National Grid raises £7bn for grid overhaul plan

National Grid (NG.) has lined up the largest equity raise the London market has seen in almost a decade to bolster its major investment plan for the UK electricity network. The £7bn raise is being done at a 35 per cent discount to Wednesday’s closing price and will grow the shares on issue by a third.

Management said the overall £60bn plan would bring on “significant economic growth” while also “decarbonising our energy systems, bolstering security of supply, and reducing consumer bills in the long term”. Projects include greater power links between England and Scotland and "the largest grid investment in over a century" in New York state. 

For investors, the result is a “switch away from yield to growth”, said chief executive John Pettigrew. This includes a rebased dividend after the growth in the share count, although it will still rise with inflation. 

Institutional investors will provide all the equity raise cash, while existing (non-retail) shareholders will be able to subscribe for seven new shares for every 24 shares held. The bookbuilding process will run through Thursday and new shares will be issued on Friday. The raise is one of the largest the market has seen since 2015, when NatWest (NWG) raised £7.5bn. Just under £19bn overall was raised on the market in 2023. 

New debt will also be needed to fund the £60bn plan.

Some of the £7bn will immediately be used to cover maturing hybrid bonds, while Pettigrew said the utility would wade back into debt markets from time to time in the second half of the decade. The spending has already started to ramp up: capex was £8bn in the 12 months ending 31 March, up 8 per cent on the year before. New York state saw the lion’s share of this spending, with £2.7bn. 

Looking ahead, the spending will be slightly weighted to the UK, with £23bn for the electricity transmission business, £8bn for electricity distribution, and then £28bn in the US split between New York state and the New England region. Regulator Ofgem still needs to sign off on the plan.

Pettigrew said the cash was raised before the plan was approved to give investors transparency, given full regulatory approval might not come until the period has actually started. National Grid has said it could increase underlying earnings per share by 6-8 per cent a year alongside the hike in spending. 

The results for the 2023/24 financial year saw underlying operating profit climb 6 per cent to £4.8bn, driven by improvements in UK electricity transmission (up 19 per cent to £1.3bn) and its New York operations (up 21 per cent to £1bn). UK electricity distribution saw its adjusted operating profit drop 6 per cent to £1.1bn due to lower regulatory “incentives” and lower property sales compared with the previous year. 

Net debt climbed 6 per cent in the year to £43.6bn. Dividend cover was flat on the year before at 1.3 times. 

This is a huge raise and a significant investment programme for the company and its investors. Shareholder returns will take a knock alongside the share price, but the certainty in the outlook is a positive. Buy. 

Last IC View: Buy, 979p, 10 Nov 2023