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National Grid - continues to trade in line with expectations

National Grid has confirmed it's performing as management expects, in a brief update ahead of more detailed half-year results.

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National Grid has confirmed it's performing as management expects, in a brief update ahead of more detailed half-year results.

The results will include the first full period of ownership of National Grid Electricity Distribution, the UK's largest electricity distribution business.

National Grid also completed the sale of its distribution infrastructure in Rhode Island in the United States, on 25 May 2022. As such, there will still be a few weeks' contribution in the period.

The UK Electricity Division is now expected to have a more even profit performance in the first and second halves of the year, with the New England division having less of a second half bias.

The net effect is a slight decrease in earnings weighting for the Group to the second half of the year.

The shares fell 1.1% following the announcement.

View the latest National Grid share price and how to deal

Our view

National Grid is making good on efforts to plant itself at the centre of the electric revolution. The National Grid Gas (NGG) sale, early completion of a second UK/France network and the WPD acquisition mean the group's portfolio will be weighted 70% toward electric. That said, the NGG sale is currently the subject of a regulatory review and is still to complete.

As the owner and operator of essential energy infrastructure across the UK and north-eastern US, National Grid is a vital business.

In return for investing billions maintaining and upgrading its infrastructure, regulators allow National Grid (NG) to earn a reasonable profit, with the potential to earn more if it exceeds targets. That translates into predictable revenues, low borrowing costs, and feeds into what should be a relatively dependable dividend. No dividend is ever guaranteed, and yields are variable and not a reliable indicator of future income.

The regulatory environment can be a double-edged sword, though, as regulators have the final say over National Grid's profit potential. As the government prepares for the UK's electric future, the group's being forced to give up control of the networks it owns by separating the Energy System Operator business. This shouldn't impact profits much - it's only a minor contributor - but serves as a reminder that National Grid's fortunes aren't completely under its own control.

A higher proportion of National Grid's revenues and profits will come from electricity as the group has effectively swapped out NECO, a US gas and electric business, and NGG for WPD.

The cost of living crisis is another short-term risk to National Grid's profits. The group will need to invest heavily to prepare for an influx of electric connections, this typically comes alongside approval from Ofgem to improve profits. But the surge in energy costs means consumers are already struggling and there's a lot of pressure on regulators to start slicing into utilities' profits.

Longer term, National Grid has the traditional pros of a utility, but also growth opportunities - a rarity for the sector. And we commend its willingness to pounce on shifting energy trends. The shares are trading at close to its long term price-to-earnings ratio.

National Grid key facts

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

Full Year Results (19 May 2022)

Full year underlying operating profit rose 11% to £4.0bn, reflecting higher UK Electricity Transmission revenue and reduced covid-related headwinds. This also includes the impact of the Western Power Distribution acquisition.

The group announced a 33.76p final dividend, bringing the total to 50.97p, a 3.7% increase.

Assuming the sale of National Grid's gas businesses goes ahead as planned, the group still expects underlying earnings per share to grow at a compound annual growth rate of 5-7% from a 54.2p baseline. This suggests earnings growth this year will be broadly flat following a strong year last year.

Adjusted operating profits in UK Electricity Transmission rose 10% to £1.1bn, reflecting higher net revenue under the current regulatory period. Investment in the network rose 21%, bringing the regulated asset base 8% higher. Return on Equity fell from 13.8% to 7.7%, reflecting the impact of a lower base return.

UK Electricity Distribution, which houses newly acquired Western Power Distribution, reported results from the time of acquisition, 9.5 months to 31 March. Underlying operating profit was £909m and ROE was 13.6%. The division recently agreed to pay £14.9m after an investigation concluded that customer advice and services were inadequate.

UK Electricity System Operator (ESO) saw net revenue rise under the current regulatory period. Adjusted operating profits rose from a £60m loss to £7m, primarily reflecting the impact of recuperated payments from previous period. This part of the business will be sold to the UK Government as it works to create an independent Future System Operator to support the energy transition.

New England saw adjusted operating profits rise 22% to £743m, reflecting higher net revenues due to high rates and new customers. Return on Equity for the segment was 8.3%, close to the 9.8% allowed by regulators.

In New York the group achieved 99% of the allowed return on equity, or 8.8%. This reflected progress on efficiency programs and lower storm costs. Adjusted operating profits rose 17% to £780m, driven by higher net revenues and lower controllable costs.

National Grid Ventures saw adjusted operating profits more than double to £307m. The bulk of this came from Grain LNG and Transmission.

UK Gas Transmission and Metering are due to be sold in the coming year.

National Grid generated £5.8bn in cash from continuing operations, nearly £2bn higher than last year due to the WPD contribution. Following £5.8bn spent on capital expenditure and investment and £2.0bn paid in interest and dividends, the group had a £1.6bn outflow. Net debt rose from £28.5bn to £42.8bn, reflecting £8.1bn in debt taken on through WPD and £8.2bn in bridge loans to finance the acquisition.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

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Written by
Derren Nathan
Derren Nathan
Head of Equity Research

Derren leads our Equity Research team with more than 15 years of experience in his field. Thriving in a passionate environment, Derren finds motivation in intellectual challenges and exploring diverse ideas within his writing.

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Article history
Published: 10th October 2022