U.K.-based electric and gas utility National Grid (NGG +2.08%) is stepping up efforts to become a major natural gas player in the U.S. market and is also looking to increase its presence in renewable energy and electric vehicle charging. The company has a solid dividend and recurrent revenue stream that is common in traditional utility stocks, but has also launched an initiative to modernize grid operations in both the U.S. and U.K. and is seeking new leadership at the highest level stateside.
The company's ongoing evolution and appetite for a move into potentially higher-margin businesses may leave investors poised for a future gain, but a recent dispute with New York Gov. Andrew Cuomo has raised eyebrows about its ability to weather regulatory challenges. This is a good time to take a look at what's at stake in the dispute and determine if it could have bigger ramifications for National Grid's operations and profitability.
The history
National Grid has been active in the U.S. for roughly 20 years and has been operating in the U.K. since 1986. The company has grown through the acquisition of utility assets in the eastern U.S. to amass more than 20 million utility customers in New York, Massachusetts, and Rhode Island.
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On the company's half-year results call Nov. 15, Chief Executive Officer John Pettigrew said National Grid has negotiated new rates for all its gas distribution companies and the rates are "enabling the strong organic growth we are seeing in our U.S. business." It is also preparing to submit a three-year grid modernization plan that will include investment of up to $50 million in energy storage, proposals for advanced metering projects, and investment in electric vehicle charging infrastructure. Pettigrew said the company is looking at what it can do to encourage more renewable gas and will explore projects over the next few years but it is not clear what the "vision" is for the technology.
In 2019 National Grid completed the $100 million acquisition of U.S. wind and solar developer Geronimo Energy which gives it a platform to accelerate the development of renewable energy generation projects and further diversify its business into building the plants rather than just managing power distribution to customers.
In terms of leadership, National Grid may be on the verge of new leadership for its U.S. operations following a resignation that was viewed as abrupt last year. U.S. Executive Director Dean Seavers resigned in November and interim leadership has been in place since then.
What happened in New York
National Grid landed a major win when it was awarded a gas supply contract for a rapidly growing population in New York state. However, in May, the company drew the ire of Gov. Cuomo when it refused to hook up new gas accounts in the area, claiming there was not enough gas supply. The Cuomo administration viewed the National Grid moratorium as retaliation for its failure to approve a proposed pipeline, and threatened to revoke the company's license.
The company ultimately agreed to pay a $36 million fine, lift the moratorium on new hookups, and present a long-term options analysis for new gas supply within three months, after which Cuomo backed off the threat to revoke its license. https://www.governor.ny.gov/news/governor-cuomo-and-national-grid-announce-agreement-lift-moratorium-immediately
What it all means for investors
National Grid has its eye on modernization, improved efficiency that can lower costs, and higher-tech initiatives like renewable generation development and electric vehicle charging. The company saw a major opportunity to grow its power distribution business in New York but has had trouble delivering on its contract and keeping up with demand. The company also made political waves in New York, which may have damaged its reputation. Investors would be wise to keep an eye on the company's ability to continue to secure steady sources of revenue in the U.S. as well as the profitability of its new ventures before deciding to add National Grid to an investment portfolio.
