The debt markets are not entirely closed for business. That much was demonstrated by National Grid, the electricity and gas network operator, which yesterday disclosed that it had raised or agreed terms on £1.9 billion of long-term borrowings since the start of the year.
That progress was a relief given that National Grid, with nearly £23 billion of net debt, already has one of the biggest balance sheet burdens in the FTSE 100 and was potentially at risk of a dilutive share issue. Its vigour so far this year means the company has to secure only a further £600 million of borrowings to meet the £2.5 billion funding requirement until next March – a feat that should be achieved without missing a beat on current form.
As befits its safe-haven utility status, the rest of National Grid’s numbers were solid, rather than surprising. Operating profits up 12 per cent to £2.9 billion: earnings per share – once adjusted for the $11 billion acquisition of KeySpan, the US gas distributor – ahead 14 per cent and the dividend raised by 8 per cent to 35.6p: in line with National Grid’s long-term targeted growth of its payout. KeySpan is proving its worth.
Cost savings from the acquisition are now running at an annual $129 million – comfortably ahead of its $100 million target. However, harsh winter weather in New England proved a double-edged sword. The cold snap boosted profits from gas distribution. But National Grid’s US electricity distribution business was held back by higher than expected costs in the wake of an ice storm, albeit that these costs can be recovered from regulators.
The broader comfort is that the company is largely insulated from a recession-induced reduction in demand for power from industrial markets – the amount of electricity it carried fell 4 per cent in the UK year-on-year, with gas down 3 per cent in the US. However, revised regulatory price controls mean that National Grid’s revenues are no longer linked to volumes. The exception is a handful of US jursidictions where agreements on new formulas should be agreed by the early part of next year.
There is a risk that the shares get left behind in a shift of cash to more cyclical stocks. But National Grid’s 95 per cent exposure to regulated assets and the falling cost of its index-linked debt mean that there are worse places to remain among utilities.
At 584½p, or 12 times earnings, and yielding 6.1 per cent, hold on.
As befits its safe-haven utility status, the rest of National Grid’s numbers were solid, rather than surprising. Operating profits up 12 per cent to £2.9 billion: earnings per share – once adjusted for the $11 billion acquisition of KeySpan, the US gas distributor – ahead 14 per cent and the dividend raised by 8 per cent to 35.6p: in line with National Grid’s long-term targeted growth of its payout. KeySpan is proving its worth.
Cost savings from the acquisition are now running at an annual $129 million – comfortably ahead of its $100 million target. However, harsh winter weather in New England proved a double-edged sword. The cold snap boosted profits from gas distribution. But National Grid’s US electricity distribution business was held back by higher than expected costs in the wake of an ice storm, albeit that these costs can be recovered from regulators.
The broader comfort is that the company is largely insulated from a recession-induced reduction in demand for power from industrial markets – the amount of electricity it carried fell 4 per cent in the UK year-on-year, with gas down 3 per cent in the US. However, revised regulatory price controls mean that National Grid’s revenues are no longer linked to volumes. The exception is a handful of US jursidictions where agreements on new formulas should be agreed by the early part of next year.
There is a risk that the shares get left behind in a shift of cash to more cyclical stocks. But National Grid’s 95 per cent exposure to regulated assets and the falling cost of its index-linked debt mean that there are worse places to remain among utilities.
At 584½p, or 12 times earnings, and yielding 6.1 per cent, hold on.
Source: The Times
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