EUR 850.00 For Business Accounts Only

Morningstar | New Morningstar Analyst Report for National Grid PLC

National Grid has grown into one of the largest utilities in the world since U.K. regulators unbundled energy distribution, transmission, and supply in the 1980s. National Grid began acquiring Northeastern U.S. utilities in 2000 and made its biggest move buying New York-based Keyspan for $11.8 billion in August 2007.National Grid's long-term U.K. rate structures offer transparent earnings and dividend growth at least in line with inflation. The dividend grew 10% annually on average between 2005 and 2012, but dividend growth has slowed dramatically as financing needs required management to target inflation-linked growth. We expect tepid dividend growth to persist in the medium term, as organic cash flow will be much too low to fund dividends and investments of around GBP 4.2 billion per year on average through 2023, based on our estimates. In the 2013-21 RIIO regulatory framework, National Grid can earn a 10% nominal return on its transmission assets plus incentives, which could add 300 basis points or more to its return on equity. National Grid has consistently earned those incentives for electricity transmission networks while underperforming for gas transmission networks. We expect this to persist through the end of the curent RIIO rate cycle in 2021. In RIIO-2, starting in 2022, we expect a 200-basis-point cut in allowed base return on equity, while incentives will be maintained and achieved by the group for electricity networks, but not for gas networks.National Grid earns about half of its profits from the U.S. The share has significantly risen over the past few years owing to regulatory improvement in the U.S., hefty investments, and the sale of a 61% stake in the U.K. gas distribution business in 2017. We forecast this share to grow to 57% though 2025 as a result of continuing hefty investments and the upcoming cut in U.K. networks' allowed returns. We factor in a 9.5% long-term allowed return on equity in the U.S., to be fully achieved by National Grid.Altogether, we are concerned by the required significant debt issuance to fund hefty investments and dividend. Among U.K. utilities, we prefer SSE, whose diversified business mix is more appealing to us.