Plug into National Grid

Since National Grid's shares went ex-dividend at the start of the month, their price has dropped 11 per cent and is close to its bear-market low of 511p. Given that National Grid's power transmission and distribution activities are 95 per cent regulated, that their revenues and cash flows are predictable and the group has no exposure to fluctuating power prices, then its financing position is the most likely cause of this weakness.

Indeed, credit rating agency Moody's placed the group on a "negative" credit watch in January 2008 and is due to review its stance in the coming weeks. But worries that the group would encounter difficulties financing its capital spending programme of approaching £3bn a year have so far proved unfounded.

, the group confirmed it has issued £1.9bn of long-term debt in 2009, leaving just £600m needed to fully fund requirements for 2009-10. Finance director Steve Lucas has every confidence of getting the last chunk done, but is in no immediate hurry.

True, during 2008-09 net debt rose by 29 per cent to almost £23bn, largely reflecting currency movements following the £3.8bn acquisition of US business in 2007. But investors should not be spooked by this. The dollar's appreciation may have increased the sterling value of National Grid's dollar-denominated net debt by £4bn, but it has also increased the sterling value of its US assets by £4.5bn.

Furthermore, National Grid's business model can support this amount of debt. "Its annual investment of £3bn is typically funded half by cash and half by debt, which means debts are constantly increasing, but then the asset base is growing at the same time," points out Elaine Coverley, an analyst at stockbroker Brewin Dolphin. "This keeps the gearing ratio fairly constant."

In the meantime, National Grid's Steve Lucas is focusing on interest cover (the ratio of operating profits to net interest payable). Over the long term, the group's interest cover has been between 3.0 and 3.5 times, which is consistent with a single A debt rating. And, indeed, in 2008-09 the ratio was 3.1 times. Therefore, the hope is that Moody's will respond to this and may even upgrade National Grid's rating within the coming weeks. This would give the share price a real boost.

However, there are also naysayers. In May, the investment-banking arm of HSBC issued a note entitled "Moody's Blues". This speculated that if National Grid's higher gearing ratio caused its debt rating to be downgraded, then the company would need to raise £2bn of new equity to underpin debt issuance until 2015.

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Putting the financial concerns aside, operationally National Grid has lots of spark. "It is a myth that British companies can't make money in the US," says Mr Lucas, adding that, on a pro-forma basis including KeySpan for all of 2007-08 and 2008-09, then underlying earnings per share still rose 10 per cent, in contrast to basic earnings from continuing activities (see table), which were hit by losses on energy contracts.

Within the next 18 months, all of National Grid's remaining US regulated contracts will have been filed for renegotiation. The hope is the regulators will allow higher returns on each bit of the group's assets that they regulate. So far in the review process, US returns have risen by one percentage point to 12 per cent on average. That's a great result for National Grid. Mr Lucas calls it "the magic combination" - the regulated asset base is rising, as are the returns allowed on it.

In the UK, there are encouraging growth prospects for National Grid from nuclear and renewable energy. The government has already indicated its commitment to upgrade the UK's seven nuclear plants. But the existing transmission structure was built for the old stations, whereas the new plants will have a generational capacity three or four times the size of what is there now. That implies a big upgrade to the power grid and, correspondingly big upgrades to the regulated base of assets on which National Grid is allowed to make profits.

The drive to develop off-shore wind farms also raises the prospect of an off-shore grid under the sea. "It's something for the future, but we are very keen to develop an off-shore grid which would greatly improve the resilience of renewable energy," Mr Lucas adds.