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WIKI ANALYSIS
With over 11 million customers, National Grid Transco is one of the largest utilities companies in the world. The company operates 4,300 miles of gas transmission pipelines, 93,800 miles of gas utilities infrastructure, and 71,000 circuit miles of electric utilities infrastructure. All of the company's operations are subject to rate regulations from the national governments of the United States and United Kingdom, as well as numerous U.S. state governments; this guarantees the company relatively steady income (averaged across its regulatory bodies, NGG's utilities companies earn a return on equity of 11%) but it also makes it difficult for National Grid to adjust when costs rise, as passing them on to consumers requires a lengthy lobbying process without the guarantee of success.
Fortunately, the company operates in 20 different regulatory regions, diluting the individual decisions of any one body in the company's larger revenue pool. National Grid is also looking to its aging infrastructure to spur earnings growth; as pipelines and cabling need to be replaced, the value of the company's assets will rise, bringing up the total value of the company's allowed returns with it. In the early 2008 financial markets, though, the credit crunch and an economic recession will make it more difficult for the company to secure funding for these capital projects are low cost. National Grid doesn't have any real competitors within its markets because the high cost of infrastructure for utilities companies means that the business creates natural, regional monopolies.
Business and Financials
National Grid plc engages in the transmission and distribution of electricity and gas in the United Kingdom and the United States. The company owns and operates high-voltage electricity transmission system in England and Wales, as well as high pressure gas transmission systems in Britain and electricity transmission systems in the northeastern United States. It offers its services to generators, distributors, suppliers, interconnector users, and directly-connected customers in the United Kingdom, as well as to other industrial, commercial, and domestic consumers.
At the end of fiscal 2007, the company's UK gas network included approximately 4,300 miles of high pressure transmission pipelines, as well as approximately 82,000 miles of distribution pipelines. It also operated approximately 71,000 circuit miles of electric distribution lines in New England and New York and approximately 11,800 miles of gas distribution pipelines in New York and Rhode Island.[1] In addition, the company provides infrastructure and related services, which include metering and meter reading services, grain LNG, interconnector services, property holding and management services, engineering consultancy and software, and network mapping services. National Grid plc, formerly known as National Grid Transco plc, was founded in 1990 and is based in London, the United Kingdom.
| 2004 | 2005 | 2006 | 2007 | |
|---|---|---|---|---|
| Operating Revenue | 7,747 | 7,208 | 8,891 | 8,686 |
| Operating Income | 1,470 | 1,803 | 1,749 | 1,862 |
| Average Number of UK Employees | 11,943 | 11,784 | 11,421 | 10,356 |
| Average Number of U.S. Employees | 9,402 | 8,663 | 8,414 | 8,618 |
National Grid Transco Acquired KeySpan
At the end of August 2007, NGG successfully completed the acquisition of KeySpan, a large American gas and electric utility. KeySpan owns and operates six regulated utilities that distribute natural gas to approximately 2.6 million customers: approximately 1.7 million in New York City and Long Island and approximately 0.9 million in Massachusetts and New Hampshire. It is the fifth largest gas distribution company in the US and the largest in the Northeastern U.S. Over 90% of its customer base is comprised of residential and small commercial customers.
Trends and Forces
Government Regulation of Gas Distribution Gives the Company Little Control over its Margins
Utilities are regulated businesses in both the U.S. and the UK. In the U.S., the national government sets regulations for transmissions while state governments set rules for distribution; in the UK, the national government regulates both. U.S. rates are set based on an allowed return on equity; across National Grid's U.S. operations, its average return on equity allowed is 11%. British regulations are different; rates are set, and then allowed to rise in five year cycles. For transmission, rates are allowed to rise at the rate of inflation plus 4.4% through 2012; electricity distribution sees rate increases of inflation plus 5.5% through 2010 and gas distribution sees rate increases of inflation plus 4.9% through 2013. The increases above inflation are allowed to support the company's need for capital investments. For example, the 4.4% increase for transmission is meant to support £4.4 billion in investments.[3]
These rules are designed to ensure both profitability for the company and accessibility for the consumer, but often hold back utilities companies, like National Grid, from achieving potential revenues and profitability by preventing them from charging delivery rates that the level of demand would allow. Regulation can also cause the company's margins to be volatile, as lobbying the government is the only way the company can control its prices. Unfortunately, natural gas costs fluctuate rapidly, but it takes a long time for NGG's lobbyists to convince state and regional regulators to raise the price ceiling. For the most part, regulators will only raise rates if the company can show that something, whether rising costs or inflationary pressure, is causing their margins to shrink to unfair levels; sometimes, they even decide to lower rates. Fortunately for National Grid, the company operates in twenty different regulatory environments, greatly reducing the overall effect of any one negative regulatory decision on the company's revenues.
