As you might expect from a utility company that does most of its business in a highly regulated market, National Grid's first-half results were a solid improvement over the year prior's. What really stole the headlines, though, was that management announced it would be selling part of its UK Gas Distribution system. Here's a quick snapshot of what happened this quarter and what to expect in the future.
National Grid results: The raw numbers
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Source: National Grid earnings release.
Here's how those operational profits broke down by National Grid's various business segments:
Source: National Grid earnings presentation, author's chart.
What happened with National Grid this half
- The big headline story was that management announced it is looking to sell a majority stake in its UK Gas Distribution business. The rationale is that while the business is a strong cash flow generator, the company wants to rebalance its portfolio toward other options with higher growth potential. Once completed, the board has approved to return a large portion of the sale returns to shareholders. Estimates say that National Grid's Gas Distribution business is worth $16.9 billion.
- In April, National Grid exchanged its ownership stake in the Iroquois Gas Transmission system to Dominion Midstream Partners . In exchange, National Grid received and 8.7% stake in Dominion Midstream.
- After announcing last year that the company expects to invest $24 billion to $30 billion in total by 2020-2021 in the UK, management now expects total investment to be on the lower end of that range as several electricity projects are taking longer to develop than originally anticipated. Since National Grid operates exclusively in the transmission side of things, it has little influence on when these projects actually do start up.
- To accommodate for that decline in UK spending, management has upped its investments in the U.S. The company expects capital investments in the U.S. to grow its asset base by 7%, which is at the high end of the company's overall asset growth plan.
- 2016 capital budget expected to be around $2.9 billion, $1.8 billion of which will be deployed in the U.S.
- Management increased Its dividend 2% to $1.1323 per American depository share.
What management had to say
CEO Steve Holiday:
Looking forwardWith the impending sale of a major stake in the UK Gas Distribution business, investors can expect either a heft cash payment, or the possibility that the company buys back some shares. That is just a one-time thing, though, so it shouldn't significantly alter the investment thesis in the company too much as there are other investment opportunities out there. Although, one could argue that the proceeds could be used to shore up the balance sheet and invest in its growth.
What is most important is the ability to invest and grow its asset base. With up to $24 billion being spent in the UK over the next five to six years and a decent amount of projects in the U.S. as well, National Grid there are plenty of opportunities to grow its earnings. As with all opportunities, though, the company will need to execute well on the development of these projects and find the lowest cost capital possible to fund it.
The article National Grid's Solid Earnings Overshadowed by the Announced Sale of Its Gas Distribution Network originally appeared on Fool.com.
Tyler Crowe has no position in any stocks mentioned.You can follow him at Fool.comor on Twitter@TylerCroweFool. The Motley Fool recommends National Grid. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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