Last week, National Grid (NGG) (NGGTF.PK) released its results for the six months to the end of September, 2012. The company runs the networks that deliver gas and electricity across the United Kingdom, almost as a near-monopoly, and also operates in the USA as a power provider.
First half performance reflects increased net regulated revenues driven by the group's growing asset base and tight control over operating cost growth.
The group reported headline profits up for the six months to the end of September improved by 17 percent to £1.7 billion ($2.7bn). However, adjusted for currency movements, regulatory revenue caps and the costs of storm damage (note: not 'Superstorm' Sandy!), underlying profits advanced 7 percent to £1.59 billion ($2.54bn).
The group's underlying pre-tax profit amounted to £1,154m ($1.85bn), up 21 percent from £953m ($1.5bn) the year before, while statutory profit before tax of £1,285m was up 37 percent higher than the £941m ($1.5bn) achieved at the halfway stage last year.
Earnings and dividends per share up
2012 first half year underlying earnings per share rose 20 percent to 23.0 pence from 19.2 pence the year before while statutory EPS jumped 32 percent to 28.8 pence from 21.9 pence.
The company has delivered on its target to grow the dividend by 8 percent a year through to 2011/12. However, as it is currently awaiting the outcome of a regulatory review in the United Kingdom, before setting a longer-term dividend policy some time in 2013, it is has set a one-year target of 4 percent growth for 2012/13.
As expected, National Grid confirmed that its first half-year dividend payout had been raised 4 percent to 14.49 pence per share going ex-dividend on 28 November and payable on January 16th, while confirming that the payout for the year as a whole will be increased by 4 percent as well. This implies that shareholders should expect to receive a total 2012/13 dividend of 40.85 pence per share.
Commenting on the results, National Grid chief executive Steve Holliday said:
"I am pleased with the progress we made in the first half of the year - operating our networks safely and reliably and delivering a record level of investment.
"This good first half-year performance reflects increased net regulated revenues driven by our growing asset base and tight control over operating cost growth. Increased investment in both our UK and US operations is in line with our forecast."
"More recently, our teams in the US responded in a timely, safe and effective way to restore service to our customers and limit disruption caused by Superstorm Sandy".
Superstorm Sandy hitting Long Island and National Grid
National Grid is contracted by The Long Island Power Authority (LIPA) to run the day-to-day operations of its electric utility business on Long Island. On Long Island, Sandy's storm damage caused loss of power to more than 1.1m customers served by National Grid on behalf of LIPA with many also affected by severe flooding.
With the results announcement, Mr Holliday also announced that the cost of restoring power to the group's US customers following 'Superstorm' Sandy would not exceed £100 million ($160m), excluding those related to the Long Island Power Authority (LIPA), with such costs accounted for within the group's second-half - while, subsequently, also confidently claiming that a class action, launched by residents from Long Island, would fail.
National Grid said it had made improvements to the way it responded to storms in the US, adding that its teams restored power to around 400,000 customers on the east coast affected by the latest superstorm within three days.
Having amended its storm restoration procedures in 2011 after two major storms, the group claims that it was able meet or exceeded its restoration objectives for its upstate New York, Rhode Island and Massachusetts service areas, where the group's teams restored power to around 400,000 customers - virtually all of those affected by the storm - within three days. At Long Island, the work being done now has moved on from restoration to reinforcement and rebuilding of the LIPA network.
During the period, National Grid has negotiated settlement recommendations for new rates in its Long Island, Rhode Island and upstate New York businesses, which had been underperforming.
Looking ahead, Mr Holliday believes National Grid was "well positioned to deliver another year of good operating and financial performance".
2013 - 2021 CAPEX: RIIO here we come
During the six months to the end of September, 2012, National Grid confirmed that it had increased capital investment by 23 percent to £1.8bn ($2.9bn), £346m ($553m) more than it did in the corresponding period of 2011, mainly due to a 34 percent rise in CAPEX in its UK transmission business.
A mandatory capital investment programme of more than £30bn for the period 2013-21 period is due to be finalised mid-December in order to improve the electricity transmission and gas distribution supply in the United Kingdom, with excess cash flow expected to be reduced.
The investment programme is subject to approval from Ofgem, the UK energy regulator. Final proposals under the next transmission price control - known as the RIIO (Revenue = Incentives plus Innovation and Outputs) - are due to be released on December 17th.
The RIIO is essentially National Grid's electricity transmission business plan for the next regulatory period, involving assessment by the company of realistic investment and future finances.
Commenting on the RIIO price control review and future CAPEX, Mr Holliday said,
"In the UK, as we work through the final stages of Ofgem's RIIO process, our focus is on successfully implementing a number of RIIO readiness initiatives, led by the ongoing development of our new UK operating model".
"In the US, our priority remains to improve overall returns through improved customer service and efficiency, combined with securing appropriate rate case outcomes in key jurisdictions."
From a funding perspective, it's worth noting that National Grid's net debt has risen from £17.6bn ($28.2bn) in 2007/08 to £19.6bn ($31.4bn) in 20011/12, and is expected to rise by a further £1.5bn ($2.4bn) to a rather massive £21.1bn ($33.2bn) in 2012/13. In addition, the company raised £3.2bn ($5.12bn) from shareholders through a rights issue in 2010.
In these circumstances, I find it somewhat difficult to be very confident that shareholders will be enjoying the same level of dividend increases they have seen during the previous regulatory period.
National Grid is likely to see somewhat reduced financial flexibility going forward balancing its free cash flows, levels of dividend payouts and net debt. In addition, to circumvent additional investment in the USA, over and above what is already currently planned, additional divestitures in the USA may again be on the cards.
In line with the group's policy of targeting 4 percent dividend growth in the current financial year the interim dividend has been increased to 14.49 pence while confirming 2012/2013 total dividend growth of 4 percent.
Once the outcome of key regulatory developments in the United Kingdom has become clearer during Spring next year, we expect National Grid to announce a new dividend policy for the next five to eight year period from April 2013. While we do not expect the amount of the dividend to be reduced the rate of annual increase may well slow to perhaps 4 percent per annum.
Disclosure: I am long NGG.
Additional disclosure: We run the Dividend Income Portfolio, which owns a shareholding in National Grid Plc, purchased when the share was historically undervalued as per our valuation methodology. Currently, National Grid is neither undervalued nor overvalued.