National Grid has agreed to sell 60% of its UK gas transmission and metering business (NGG), which has been valued at £9.6bn, to Macquarie Asset Management and British Columbia Investment Management Corporation (BCI).
The group's remaining 40% stake will be managed by a newly created holding company, GasT TopCo. Macquarie and BCI will have the option to buy the remaining stake between 1 January 2023 and 30 June 2023.
National Grid will receive around £2.2bn in cash when the deal closes, which is expected to be in the second half of 2022. The group will also gain approximately £2.0bn from debt financing.
Together with the NECO sale, the deal is expected to shift the proportion of National Grid's portfolio allocated to electricity to around 70%.
Shares were broadly flat following the announcement.
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Our view
National Grid is making good on efforts to plant itself at the centre of the electric revolution. The National Grid Gas (NGG) sale, early completion of a second UK/France network and the WPD acquisition mean the group's portfolio will be weighted 70% toward electric.
As the owner and operator of essential energy infrastructure across the UK and North-eastern US, National Grid is a vital business.
In return for investing billions maintaining and upgrading its infrastructure, regulators allow National Grid (NG) to earn a reasonable profit, with the potential to earn more if it exceeds targets. That translates into predictable revenues, low borrowing costs, and feeds into what should be a relatively dependable dividend. No dividend is ever guaranteed, and yields are variable and not a reliable indicator of future income.
The regulatory environment can be a double-edged sword, though, as regulators have the final say over National Grid's profit potential. Ofgem has been a thorn in NG's side as it prepares the UK's grid for a surge in electricity needs. The regulatory body recently recommended that NG separate itself completely from managing the grid that it owns, to prevent a conflict of interest and ultimately keep electricity costs manageable for the British public.
It's unclear whether Ofgem will get its way, but NG recently acquired Western Power Distribution (WPD), making it an even larger electric monopoly, which could attract more regulatory attention. This isn't a clear-cut risk yet, but is something to be mindful of.
A higher proportion of National Grid's revenues and profits will come from electricity as the group effectively swaps out NECO, a US gas and electric business, and NGG for WPD.
It's not a straight swap though. WPD added £13bn to overall net debt and NG's using short-term, higher-interest ''bridge'' loans to fund the purchase. That's ok as long as they're only used to bridge the gap between acquisition and sale. NGG's got one foot out the door now, and last we heard the NECO sale was on track to complete early this year. However, neither is a done-deal just yet. The NGG sale could face pushback from lawmakers now that energy independence has become a priority. Selling the business to foreign investors is sure to raise eyebrows.
The risks are heady, but a necessary evil, as NG positions itself for a lower-carbon future. There's no doubt that electricity needs will ramp up in the long-term as demand for electric vehicles rises
National Grid has the traditional pros of a utility, but also growth opportunities - a rarity for the sector. And we commend its willingness to pounce on shifting energy trends. But we'll be keeping a close eye on what this means for regulatory pressure.
National Grid key facts
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Half Year Results (18 November 2021)
Underlying operating profit rose 47% to £1.4bn, with £257m coming from newly purchased Western Power Distribution. Excluding this, profits rose 20%, as the group recovered from last year's covid disruption.
The group will pay an interim dividend of 17.21p per share, compared to 17p per share last year.
National Grid said that the positive start to the year means it expects full year earnings per share to be ''significantly above the top end of our 5 - 7% range''.
Underlying operating profit in UK Electricity Transmission rose 13% to £552m, driven by favourable new regulatory pricing. The division is expecting revenue to rise as new price controls come into effect but will be offset by higher spend on IT and cyber.
UK Electricity Distribution now includes Western Power Distribution and contributed £257m to underlying operating profits.
The timing of regulatory changes, and significant under-collection last year meant underlying operating profits at UK Electricity System Operator (ESO) rose to £49m from £37m. Excluding the timing tailwind, the revenue increase was partly offset by rising costs and depreciation. Revenue in the division is expected to rise by about £70m under new price controls, but should be offset by increased costs and depreciation charges.
New England saw underlying operating profits rise 25% to £247m. The division expects revenue to gain $50m due to rate increases, while lower levels of covid-related non-payment should bring bad debts down. The sale of the Rhode Island business is on track to complete in March 2022.
New York underlying operating profit fell 24% to £141m as environmental provisions and storm costs offset rate increases. Full year revenue is seen rising by £170m, but will be offset by rising costs. Covid-associated bad debts are expected to decrease by around £100m.
NGV & Other saw adjusted operating more than double to £161m, reflecting contributions from the IFA2 France/UK connected network and gains from the NG Partners investment portfolio. The group's first France/UK connected network, IFA1, was damaged by a fire, offsetting it's revenue increase during the period. The North Sea Link, the France/UK connected network and rising prices are all expected to drive full year operating profits £200m higher.
UK Gas is now classified as 'held for sale' and expected to be sold by summer 2022.
Capital expenditure rose 15% to £2.8bn during the half as new costs associated with WPD, together with increased spending in UK Electricity Transmission outpaced reduced investment in the now operational France/UK network.
The WPD acquisition was the primary reason net debt rose by £13bn to £41.5bn. Excluding the impact of the acquisition and the business held for sale, the group had a free cash outflow of £360m an improvement from last year's outflow of £438m.
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