EUR 850.00 For Business Accounts Only

Morningstar | National Grid Faces an Unfavorable Political Backdrop

Natioanl Grid owns and operates energy networks in the U.S. and in the U.K.In the U.K., long-term U.K. rate structures have offered 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 high investments. In the 2013-21 RIIO regulatory framework, National Grid can earn a 7% real 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. In RIIO-2, starting in April 2021, we expect a 200-basis-point cut in real allowed base return on equity to 5%, while incentives will be maintained. There is some downside risk to our estimates since the U.K. regulator Ofgem proposed a 4% cut in December 2018 as part of the consultation process. National Grid’s management stated in May 2019 that 5.5% would be a fair return. Labour party’s manifesto foresees nationalization of U.K. energy networks with shareholders’ compensation below market value. This threat will prevail until the next general election scheduled in 2022, barring any anticipated polls. 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 the U.K. gas distribution business. We forecast this share to grow to 60% though 2025 as a result of continuing hefty investments and the upcoming cut in U.K. networks' returns. We factor in a 9.5% long-term allowed return on equity in the U.S., to be fully achieved by National Grid.Among U.K. utilities, we prefer SSE, whose diversified business mix is more appealing to us.