 years. Lucas has worked in
industries involving large capital expenditure for his entire business career,
building consistently upon his experience in the oil, gas and utility sectors.
After leaving Robson Rhodes in 1983 he spent 11 years working in various roles
at Shell and then moved on to British Gas as the FD of exploration and
production. Roles as BG group treasurer and Lattice group FD followed as British
Gas was transformed through a series of demergers and restructurings. When
Lattice merged with National Grid Transco, Lucas was appointed FD of the new
company, and he hasn’t looked back since.
He is now in a plum sector that is priming itself for a long period of
growth. Over the last year National Grid stock climbed almost 200p from 560p per
share to over 750p, and forecasts indicate that over the next twenty years more
than $10 trillion dollars (£5 trillion) will be pumped into the sector globally.
The growth story has just begun.
Lucas is adamant that National Grid is one of the best placed utility
companies to capitalise on the good times that lie ahead. Unlike its UK
competitors, National Grid is a global business. It is the leading gas and
electricity utility in the UK and after its $7.3bn acquisition of US rival
Keyspan at the beginning of 2006 it is now the second largest utility in the US
by customer numbers.
Arriving at this point, however, has not been easy and Lucas has had to
endure his share of market criticism over the years as analysts and investors
questioned the group’s strategy and investment plans. The business’s focus on
mergers and acquisitions was one of the areas where the board received a large
amount of flak.
‘We always believed we should grow through mergers and acquisitions. That was
a deeply unpopular message three years ago, where people were suspicious about
the value M&A was bringing, particularly M&A into the US, but we still
believed that that was the right thing to do,’ Lucas recalls.
‘Our share price was very low, in the 80s, and we asked the question lots of
times: “Are we doing the right thing?” and the answer was always yes. We never
took acquisitions off the agenda. We kept looking for opportunities and I feel
that we have been vindicated.’
The right path
The eventual acknowledgement from the market that M&A is a good way for
National Grid to grow has not sparked a sudden urge to start pursuing deals
faster than before simply because M&A is the flavour of the month. Instead,
Lucas is content to keep a lookout for deals at the same pace now as when M
&A was frowned upon.
‘Our pace neither quickens nor slackens. We have M&A capability and we
are always looking at the numbers, looking at the opportunities. We don’t panic
about finding our next deal and we don’t get indigestion when we announce a
series of deals in succession,’ he says.
Lucas is something of a deal expert, having negotiated a tumultuous period
overhauling British Gas and a series of transactions at National Grid, Lucas is
well versed in the machinations of takeovers, restructurings, demergers and
strategic reviews. He believes that making any corporate transaction worthwhile
requires rigorous discipline, patience and a clear focus on the ultimate aim of
‘If you look at the corporate history that I have been involved in, it has
been all about focus. British Gas started out as a big operation with a large
spread of upstream and downstream operations and they were split up to create
focused businesses,’ he says. ‘You don’t make money by just buying businesses.
You make money by buying businesses and then managing them better than they were
managed before. You have to work on relationships and be rigorous about the
numbers and that all comes down to focus and discipline.’
This philosophy is one that has served Lucas well, particularly as National
Grid has expanded into the US. He is known to fly over to the US four times
every six weeks to meet with people face to face and has refused to let the
complex US regulatory focus scare National Grid away from pursuing deals in the
region. Focused and disciplined that he is.
Lucas admits that US regulatory regime can be complex, particularly in the
utility sector where there are both federal and state regulators to satisfy. The
trade off though, is that once a deal with regulators has been thrashed out, the
final result is certain and long term.
‘The US is characterised by very complex and overlapping regulations. There
are state regulators and federal regulators. We deal with six separate
regulators in the US, with each of their permutations and priorities, but if you
are as big as National Grid then it is worth it,’ Lucas says. ‘The regulation is
complex and it is hard work but it is worth it. It is very consistent. It is
reliable and instead of the five year deals we get in the UK, we get ten year
deals and in some cases even 20 year deals. So you can get a lot of visibility
and clarity for a long time which is a great backdrop to investment.’
Looking at the broader regulatory picture in the US, Lucas is also happy with
the way tax authorities operate and even admits that the Sarbanes-Oxley Act has
brought benefits to National Grid. Sarbox gave the business an opportunity to
look at things more closely and critically, with the end result that National
Grid has become a tighter, better run organisation, he says.
Although the headline tax rate may be higher in the US, the various reliefs
on offer bring the rate down, the exact opposite of the situation in the UK,
according to Lucas.
‘We have a unique perspective in that we have a direct involvement in the UK and
the US. In the US you start with a very high headline rate but you get reliefs
that actually take you down from that. In the UK it is the other way around. You
start with 30% and then because of all the things that are disallowed you can
add 2% onto that, so that just tells you the environment here is less
straightforward.’ It’s another thing for the taxman to think about.
A trying process
In December last year, after months of punishing negotiations, National Grid
and the energy regulator Ofgem finally reached an agreement on the rates of
return the company could claim for the next five years.
The two parties agreed National Grid could be allowed a post-tax rate of
return on capital of 4.4%. Originally Ofgem had proposed a rate of return of
4.2%, but after a period of frantic discussions the regulator agreed to raise
the allowable rate. This painstaking process is something that Steve Lucas has
to go through every five years in the UK.
‘It (the deal with the regulator) makes it both difficult and easy for me,’
Lucas says. ‘The easy bit is that once prices and revenues are agreed, then I
don’t have to send an army of salesmen to get the revenue in next week or next
month or next year, so the top line, in a way, is guaranteed. Now how many FDs
can say that?’
The tricky bit is ensuring that the revenues and prices are good enough to
please customers and shareholders in addition to the regulators. ‘The only
problem is that every few years or so, in the UK its five years, you have to
negotiate that top line, and that is a very lengthy, involved exercise,’ Lucas
In the US Lucas and National Grid face a similar challenge. The group has
pursued a strategy of acquisition in the US, but every time it closes a deal,
any rate deals that the new acquisitions had with regulators go out the window
and have to be renegotiated from scratch. But the certainty once such a deal has
been agreed is something that Lucas appreciates. ‘If you have the clarity on
your business going forward then that is a great backdrop for making investment
decisions,’ Lucas says.
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