Utility Week

Utility Week 13th October 2017

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UTILITY WEEK | 13TH - 19TH OCTOBER 2017 | 15 Finance & Investment Analysis F or over 15 years – amid some scepti- cism – National Grid has been build- ing 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 bur- geoning 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 ris- ing 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 electric- ity distribution figure is $7.7 billion. Most of the remainder relates to electricity transmis- sion. 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 jurisdic- tion 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 electric- ity customers and 600,000 gas customers, spread across a wide supply area. By con- trast, in downtown New York, covering Man- hattan, 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 him- self – 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 opera- tions – 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 prof- its 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 opera- tions, 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 net- work 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 uncertain- ties 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 Cor- byn, as "a government in waiting", is of abiding concern to the utilities sector, where widespread renationalisation has been pro- posed. 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 undoubt- edly become more susceptible to political risk – as its lacklustre share price perfor- mance of late underlines. Over there, though, National Grid is doing well, while over here life could get somewhat tougher. Nigel Hawkins, director, Nigel Hawkins Associates 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. TOTAL ADJUSTED OPERATING PROFIT, PER CENT (2016/17) UK electricity transmission 29 UK gas transmission 11 US regulated 37 Other activities 4 Discontinued operations 19 29% 11% 37% 4% 19%

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