True to its roots, National Grid is working hard on behalf of the nation. On Thursday, it announced a £12.5bn five-year capital expenditure programme – double its expectations of a year ago. Almost three-quarters of that will go on upgrading the UK’s power and gas networks.
Capex upgrades usually set off alarm bells for investors, but they can hardly complain. The utility turned in slightly better-than-expected results for the year that ended in March. The 10 per cent increase in the dividend beat the company’s own target for the third year running.
There is no denying, however, that these are interesting times for what is often seen as a rather dull business. All Grid’s regulated operations, both in the UK and the recently expanded US division, face price reviews over the next two years. Grid is at the forefront of fitting out its home market for the twin challenges of dependence on gas imports and the expansion of renewable energy. Getting growth from largely regulated activities is a challenge – most of last year’s profit gains came from faster-than-expected cost-cutting and Grid’s unregulated communications business. Assessing how regulators will treat Grid with respect to pricing, investment and financing assumptions is, therefore, critical for investors. In that light, the bold capex plan makes a lot of sense. Politicians, usually at pains to not be seen to be lining the pockets of utilities’ shareholders, are right now more worried about security of energy supplies.
Regulators will take note of today’s low interest rates when setting medium-term financing cost assumptions. But rising inflationary pressures and distortions in the gilts market should persuade them not to set the bar too high. All that suggests Grid will be offered rather more carrots than sticks.