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National Grid makes £4bn profits, high energy prices 'inevitable'

Published: 18:14 19 May 2022 AEST

National Grid PLC - National Grid makes £4bn in profits despite heavy investments in energy transition

National Grid PLC (LSE:NG.) doubled full year profit and hiked its dividend, as it upped investment to prepare for increased use of electric vehicles and other energy transition changes, while also preparing to sell its gas business.

The FTSE 100-listed energy supplier reported pre-tax profit up 107% to £3.44bn, while earnings per share increased to 60.6p from 37p a year ago. 

Increased profits at the company result from higher net revenues from UK electricity transmission, higher revenues from its Massachusetts Gas business and the first year of operation of the IFA2 and North Sea Link interconnectors, said the company.

33.76p final dividend lifted the total to 50.97p, a 3.7% increase on the previous year.

Assuming the sale of its 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, suggesting earnings for 2022/23 will be broadly flat. The utility said its financial outlook for five years, from 2020/21 to 2025/26, remains unchanged.

Capital investment of £6.7bn for continuing operations was up 18% on a pro forma basis, but the electricity and gas provider said recent rise in energy prices pose "a significant challenge".

"The world has changed dramatically over the last year, with the tragic war in Ukraine, a global economic slowdown, and rapidly rising inflation. The UK and US communities we serve are facing significant cost of living challenges, at a time when further urgency is needed to address climate change," said chief executive John Pettigrew.

The CEO added with the acquisition of  UK's largest distributor Western Power Distribution (WPD), the business is much more focused on electricity infrastructure, putting it at the centre of the energy transition. 

"We've invested a record £6.7bn in critical energy infrastructure, part of our five-year £30-35bn investment programme. Over 70% of our five-year investment is aligned to EU taxonomy principles making us one of the FTSE's largest investors in the delivery of net zero."

The shares fell 1.2% to 1229p on Thursday. 

Price hikes inevitable

Laura Hoy, equity analyst at Hargreaves Lansdown, said: “National Grid’s planted itself firmly at the centre of the electric revolution with a portfolio that’s set to lean 70% to electrification. That’s offered a huge growth opportunity for the company as it looks to shore up the existing grid and expand capacity to allow for the influx of new connections. "

She said the 21% increase in spending on the network and an 8.7.% increase in the group’s regulated asset base was important as this is the value that regulators like Ofgem use to determine how much the group’s allowed to earn.

"The bigger the base, the better the profit potential."

Hoy added that while the group is returning excess cash earned from the sub-sea energy link with Europe to customers earlier than anticipated, "this will do little to quash ongoing concerns about the impending rate hikes when the price cap is revisited again in October".

"The group argues that it must spend to keep up with the UK’s ambitious climate change targets, the current grid simply isn’t strong enough to cope with a ballooning number of new connection requests. In normal times this wouldn’t be much of an issue, utilities are constantly negotiating with regulators on how they’ll be compensated for infrastructure investment. But with energy prices soaring uncomfortably higher, price hikes for customers are inevitable.

"Together with the investment needed to shift to an all-electric future, it leaves regulators stuck between a rock and a hard place.”

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