YOUR MONEY: Plugged into the National Grid
Regional electricity companies will post new share certificates to up to 2 million people in the coming weeks. Steve Lodge reports
Sunday 10 December 1995
The good news is that Grid shares do not require the recipients to stump up any cash, that small savers will be able to sell them free of charges, and that all of us - even non-shareholders - will get a pounds 50 windfall discount on our electricity bills next year as part of the deal.
The bad news is this is no privatisation bonanza, even though the Grid was once a nationalised entity. Do not expect big gains in the short term on the launch price, likely to be around 208p. And for those getting Grid shares, their value will be offset by falls in the price of their shares in the regional electricity companies, called RECs. The few hundred Grid shares that REC investors might typically get are no instant windfall: their value comes directly out of their original REC shareholdings.
Shareholders in seven of the 12 regional electricity companies - named in the table - get the Grid shares. Shareholders in Southern Electric may also get shares - a decision should be made in January. But the four other RECs - Norweb, Manweb, Eastern and South Western - will not be handing out Grid shares. And investors in PowerGen, National Power and the Scottish and Northern Irish electricity companies get nothing.
One reason for the lack of noise about tomorrow's flotation is that it does not involve a privatisation-style sale of shares to the public. The National Grid, which is responsible for high-voltage electricity transmission in England and Wales - is already owned by the RECs. They are simply "demerging" it - hiving it off as a separate company either by giving their investors shares or, if not, selling their holdings in the stock market at a later date.
Many of the 2 million beneficiaries could be forgiven for not being aware of much of this. In the words of one stockbroker, the pounds 3.5bn flotation has been "badly publicised". Most people due to receive shares should have had some notification from their REC. But the broker says: "The information is the most confusing I've seen for a long time."
Here then are some pointers:
q Official dealings in National Grid shares start tomorrow. But small shareholders should think twice before selling immediately. The Grid share certificates will go out on or around 18 December, along with a free selling offer run by Lloyds Bank registrars for the Grid. This is a postal service that requires you to send in your certificate with the sell order. The free offer only covers sales of holdings of 500 shares or less and will be available until 31 January.
Alternatively, investors can sell their holdings this week before they receive their share certificates through a stockbroker. But this will cost, and investors will be expected to have sent their share certificates in by 22 December, according to Trevor Smith, private client director at stockbroker Waters Lunniss. Note that the Christmas post may mean you miss this deadline - potentially incurring additional costs - and that many of the cheapest selling offers require the certificates up front.
q With the Grid offering a yield - in effect its annual income - of 6 per cent-plus of the price, the shares may seem attractive. Fraser McLaren, electricity analyst at stockbroker Greig Middleton, says other positives include the potential for further cost-cutting and buying from big investors supporting the price. But having been in the private sector since the RECs were sold off in 1990, the Grid has already undergone much cost- cutting. Negatives for the future include political and regulatory worries - the Grid is facing a price review - and the fact that the companies not handing out their Grid shares have to sell them in the stock market over the next year, which will offset big investors buying.
q The actual number of Grid shares you will receive and the effect on the share prices of the seven RECs handing them out will vary a lot, as our table shows. The numbers vary in part because the RECs held different stakes in the Grid. The figures for the effect on the share prices are based on a Grid price of 208p, which was the price at the end of trading last week in advance of joining the stock market officially.
The greater the allocation level, the greater the value of Grid shares to each REC share - and the greater the expected fall in the price of the REC. So do not feel cheated if, say, you hold Seeboard, which is only giving 48 Grid shares for every 100 Seeboard shares held. You may get fewer Grid shares, but your Seeboard shares will fall less. Equally, those who have been investors in the four RECs not handing out Grid shares - all of which have in effect been taken over - should not feel they are missing out. The prices paid for their shares have included the value of their Grid holdings.
q The Grid shares will be treated like a dividend in tax terms - paid net of basic-rate tax. So basic-rate taxpayers will be square, but higher- rate taxpayers will owe another 25 per cent of the value of the shares, which they should declare in their annual tax return. The value of the Grid shares will be the closing price in the stock market on Monday, according to Mr Smith. When you sell your shares, any gains from this Monday price will only be subject to further tax if you fall within the capital gains tax net.
q If you hold your REC shares in a tax-free personal equity plan, the Grid shares should be automatically paid into that PEP, says Matthew Orr of stockbroker Killik & Co. You will also benefit from a 25 per cent boost to their value from the PEP manager claiming back tax that is deemed to have been deducted already - called the tax credit. (Non-taxpayers will also be able to claim this extra 25 per cent.) But Mr Orr warns that if you hold your REC shares in a single-company PEP, while you will still be able to benefit from the tax credit, you will then be required by the Revenue to remove the Grid shares from your plan. Your PEP manager should be able to explain all this and any costs in greater detail.
UNLOCKING THE GRID
Electricity Grid shares per Value of Grid shares
company (REC) 100 REC shares per REC share/
possible fall in
REC share price*
Northern 107 223p
South Wales 91 190p
London 85 177p
Midlands 80 168p
Yorkshire 75 157p
East Midlands 71 148p
Seeboard 48 100p
* Based on National Grid share price of 208p
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