National Grid (NG.) Ord 12, 204/473p
HL comment (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.
Shares were broadly unchanged following the announcement.
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.
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 effectively swaps out NECO, a US gas and electric business, and NGG for WPD.
It's not a straight swap though. WPD added £13bn to overall net debt and NG's using short-term, higher-interest ''bridge'' loans to fund the purchase. That's ok as long as they're only used to bridge the gap between acquisition and sale. NGG's got one foot out the door now, and last we heard the NECO sale was on track to complete. However, neither is a done-deal just yet.
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. But investors are paying for NG's strengths with an above-average price-to-earnings ratio.
National Grid key facts
- Price/Earnings ratio:18.3
- 10-Year Average Price/Earnings: 14.3
- Prospective dividend yield (next 12 months): 4.3%
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
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 Wester 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 lower 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. 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.
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Previous National Grid updates
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