The amount of capital being absorbed to finance the energy transition is staggering. This is particularly true of National Grid, which is in a hurry to upgrade its networks in the UK and the USA, so outdated are they and, in the case of the USA, so poorly interconnected between the various states.
At the end of last week, the British company surprised the market by announcing a £7 billion rights issue. This will be used to finance an investment program of £60 billion over the next five years, an uncommon amount that represents between two and three times what National Grid used to invest on an annual basis.
With this operation - the largest rights issue in Europe since the banks were recapitalized after the subprime crisis - the company is entering a new era. The imperative to modernize its networks was made more pressing every year by projected growth in electricity demand: this is set to double in the UK by 2050, and to rise by 30% in the USA over the same period.
The bad news is that National Grid has announced that it will also need to increase its debt to finance its investment program - this, in addition to the asset disposals currently underway, notably its highly strategic LNG terminal in England, as well as its onshore renewable energy production capacity in the USA.
Already high, debt ratios could therefore flash bright red at the first unforeseen event. For this reason, management also announced a 15% reduction in the dividend. Unsurprisingly, the sum of these developments displeased the market.
National Grid needs to ensure a decent return on its colossal future growth investments. Experience shows that this kind of performance is more quickly promised than realized; in this respect, investors are more used to disappointments than happy surprises.
After a year's hesitation, the company is promising 5% annual growth in earnings per share between 2025 and 2029. This would be higher than the 3.7% annual growth rate achieved over the last ten-year cycle. The market therefore remains cautious, all the more so in view of the difficulty of passing on price increases in the UK market.
Adjusted for the new dividend, the current yield is 5%, i.e. a risk premium of 0.7% on the ten-year British Treasury note, and 0.5% on the ten-year US Treasury note. Not sure it's worth the risk, or that this risk remuneration is adequate.
