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National Grid Transco
National Grid Transco’s first half turnover fell by 6.1% to £3.8bn largely due to a reduction in reported earnings from the US electricity distribution business. Before exceptionals and goodwill, operating profit grew 2.4% after correcting for exchange rates. With 37.6% of the operating profits generated in the US the weakening US dollar reduced the reportd operating profit to £770m (-1.5%). EPS was up 10.3% to 9.6p primarily due to a 8% reduction in interest cost.
UK gas and electricity transmission (47.6% of operating profits) operating profit fell 3.2% due to a 31% drop in the gas transmission profit due to lower income from capacity auctions. Natioanl Grid Transco expects to recover income in the second half. Electricity transmission fared better; operating profit increased by 10% on higher connection charges and an inflow of under collected revenue from the previous year.
The US electricity distribution business (27% of operating profit) reported a 14.3% fall in turnover. Though reported operating profit was down 3.3%, after correcting for exchange rates operating profit was up 7.8% due to lower costs. Cost control is vital, and the reported 15% reduction in cost in real term (from March 2002) is encouraging with cost cutting still going on.
Overall, although reported operating profit fell, growth can be seen when adjusted for exchange rates. Capital expenditure for regulatory purposes is higher than the amount reported in the accounts because some items accounted as costs are treated as capital expenidture by the regulator. This effectively increases future revenue (through higher tariffs set by the regulator) increasing future profitability.
With the sale of four gas distribution networks, the company will return £2bn to the shareholders. They still have not indicated whether they plan a special dividend or a share buy back, with the latter more likely.
Nation Grid Transco shares trade at a prospective PE of 14.2× (at 505p) at the higher end of the range for the sector. The 4.7% yield is in line with the sector. The management is willing to scale down operations and return money to shareholders is also positive as it suggests a strong focus on shareholder value.
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