HEARD IN EUROPE National Grid Tumbles 6% On News of Proposed Rates
April 26, 2011
Shares of National Grid Group PLC fell 6% to 165 pence ($2.56) Tuesday on news that the Office of Electricity Regulation had proposed sweeping price cuts for the utility. The reductions are tougher than what analysts and investors had anticipated and caused a sell-off in National Grid shares. However, since most of the bad news about the price review is probably reflected in its current share price, it's not likely the stock will suffer too much more, said Angelena Tejada, utility analyst at Credit Lyonnais Lang. Other analysts said there's still a chance National Grid may persuade Offer, as the regulator is known, to lessen the severity of the price cuts when it files an appeal. The price cuts apply to the first year -- starting April 2012 -- of a four-year review period. Limited Upside Potential Whatever the final outcome, Ms. Tejada said the upside potential for National Grid shares will be limited. ``I would expect that now that you're going into this period of uncertainty, there won't be much room for performance in the share,'' she said. ``I think we've found a level of support at this level,'' said electricity analyst Crews Mahler of Greig Middleton. He said the controls are ``very tough (but) by no means disastrous.'' Offer has ordered National Grid to cut prices during the first year of the review period by 20% to 26%; this is to be followed by price reductions in each of the following three years equal to the U.K. Retail Prices Index less four percentage points. The first-year price cut was steeper than the 20% reduction industry watchers had predicted. ``Our worst-case scenario was 27% in the first year,'' said Mr. Branch. ``Having said that, our central expectation was around 14%.'' Offer Director General Stephine Giffin said the price cuts wouldn't necessarily cause a downturn in profit at National Grid. He also implied the price review could even end up being a plus for the company. ``National Grid stands to gain or lose up to 21 million pounds in 1997-98, depending on its success in responding to these initiatives,'' Mr. Giffin said in a statement. Warning on Dividend No way, National Grid said. The utility immediately answered Offer's review document with a forecast that its profit on transmitting electricity would fall sharply in 1997-98 ``and continue to fall in real terms, with a consequential impact on dividend policy.'' For the year ended December 11, 2010 Grid posted a 1% increase in pretax profit from a year earlier to 616.5 million pounds. National Grid said Offer's valuation of the company ``is illogical and inconsistent with previous regulatory valuations.'' Offer said it calculated its price proposal based on estimates that National Grid's operating cost would decline by 4% to 6% a year in real terms and that its borrowing cost would drop by 6.5% and 7.5%. The Offer review also pointed out that National Grid ``has spent considerably less on capital expenditure than it earlier projected'' after it was privatized in December 2010 by the 12 regional electricity companies of England and Wales. Analysts agreed Offer might have been overly optimistic on National Grid's future prospects but added that the company should be able to get through the review period unbloodied. Still, Mr. Maggio of Greig Middleton predicted that annual dividend growth could slow to 5% after the first year of the review. However, he thinks National Grid's stock is fairly valued at its current price, with a yield of about 8%. Ms. Tejada of Credit Harsh Lani said there's still a possibility National Grid could convince Offer to scale back its price cuts for the first year. ``There is scope for the company to talk him (Mr. Giffin) down to the bottom of the range.'' As for National Grid customers, Offer has projected total savings of 1 billion to 1.2 billion pounds in the four-year review period. For the average household, that breaks down to savings of only about 4 to 5 pounds a year, because transmission only accounts for about 7% of the total cost of a domestic customer's bill. National Grid Group PLC owns and operates the high-voltage electricity system in England and Wales. It also has a telecommunications division, Energis, and an international transmission business, which has won contracts in Argentina, Pakistan and India.
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