National Grid plc. (NYSE: NGG)
The current low interest rate environment is good news for utility stocks, which tend to do well when rates decline because their yields are relatively high. During periods of rising interest rates, utility stocks tend to perform poorly for two reasons. First, utilities are heavily debt-financed, and their interest costs are likely to rise. Second, investors seeking income often migrate away from utilities and move toward bonds as fixed-income rates move higher.
In our view, National Grid’s underlying business fundamentals remain strong. The company’s operations are 92% regulated, which provides a high level of earnings stability. The company is also benefiting from investments in its U.K. network and from a favorable regulatory environment in both the U.K. and U.S. which should enable it to earn returns above its cost of capital. In the U.S., we believe that National Grid’s business is poised for further growth driven by rate increases, cost-savings programs, and new capital projects centered on infrastructure improvement. The balance sheet appears solid and able to support the dividend. The company’s ADRs trade ticker is NGG.
National Grid, an energy transmission and distribution company located in Britain and the U.S., showed a solid financial performance in FY20. In addition, it has continued to deliver strong organic growth at the top end of its 5% to 7% range.
During FY20, National Grid made a number of announcements about several important projects and events. (1) The company continued working on its goal to achieve net zero for its generation emissions by 2050. (2) The construction of three interconnectors was on schedule for completion in FY21. (3) The company completed its US Geronimo acquisition in late FY20. (4) Close to the end of FY20, National Grid received 2 billion pounds in proceeds from the sale of its Cadent stake. (5) The cost efficiency program is on track to rake in 50 million pounds in savings in the U.K. and $30 million in the U.S. by the end of FY21. (6) The company made capital investments of 1.3 billion pounds in FY20, which was up 14% year-over-year, and was driven by an increase in U.S. capital spending and 2.2 billion pounds spent on the Geronimo acquisition. Finally, the company has successfully implemented its business continuity plans in response to the COVID-19 pandemic.
For the year ended March 31, on more shares outstanding, adjusted EPS was 58.2 pence, compared to 58.9 pence in the prior year. However, underlying operating profit was up 1% caused by higher rate revenues recorded in the company’s U.S. regulated businesses, and the lower operating costs which more than offset higher deferrable storm costs, higher bad debts costs, increased depreciation, the non-recurrence of favorable U.S. legal settlements and the sale of the company’s Fulham property site in FY20. The combination of these factors was partly offset by higher net financing costs, driven by the implementation of IFRS (International Financial Reporting Standards) and higher average net debt. Underlying profit after tax increased by 1% and, combined with a higher share count, decreased underlying EPS by 1% to bring it down to 58.2 pence ($3.69) in FY20.
EARNINGS & GROWTH ANALYSIS
Our FY21 EPS estimate (in U.S. dollars) is $3.94, based on our expectations for benefits from rate increases as well as lower operating expenses going forward. Our FY22 EPS estimate is $4.13.
FINANCIAL STRENGTH & DIVIDEND
The board authorized a full-year dividend per ordinary share of 48.57 pence which is 1.3-times adjusted EPS. In addition, company directors authorized an interim dividend of 16.57 pence per share which was paid in the fiscal year ending March 31, 2020. This absorbed approximately 57 million pounds of shareholders’ equity. An interim dividend for the year ended March 31, 2019 of 16.08 pence per share was paid in January 2019.
The full-year dividend for FY20 was 47 pence ($3.20 per ADR). This compares to 46.7 pence ($3.00 per ADR) for FY19.
Also of note is the fact that National Grid’s balance sheet remains strong, with Baa1, BBB+, and BBB+ ratings from Moody’s, Standard & Poor’s and Fitch, respectively.
MANAGEMENT & RISKS
John Pettigrew is the company’s CEO. He succeeded Steve Holliday, who retired on March 31, 2016 after nine years in the position. Mr. Holliday led National Grid through its 2007 acquisition of Keyspan and through the financial crisis of 2008-2009.
National Grid was affected by Brexit. However, we should note that the company generates substantial revenue from the U.S., and that the decline in the pound has benefited this portion of the business.
Specific to National Grid, we would likely reduce our earnings estimates if economic conditions deteriorate in the U.K. or the Northeastern U.S.
National Grid is an international electric and natural gas delivery company. Over the last several years, it has acquired a range of U.S. utilities, including Keyspan, New England Electric System, Eastern Utilities Associates, and Niagara Mohawk.
New Jersey Resources Corp
We expect the stock to outperform most of the other stocks in the gas distribution sector.
Adjusted net income for 2Q20 totaled $106.9 million or $1.12 per share, compared with $112. .27 per share for the same period in FY19. First-half adjusted net income totaled $147.3 million or $1.57 per share, compared with $166. .88 per share for the same period in FY19. Adjusted earnings declined in 2Q20 primarily due to abnormally warm winter weather.
According to management, business operations at NJR have not experienced a material impact with the COVID-19 pandemic as regards essential services.
NJNG reported 2Q20 adjusted earnings of $86 million. It was $68.5 million in 2Q19. The increase in 2Q20 was primarily due to the base rate increase resulting from NJNG’s recent and lower O&M expenses.
Midstream reported 2Q20 adjusted earnings of $4.3 million, compared to $4.5 million during the same period in FY19. First-half 2020 adjusted earnings were $7.3 million, compared to $8.1 million during the same period the previous year.
CEV reported 2Q20 adjusted earnings of $16.0 million, compared with $21.7 million during the same period in FY19. The 2Q20 decrease was primarily due to company’s recently sale.
Operating revenue in 2Q20 was $639.6 million, compared to $866.2 million in 2Q19.
EARNINGS & GROWTH ANALYSIS
NJR reaffirmed FY20 adjusted earnings guidance of $2.05-$2.15 per share. The company expects to release its 3Q financial results on August 4.
FINANCIAL STRENGTH & DIVIDEND
In the long-term, we expect NJNG to post relatively strong annual customer growth of 1.7%-1.8%, aided by improving economic conditions in the company’s central New Jersey service territory. We also expect earnings to benefit from potentially higher-return, non-regulated operations and from customers switching from more expensive fuels to natural gas.
During the first six months of FY20, cash flows from operations were $179.1 million, compared with $171. operations during the same period in FY19. The increase was primarily due to decreased working capital requirements and reductions in the value of gas in storage. NJR does not have any material long-term debt maturities until September 2022.