Below we summarise the key takeaways from a meeting between Morningstar equity analysts and National Grid's (NG.) management team, which took place at the annual financial conference of the US Edison Electric Institute -- the association of shareholder-owned electric companies operating in the US – between October 31st and November 3rd.
Management reiterated its 8% dividend growth target in 2011 and 2012, and our meeting led us to reaffirm our projection for 6%-8% dividend growth in 2013-15. We estimate £15 billion of the firm's five-year, £22 billion investment plan will be generating regulated returns and cash flows by mid-2013. Management also set the record straight on its US strategic review, saying it only plans to sell its New Hampshire gas and electric utility. We expect the sale would only net $100 million-$200 million. Even without further U.S. divestitures, the region will see a shrinking share of profits, given regulatory challenges and National Grid's more-favourable UK equity returns around 14%.
We expect to get a revised US growth outlook following rate activity in Massachusetts and New York. Management told us a fair outcome in Niagara Mohawk's $369 million New York electric rate increase request could allow opportunities for $4 billion-$6 billion of transmission projects in New York to improve reliability and tap Canadian renewables to meet the state's 29% renewable portfolio standard by 2015. We think the Massachusetts gas rate case outcome in November was fair. The $58 million revenue increase was just 56% of National Grid's revised request and allows a below-industry-average 9.75% return on equity. However, regulators granted rate decoupling and rate trackers for pension expenses, commodity cost bad debt, and capital investment, all but eliminating regulatory lag. We think this trade-off between a lower return on equity and improved rate structures is fair. We also await management's plans to reduce a significant portion of its $2 billion U.S. operating cost base starting in 2011.
In the United Kingdom, National Grid plans to file its initial plan for its elongated eight-year transmission rate cycle starting in April 2013. Much of that plan will incorporate growth investment projected in the UK electric regulator's eight-year energy plan issued this year. The plan received buy-in from across the political spectrum even after the recent regime change in Britain. We expect more details on the plan in December.
