National Grid ups earnings, spending forecasts

National Grid (NG.) was keen to stress its higher interim profits were from internal moves rather than the energy crisis that has hit Europe this year – including past acquisitions and asset sales. But it has also outlined higher earnings growth than expected for the coming five years and higher capital investment – £40bn against a previous £35bn plan. The capital spending forecast for the current financial year has gone up £500mn to £7.5bn. 

CFO Andy Agg said the longer-term increase was driven by new currency forecasts and higher costs all around, while the immediate earnings growth expansion came largely from the stronger dollar – a 5¢ swing is about 1p in earnings, Agg said. The £2.2bn operating profit, up 50 per cent on last year, was boosted by a full six-month period with Western Power Distribution as part of the UK electricity distribution division – the full-year impact is expected to be £230mn. Also kicking that figure up were one-off payments like £210mn in property sales and £70mn from an insurance payout after the Sellindge interconnector fire last year. 

The new guidance for the compound annual growth rate (CAGR) in underlying earnings per share over the next five years is 6-8 per cent, from 5-7 per cent previously. National Grid has consistently increased expectations for earnings over the past 18 months as conditions have improved its outlook. 

Regulators provide some challenge to endless deals and growth. 

The Competition and Markets Authority is looking into Macquarie Bank’s purchase of the utility’s gas transmission business. An initial decision on this will come on 22 November. A longer-term concern is Ofgem’s latest price control draft for the 2023-2025 period, which sees a one-fifth cut to total spending compared with National Grid’s plan. “We expect this gap to narrow [following negotiation],” National Grid said. 

As an ex-public entity with a balance sheet carrying significant UK infrastructure, National Grid issued £4bn in new bonds to refinance maturing debt just as corporate bond yields rose. Net debt is expected to come down by £5bn by the end of the financial year through the gas transmission business disposal and the completed sale of a pipeline in the US. 

As a utility, National Grid is much more stable than its high debt load suggests. But the cost of borrowing and the uncertain regulatory situation keeps us on neutral. Hold. 

Last IC View: Hold, 1,222p, 19 May 2022