National Grid upgrades after UK power chaos

National Grid (NG.) has increased its full-year profit expectations as the UK grapples with hefty increases in power prices. The transmission and power network company reported operating profit up by £100m more than expected, after electricity auction prices climbed and the early commissioning of a new interconnector, used to import power. 

This is not unexpected in a year when the UK – unhappily – learned about the general workings of power markets, after a fire at National Grid’s Sellindge interconnector exacerbated existing electricity issues (low wind turbine output and gas supplies) and helped drive up prices. National Grid said its performance year-to-date would see it well above its 5-7 per cent underlying earnings per share annual growth target. 

In the six months to 30 September, National Grid reported an underlying operating profit increase of almost half, to £1.4bn. The consensus forecast for the full year, as per FactSet, is £3.7bn, compared with £3.3bn last year. Earnings were boosted by the integration of new acquisition Western Power Distribution (WPD), which contributed £257m. 

The up-for-sale UK gas transmission business, which is not included in this measure, saw its underlying operating profit climb by three-quarters to £332m. Finance chief Andy Agg said the volatility in UK power markets in recent months had not changed the company’s plan to shift the unit off the books. “We have not seen on any impact on interest,” he said, adding it was a step removed from the massive price hikes given its role was to move gas around the country. 

National Grid has also just outlined its plans for the next five years, headlined by £35bn in capital spending, split equally between the UK and US. Agg said the $1.2tn (£890bn) US infrastructure bill should smooth the way for permitting and “much better align the federal government with the state governments” in terms of power network planning. 

As with SSE (SSE), debt remains high for this former government-owned entity. Agg said the £41.5bn in net debt forecast for the end of the year would come down once the UK gas transmission business was sold, with the overall company leverage goal at 70 per cent. Net debt overall is currently twice the level of equity. 

This is still a company in transition, guided by regulators but also looking at how to manage a volatile UK energy market. Hold.

Last IC View: Hold, 940p, 20 May 2021