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National Grid Transco full year results
Full year turnover at National Grid Transco was down 4.0% to £8.5bn with operating profits (before exceptionals and goodwill) flat at £2.2bn. With about 45% of the sales generated in the US, the weakening of the dollar reduced operating profit by £65m (2.9% of operating profit). At CER, operating profits were up 3.0%. Business to be disposed of (the four UK gas distribution businesses) generated 15.6% of the operating profit, with acquisitions adding 1.8% to operating profit. Operating profit on existing business (i.e. excluding those to be disposed of) was up 5.3% to £1.8bn indicating good performance in the retained businesses.
The sales of the gas distribution network is expected to be completed in June 2005. The 5.8bn proceeds will be used to return £2.0bn shareholders with the remainder used to repay debt.
All business increased profits, with the exception of the UK gas distribution business. Operating profits were £146m below last year at £570m (25.8% of operating profit). More than half the decrease in profits was due to National Grid spending more on maintenance capital. Though under current accounting rules such expenses are treated as costs, such costs increase regulatory capital (i.e. the value of the assets as seen by the regulator). This effectively increases future revenue (through higher tariffs set by the regulator). In the future, under new accounting regulations such expenditure will not be treated as an expense, and will be capitalised and depreciated over the useful economic life, reflecting the economic reality of the expense.
All business in the US generated higher profits in dollars, but in sterling total operating profit across all businesses was 1.8% lower at £618m. At CER, operating profits were up 7.5%. The weakening of the dollar wholly eroded the US profit growth. This could easily go both ways.
National Grid Transco reports good cost control, continuing to reducing “controllable” costs. For example, controllable costs were 23% lower in real terms since March 2002 in the UK gas distribution business.
Free cash flow per share of 27.5p is 76% of EPS. National Grid Transco increased full year dividends by 20%, and will increase dividends by 7% per year over the next three years. This year’s dividend of 23.7p is 87% of the free cash flow per share leaving little room for dividend growth to be financed from free cash flow unless the company continues to increase profits and improve cash flow.
National Grid Transo’s share trades at a prospective PE of 13.0× (at 516.75p) in line with the sector as is the 5.0% yield. The management is willing to scale down operations and return money to shareholders is positive as it suggests a strong focus on shareholder value.
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