Is National Grid on disposal manoeuvres?

Following speculation around the possible sale of National Grid's gas metering business, Nigel Hawkins explores the potential for wider strategic repositioning of its asset portfolio.

Things are afoot at National Grid as it seeks to provide its business both with greater focus and enhanced long-term growth.  

Furthermore, with net debt of £23.9 billion and annual investment of c£3.5bn, it is hardly surprising that National Grid is casting a beady eye over its existing asset portfolio.

Recent speculation has highlighted the possible disposal of its gas metering business, which is potentially worth c£1bn. In 2014/15, it reported an operating profit of £160 million on meter revenues of £309 million: decent margins indeed.  

Logically, too, the future of its remaining four regional gas distribution businesses is bound to be addressed.

After all, top-dollar prices are being paid for long-term utility assets, and especially those where the price regulation – and indeed political – risks are comparatively low: such a scenario applies currently. 

Having sold four of its gas distribution businesses some years ago, there are clear valuation parameters that National Grid will continually be assessing. Of course, all such disposals have to be framed within a defined corporate strategy, which has been subtly tweaked in recent months.  

Above all, National Grid’s focus is on its UK electricity transmission business, which yielded an operating profit of over £1.2bn last year. Material savings are already being delivered from its eight-year RIIO regulatory settlement and the quest for more will continue.  

Its focus on the UK gas market seems slightly less clear-cut, despite the heavy investment requirements of its former Transco business. However, NG has emphasised that improving customer service – hardly its USP – is now the priority for its gas distribution operations.  

Significantly, despite some encouraging progress of late, financial returns in the US are well below the UK level.  

But National Grid does have major investment plans for New England Power along with its other state-based US operations.

More specifically, investment in electricity interconnectors holds particular attractions for NG. Recently, it announced its planned participation in the 450-mile Norway Interconnector project.

In effect, electricity interconnectors are a part-surrogate for domestic generation investment. And, in NG’s case, it is well placed to wheel power at short notice around various networks, using surpluses in one market to cover shortfalls elsewhere.

Projected financial returns from interconnectors, despite price regulation constraints, are also very impressive – and certainly compared with many pure generation projects. 

Interestingly, National Grid has flagged that between £3-4 billion has been earmarked for investment in new businesses, which could embrace anything from further interconnector projects to highly innovative electricity storage technology.

After many years of quiet progress – and a soaring market capitalisation – National Grid now seems keen to inject an element of non-regulated long-term growth into its operations.

Its unrivalled expertise in electricity transmission would seem to be the base upon which these aspirations are most likely to be fulfilled.