Pair Trade: National Grid - Short SSE

Wednesday, October 15th 2012

Investment Case

Technical Comment

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Company Description

Analysts Recommendations:

Source: Bloomberg

National Grid has been underperforming since Ofgem Initial

Proposals last July for the 2013/14 – 2020/21 reviews for the RIIO

Electricity Transmission, Gas Transmission and Gas Distribution. The

proposals were tougher than expected.

The company published its detailed response to Ofgem Initial

Proposals. It highlights many areas where National Grid believes

there’s some score for an improvement. The Final Proposals should

be announced next December. Probably, the company will not get

respite in all the points raised, but it could be enough to further

derisk its balance sheet and dividend policy.

Main risks are a tougher than expected regulatory review on RIIO and

on settlements from its renegotiation of US rate plans.

SSE is a well-managed company. SSE is the first of the suppliers to

announce a tariff increase for this year, which could point to a

weaker financial position (last month it was put on negative outlook

by S&P) and stronger competitors. Over the next months, the

company will need its major wind farm construction projects to

commission on time (renewable energy subsidies could be cut),

energy prices to show a positive evolution and emission costs to

remain low.

The National Grid / SSE currently trades at a ratio of 0.4867. We’ll

define as our targets 0.4996 and 0.5100. 0.4773 will be our stop-loss.

Market Price Data

National Grid (NG/ LN)

Last Price (GBP) 693.50

YTD Change 10.96%

Mkt Cap (GBP bn) 25.230

SSE (SSE LN)

Last Price (GBP) 1425.00

YTD Change 10.38%

Mkt Cap (GPB bn) 13.651

Source: Bloomberg

Market Multiples

P/E

2014 EPS

2011/14 DY

2014 Net

Debt/

Est. CAGR Est. Est.

EBITDA Est. 13

National Grid 12.68 -2.21% 5.97% 4.14

SSE 11.81 3.76% 6.16% 3.17

Source: Bloomberg

Next Report Date

National Grid Q3 Results November 15th

SSE Q3 Results November 14th

Source: Bloomberg