NATIONAL Grid’s surprise £3.2bn rights issue, which successfully closed in June, still touches a raw nerve with chief executive Steve Holliday.
Large investors said he had spent the previous 18 months telling them the firm did not need to come to them for cash. And then in May, alongside its results, it announced the largest ever cash call by a UK utility. Some shareholders felt they had been “misled” by the company, which runs the country’s energy transmission network. The firm’s stock slid seven per cent on the day of the announcement.
It is the only time the confident Holliday, who has been at the helm of the company for three years, looked on the back foot during our hour-long meeting.
“It is always challenging to communicate a step change,” says Holliday as he leans his powerful frame back into his seat (he used to play rugby as a fly-half to a good standard) in his spacious fourth floor office in The Strand overlooking Trafalgar Square. “But at some stage in the future it was clear that we were going to have to ramp up our investment programme.”
He says a series of projects the firm had earmarked all came together in a remarkably short space of time.
RISE IN CAPITAL SPENDING TO £22BN
Over the last five years National Grid spent £14bn on capital projects; over the next five years this will rise to £22bn. Last year the firm spent £3.3bn on its infrastructure; this year that will rise to £3.9bn.
The firm has an impressive list of investments on its hands over the next couple of years. Around £2.8bn has been earmarked for nine major projects to link up the next generation of nuclear power stations as well as wind farms in Suffolk, Somerset and Wales.
It will also spend £1bn ripping out the old electrical wiring in London and Birmingham, some of which dates back to the 1950s, and installing the latest systems housed in three-metre high tunnels.
Holliday says: “This is essential work for these two cities, which play critical roles in the UK economy.”
The firm will spend £800m upgrading the UK’s gas network to secure the country’s liquefied gas supply from abroad. And Holliday says the business will also set aside £1bn “to take advantage of non-regulated opportunities [activities that are largely not subject to price control]” such as three projects to run electricity interconnectors between the UK and Norway, Belgium and France.
Holliday says this investment over the next five years will expand the UK generation capacity by an “unprecedented” 22,000 megawatts, a third of what the country currently uses (although much of this new capacity will be wind power and so will not be in constant use).
UP TO 5,500 NEW JOBS TO BE CREATED
This investment programme is expected to create 500 new jobs at National Grid, which currently employs 27,000, and another 5,000 jobs among its suppliers.
Holliday said the board looked at a number of ways to finance this expansion.
He says: “As you would expect us to we diligently looked at all of our options to finance this additional spending. We looked at debt, cutting the dividend, issuing new equity. We thought that equity was the best way to finance this.”
Holliday adds that the deal was constructed to allow the firm to keep its single A-grade credit rating. And that its debt over the next five years is expected to rise from £22bn currently to £30bn.
This deal will also allow it to fulfil an earlier promise to continue to boost its dividend by eight per cent a year for the next two years.
One National Grid insider said investors and the senior management had their wires crossed over how new projects would be financed.
The source said: “Investors continually asked us whether we had the ability to raise debt as a result of the credit crunch. We always told them yes. Shareholders knew new projects were on the way, and assumed they would be wholly financed by debt, rather than a mixture of debt and equity.”
Holliday is keen to stress that he will only invest in projects once he has signed contracts from generators to use his networks for sometimes as long as twenty years ahead.
The energy boss says: “We will only invest once we have locked in returns.”
Holliday adds that the speed at which the investment became due is what might have caught investors on the hop.
He says: “Investors needed to see this and understand this. And when they did, they took up their entitlement of shares in overwhelming numbers.”
And indeed in June 94.2 per cent of existing investors took part in the £3.2bn fundraising, buying two new discounted shares at 335p each for every five they held.
NUCLEAR POWER OR WIND POWER
Investors stumped up the cash because the firm’s very long contracts with power generators give it strong returns. As one large shareholder said: “It has got to be among the most stable companies in Britain.”
But Holliday adds: “We have to reflect on the amount of information we put out telling our major shareholders and others about our investment plans.”
At the same time as its rights issue in May it also posted a 12 per cent jump in pre-tax profits to £1.97bn on the back of strong long-term contracts.
The business is also the second largest power firm in the US, servicing eight million customers after its acquisition of rival Keyspan in New York in 2006.
But National Grid has said it may exit some of its smaller US businesses if US regulators do not allow it more attractive returns.
Holliday says he has found the transition from a Labour government to a coalition one, under energy secretary Chris Huhne, plain sailing so far. He says this is because the broad themes of energy policy – moving towards 20 per cent of power from renewable sources by 2020, nuclear new build, and security of supply concerns – are shared across all the major parties.
The energy boss says: “There has been a high level of political consensus over these issues for some time. Differences may lie in execution, but not over the broad targets.”
Holliday backs the consideration the energy department is giving to setting a floor for carbon credits, which would make investment in nuclear energy and other low carbon generation much more attractive. But he insists this should be simply the start.
He says: “The government needs to work out how to provide enough incentives to attract private capital over the next ten years and more, so that private investors will back building new power stations.”
Power transmission will look very different in the future. Instead of National Grid having to link up just a relatively small number of large nuclear or coal-fired power stations to the network, it will now also have to link up a number of smaller sources like wind farms.
But this thought seems to animate the power chief. He says: “We need a mixed bag of big and small power. All these horses need backing.”
He adds: “How will the energy mix look in 2050? We know how some of it will look because we are building it now. But it is important to leave room for technologies we can’t quite commercialise now, but we may be able to in the future. It’s such a bloody exciting challenge.”
Now that Holliday has smoothed over his difficulties with shareholders, he can go back to his main job – making sure the UK has the power it needs when it needs it.
CV | STEVE HOLLIDAY
Work: Chief executive of National Grid since January 2007. From 2002 to 2007, he was National Grid’s group director for UK gas distribution and business services. Before that he was the executive director of British Borneo Oil and Gas. Prior that he spent 19 years with the US energy giant Exxon, during which time he held a number of senior positions.
Education: BSc in mining engineering from Nottingham University
Family: Married with three children, lives in West London
Hobbies: The England rugby team and the arts