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National Grid's Earnings Underwhelm, but There Are Some Silver Linings

The entire investment thesis for National Grid (NYSE: NGG) had been up in the air for a couple of years as management completed the sale of its gas distribution business. Now that the deal is out of the way, investors can focus on the day-to-day operations of the business. While the company's first-half results may not look great on paper, there are some reasons to be optimistic about its future.

Here's a brief review of National Grid's most recent quarter and what management plans to do over the next couple of years. 

Image source: Getty Images.

National Grid's results: The raw numbers

Metric* H2 2017 H2 2016 % Change
Revenue $8.75 billion $8.73 billion <1%
Operating profit $1.67 billion $2.05 billion (18.5%)
After-tax profit $885 million $703 million 25.9%
EPS (ADR**) $1.24 $0.92 34.7%

Data source: National Grid earnings release. EPS = earnings per share.
*NATIONAL GRID RESULTS ARE REPORTED IN BRITISH POUNDS AND WERE CONVERTED TO U.S. DOLLARS USING NATIONAL GRID'S ACCOUNTING STANDARD, WHICH IS A WEIGHTED AVERAGE EXCHANGE RATE FOR THE RESPECTIVE REPORTING PERIOD. FOR H2 2017, THE EXCHANGE RATE WAS 1 POUND = $1.31. FOR H2 2016, THE EXCHANGE RATE WAS 1 POUND = $1.39.
**1 U.S. ADR = 5 COMMON SHARES OF NGG.

What always seem to obscure National Grid's results are currency exchange rates. When converting to U.S. dollars, many of the company's results can change significantly. According to its earnings results -- which are given in British pounds -- revenue and earnings increased 6% and 34%, respectively. 

National Grid's sale of a 61% stake in its U.K. gas distribution business also obscured its results. As a part of that deal, the company took 589 million pounds in debt redemption costs to separate the business in the second half of 2016. Those made its 2016 overall result look worse by comparison.

Operating income was down across all of its segments for two reasons. One is the conversion to U.S. dollars in the respective periods. Using its reported currency, its NG Ventures and other activities segment increased modestly. The other major factor related to the timing of revenues. According to management, revenue timing negatively impacted its results by a total of 230 million pounds.

Data source: National Grid earnings release. Chart by author.
*Discontinued operations includes National Grid's stake in its U.K. gas distribution business.

What happened at National Grid this quarter?

  • With the sale of its U.K. gas distribution business out of the way, management's focus is now on its rate cases for its U.S. operations. With its current filings, approximately 70% of its U.S.-based revenues will be under new rates by the end of April 2017. 
  • Upon completion of the U.K. gas distribution sale, management said it would repurchase 800 million pounds worth of common stock. So far, it has completed 60% of that share buyback plan and expects to finish it by the end of the fiscal year.
  • Its fastest-growing segment is its NG Ventures segment. Management has increased capital spending in this segment by 81% to 233 million pounds for the fiscal year. Increased expenditures relate to the construction of two long-haul transmission lines connecting the U.K. with mainland Europe. Management also said it has started work on a third line from the U.K. to France and has been awarded preferred bidder status on a fourth line.
  • The company now expects its continuing operations results for this fiscal year to be more or less in line with the prior year's results. 

What management had to say

In CEO John Pettigrew's press release statement, he gave the company's outlook for 2018 and beyond:

Our outlook for the year is unchanged, underpinned by our expectations for a stronger second half. We are focused on completing rate filings in the US, continuing proactive discussions with Ofgem [U.K. office of gas and electricity markets] ahead of the next regulatory settlement in 2021 and seeking new opportunities to grow the business and optimise our performance. We are confident that our strategy continues to create value for shareholders, delivering an attractive yield, and asset growth in the 5% to 7% range.

10-second takeaway

Even though National Grid's results don't look great in U.S. dollar terms, there are reasons to be optimistic about the company's future. Its U.K. regulated businesses are about as steady as they come and help to support its dividend and growth plan. With new rates for its U.S. business coming down the pipe in 2018, there's a good chance that it will be able to boost returns from that business by a couple of percentage points. 

The most promising segment appears to be its NG Ventures, though. The addition of long-haul transmission lines and other smaller-scale projects such as energy storage and renewable energy assets could spur growth beyond its previously sluggish pace. In the meantime, investors can expect a high-yield dividend on a consistent basis.

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Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends National Grid. The Motley Fool has a disclosure policy.