ii view: Norwegian sea cable powers National Grid profits

Importing renewable energy from Europe and a yield of around 5%. We assess prospects. 

First-half results to 30 September

• Underlying or adjusted operating profit up 47% to £1.41 billion
• Interim dividend up 1.2% to 17.21p per share
• Net debt up £13 billion to £41.5 billion following an acquisition

Chief executive John Pettigrew said:

“Looking ahead, the new organisational structure that we have implemented, alongside a major cost efficiency programme, will ensure we are in a strong position to capitalise on the significant growth opportunities ahead. Our focus will be on delivering critical and green investment to enable the decarbonisation of power, transport and heat, and lead a clean, fair and affordable energy transition across the jurisdictions we serve."

ii round-up:

UK and US energy company National Grid (LSE:NG.) reported a 47% improvement in adjusted profit as a contribution from its recent purchase of Western Power Distribution (WPD), the UK’s biggest electricity distribution business, kicked in.

The grid operator also announced a new £400 million annual cost saving programme along with raising its full-year earnings guidance given the strong first half performance. 

National Grid shares rose marginally in UK trading, having risen by close to 13% year-to-date. Shares for the UK’s biggest renewable energy generator SSE (LSE:SSE) are up by around 4% over that time. British Gas owner Centrica (LSE:CNA) is up by more than 40%. 

National Grid now expects generate full-year adjusted earnings per share significantly above the top end of its 5-7% range, largely driven by the early commencement of its new subsea interconnector between the UK and Norway. 

The UK and Norway can now share renewable energy for the first time because of the £1.6 billion 450-mile electricity cable. The link is expected to boost full-year profit by around £100 million.

The North Sea Link is National Grid’s fifth interconnector, which also operates links to Belgium, France and the Netherlands. By 2030, 90% of electricity imported via National Grid’s interconnectors will be from zero carbon sources. 

National Grid’s earlier 2021 purchase of WPD comes as it looks to sell most of its stake in the UK’s gas transmission network. It follows broader industry moves away from high carbon emitting gas towards renewably generated electricity. 

In line with policy, the interim dividend was raised to 17.2p per share from last year’s half-year payment of 17p per share.  

ii view:

Employing over 20,000 people, National Grid operates energy transmission networks in both the UK and USA. In the UK it owns thousands of miles of both overhead and underground electricity cables along with a series of North Sea interconnectors. In the US, along with both electricity cables and gas pipes, it also operates and is building both wind and solar energy projects. 

For investors, Covid has previously crimped performance as businesses closed or used less energy. Negotiations with UK and US regulators regularly offer uncertainty, but climate change and clean energy has become central within management’s strategy. Due to a degree of predictability for energy usage, it can offer five-year financial plans which few other companies can. For now, and with a dividend yield of around 5% still highly attractive in an era of ultra-low interest rates, income seekers are likely to stay interested.  

Positives: 

• Attractive dividend payment (not guaranteed)
• Five-year financial outlook previously detailed

Negatives:

• Covid-19 raised costs and reduced consumption
• Net debt of £41.5 billion following its WPD buy

The average rating of stock market analysts:

Buy