Old Transmission Infrastructures in Both the U.S. and UK Need Replacing
Electric and gas distribution in both the U.S. and UK are beginning to age. Old, fraying wiring and rusting pipelines are risky; on April 15th 2008, for example, National Grid announced it would perform studies on its pipelines in New York City, after numerous leaks, fires, and explosions occurred the weekend before.[4] Bad infrastructure can lead to consumer deaths, bad publicity, and angry regulators, so National Grid has incentive to spend the large amounts of money needed to repair, expand, and replace them. Furthermore, the company's old capital has had years to depreciate, decreasing the value of its rate base, and of its equity; by replacing the pipelines and cabling, the company increases the value of both, and thus increases the amount of money it is allowed to earn.
The Credit Crunch Makes Accessing Funds for Capital Investment More Difficult
Transmissions pipelines and distribution infrastructure are both expensive endeavors for companies to undertake, which is why transmissions companies are parts of natural oligopolies and utilities are natural monopolies. National Grid Transco will need to make a number of new and upgraded installations, especially given the age of its capital and the early 2008 press over gas leaks and explosions. Such capital expenditures can cost billion of dollars, too much for the company to finance even with the rate increases allowed by the British government, so the company will need to turn to capital markets for funding. The credit crunch, however, as well as a worldwide recession means that lenders are less willing to hand their money out, making it more difficult for NGG to secure the funds needed to finance its investments at low interest rates.
Competition
High infrastructure costs make NGG a monopolist utility in the regions it services, though government regulation keeps the company from exploiting customers with high prices.
Other American gas utilities include
- AGL Resources - AGL Resources operates gas delivery services in Florida, Georgia, Maryland, New Jersey, Tennessee, and Virginia, and has close relationships with twelve different gas marketing companies.
- Atmos Energy - Atmos operates in Texas, Kentucky, Louisiana, Mississippi, Colorado, Kansas, Tennessee, Georgia, Illinois, Iowa, Missouri, and Virginia. It is not only a gas utility but also a natural gas marketing, pipeline, and storage company.
- Energen - Energen is an energy holding company that operates in businesses ranging from oil exploration and production to natural gas marketing and distribution. Its utilities business is the largest gas distributor in Alabama.
- Equitable Resources - Equitable Resources is a vertically integrated natural gas company that operates from the upstream to natural gas distribution. Its gas utilities operate in Pennsylvania, West Virginia, and Kentucky.
- ONEOK - ONEOK is a transport and distribution company that acts as a utility in Oklahoma, Kansas, and Texas.
- National Fuel Gas Company - NFG is a diversified natural gas company that does exploration, production, transportation, marketing, and distribution of gas; its utilities segment operates in New York and Pennsylvania.
- Sempra Energy - Sempra is a gas and electric utilities company in California.
- Southern Union Company - Southern Union operate natural gas storage and transport services, and produces and refines natural gas; its utilities business operates in Missouri and Massachusetts.
| AGL Resources[5] | Atmos Energy[6] | Energen[7] | Equitable Resources[8] | National Fuel Gas Company[9] | ONEOK[10] | Sempra Energy | Southern Union Company[11] | National Grid Transco | |
|---|---|---|---|---|---|---|---|---|---|
| Total Revenue (Millions) | $2,494 | $5,898 | $1,435 | $1,361 | $2,039 | $13,488 | $11,438[12] | $2,617 | £8,778 |
| Gas Delivered (Bcf) | 319 | 297.3 | 82.7 | 49.5 | 38.98 | 176.55 | N/A | 56.2 | N/A |
| Number of Utilities Customers (thousands) | 2,271 | 3,187 | 451 | 274[13] | 725[14] | 2,050 | N/A | 552 | 11,571[15] |
References
- ↑ Reuters Full Description: "National Grid Plc NGG (NYSE)"
- ↑ NGG 2007 20-F
- ↑ Morningstar Analysis, NGG, 04/08/2008
- ↑ TimesUnion: "In wake of explosion, aging utilities studied"
- ↑ ATG 2007 10-K
- ↑ ATO 2007 10-K
- ↑ EGN 2007 1-K
- ↑ EQT 2007 10-K
- ↑ NFG 2007 10-K
- ↑ OKE 2007 10-K
- ↑ SUG 2007 10-K
- ↑ SRE 2007 10-K
- ↑ Equitable Resources: Equitable Utilities: Equitable Gas
- ↑ Reuters Full Description: National Fuel Gas Co
- ↑ Reuters: Full Description: National Grid Transco
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