Electricity grids are one of the major bottlenecks of the energy transition. They will require vast investments to meet growing demand. That puts network companies in the position of having to raise equity, flog assets or contain dividends in order to square the numbers. National Grid — which on Thursday announced a £7bn rights issue, disposals and a dividend “rebase” — is ticking all three boxes.
Its dash for cash is for a good cause. The UK network company sees room to invest £60bn between 2025 and 2029, almost twice as much as its capex between 2020 and 2024. A big chunk of the uplift will come from debottlenecking the domestic grid, with capex on the high voltage transmission network set to more than triple. That will drive 10 per cent annual growth in its asset base between 2025 and 2029.
Electricity demand in the UK is forecast to broadly double by 2050. With this sort of opportunity ahead, National Grid does not want to find itself counting nickels and dimes. Hence the blowout equity increase.
At £7bn, its rights issue is equivalent to 17 per cent of its pre-announcement market capitalisation. On top of that, it plans to sell a liquefied natural gas terminal in the east of England and its US onshore renewables business, which UBS values at £3.6bn. It will rebase its dividend to keep the overall cash outflow flat despite the increase in the share count. That translates into a 14.7 per cent reduction in dividends per share, which will then grow in line with inflation. Overall, this puts National Grid on a sound footing to fund its long-term growth plan and keep leverage somewhere between 60 and 70 per cent.
The trouble for investors, however, is that — at least initially — growth will not be enough to compensate them for all the additional equity they are putting in.
To get its £7bn, National Grid will issue 1.085bn new shares, raising its total count from 3.7bn to 4.8bn. As a result, despite expected net income growth, it is guiding to flattish underlying earnings per share in 2025. While EPS will then rise at a respectable clip, this initial effect means annual growth will be modest, about 5 per cent a year to 2029 on Bernstein calculations. That compares with 6 to 8 per cent expected between 2021 and 2026.
Funding the green transition is a laudable ambition but it will not light up returns.
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