National Grid beats 2021 forecasts, plans big energy shift

National Grid (NG.) kept profits rolling in despite the pandemic, and has laid out a five-year plan that will see it push more into electricity generation over gas. In its domestic market, National Grid is in the process of selling its gas transmission business.

But the US and UK power networks giant will stick with gas-fired power as a key technology. Finance chief Andy Agg told the Investors’ Chronicle the company sees gas as having a “long-term role in the future of energy”. 

The chief executive of US gas-fired power plant owner Vistra (US:VST), Curt Morgan, recently told the Wall Street Journal he was diversifying the business as he was “hell-bent on not becoming the next Blockbuster Video”.

Agg said National Grid did not see it that way. 

“Our focus on the ongoing investment in the gas business in the US shows gas is moving towards a sustainable, low-carbon fuel,” he said. 

This week, the International Energy Agency (IEA) said annual global investment in transmission and distribution grids would need to expand from the current $260bn (£184bn) to $820bn by 2030 to support the energy transition. But under a net zero carbon emissions by 2050 scenario, the IEA sees 90 per cent of energy generated from renewable sources, with nuclear plants providing the other 10 per cent. 

National Grid’s 2021 underlying operating profit of £3.3bn was 3 per cent ahead of consensus forecasts, but a 5 per cent drop on last year. Net debt was also down to £29bn, helped by the US/GBP exchange rate and shifting NECO – the Rhode Island gas and electricity business – debts in the assets-for-sale pile. 

This sale is the divestment part of the sizeable restructuring, alongside the £7.8bn purchase of Western Power Distribution (WPD), which will take the business directly into homes in the UK. National Grid’s existing status as owner of the high-voltage transmission network means this is equivalent to a motorway owner taking over B roads as well. 

The deal is expected to close by July, with NECO forecast to be off the books by early 2022. 

The Covid-19 impact was £355m, instead of the initial forecast of a £400m hit, and the net impact on the operating profit was £296m. 

Looking ahead, National Grid has guided overall capital expenditure of £30bn-£35bn over the next five years, and asset growth and EPS compound annual growth rates of 6 to 8 per cent and 5 to 7 per cent, respectively. Asset growth was 5.6 per cent in the last financial year and capex was £5.1bn. 

What both National Grid and IEA forecast is increasing demand for power lines as electricity demand ramps up. This combined with the dividend is enough for us to keep it on hold, despite the usual regulatory uncertainty. 

Last IC view: Hold, 830p, 19 Mar 2021