Half-year results are out today from FTSE 100 firm National Grid (LSE: NG), the gas and electricity transmission and distribution operator. At first glance, the figures are not pretty. Statutory measures show that operating profit, profit before tax and earnings per share all fell in percentages measured in the 20s and 30s, compared to the equivalent period last year.
But let’s look at the underlying figures to get a better picture of performance. They are still not that great, I feel. Underlying operating profit slipped 6% and profit before tax eased back by 4%. However, earnings per share increased by 6%, and another figure that has a strong tendency to rise – capital investment – went up 7%. I said in an article at the beginning of October: “Maintaining and developing the infrastructure for energy transmission and distribution is a capital-intensive pursuit, and there’s no getting out of it because of fierce regulation on both sides of the Atlantic.”
Escalating capital investment
Indeed, the capital investment figure is considerable at £2.1bn, up 7% on the equivalent period a year ago. In a flavour of where the money goes, the company ploughed almost £1.2bn into its US regulated business, up £88m over the prior period because of mandated gas work across New York and Rhode Island. The directors said in the report the money is funding the replacement of leak-prone US gas pipes and reinforcing the electricity system to improve the safety and reliability of networks.
The US business is important to National Grid and contributed 32% of operating profit in the period, but it sure is sucking capital from the company. Meanwhile, 43% of operating profit came from UK electricity transmission, just 4.5% from UK gas transmission and the remaining 20.5% from National Grid Ventures and other activities. So, let’s hope that all that capital going into the US assets ends up generating good returns for the company in the years ahead. Chief executive John Pettigrew said in the report that in the US the firm has “completed a full refresh” of its rate plans so that all its distribution businesses are now operating under new rates, “a major milestone which will support our continued growth.” The firm is also seeking “a fair settlement on union negotiations in Massachusetts.”
Challenges in the US
Based on the figures, the US business looks tough. Although it contributed 32% of National Grid’s operating profit in the period, it also accounted for 64% of overall revenue, suggesting that profit margins are thinner across the pond. The company puts that down to a second-half weighting in the US business, American tax reforms and £56m of costs from “a number of storms.” However, most of the storm costs are recoverable under existing regulatory mechanisms.
Meanwhile, the firm raised over £1bn of new long-term debt for the US business. Overall net debt increased to £25.6bn, £2.6bn higher than at 31 March 2018. Yet the directors were happy to push up the interim dividend by 3.8% even though City analysts following the firm expect flat earnings to March 2020. Without any growth in earnings on the table, I’m sticking to my view from last month: “I think National Grid has a lot to prove at the moment if it is to restore investor confidence and I’m in no hurry to pile into the shares.”