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National Grid - increasing investment in clean energy

Half year revenue from continuing operations rose £2.5bn to £9.4bn, a result of higher prices passed on to customers...

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Half year revenue from continuing operations rose £2.5bn to £9.4bn, a result of higher prices passed on to customers. Though, National Grid pointed out it hasn't made any additional profit on those increased prices.

Underlying operating profit, excluding the impact of exchange rates, rose 44% to £2.1bn. That largely reflected higher profit from UK Electricity Distribution and includes a £210m increase in the sale of property within the National Grid Ventures division.

Guidance for full year earnings per share has been upgraded, now expected to grow at a compound annual growth rate in the middle of a 6-8% range, up from 5-7%. On a five-year view, total cumulative capital investment is expected to be up to £40bn, an increase from prior guidance of £30-£35bn.

The £3.1bn sale of NECO to PPL completed in May and the sale of a 60% stake in UK Gas Transmission & Metering is on track to complete by the end of 2022.

Net debt rose £3.7bn to £46.5bn as £2.4bn of operating cash flow was offset by unfavourable exchange rate movements and £3.9bn in capital expenditure.

The board announced an interim dividend of 17.84p.

The shares were broadly flat following the announcement.

View the latest National Grid share price and how to deal

Our view

National Grid's strategic pivot into cleaner energy is nearing completion. The Rhode Island sale and integration of Western Power are complete, with the sale of a 60% stake in UK Gas Transmission & Metering the last step of this stage. All going to plan, the portfolio will be 70% weighted towards electricity in the near future.

Not stopping there, another £29bn in capital expenditure's ear marked for the decarbonation of energy networks for the period up to 2025/26.

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.

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.

There's also the impact of higher interest rates on the cost of debt. Finance costs rose 43% over the half as repayments on index linked debt rose. The rise is being absorbed, and then some, by higher profits but it's something to keep an eye on.

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 above their long-term price-to-earnings ratio as investors have looked for shelter in robust businesses - a trend that may not continue.

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.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 10th November 2022