More on National Grid
National Grid: 2006 results
National Grid reported flat business operating profits for the year to March 2006.
The company defines “business operating profits” to exclude exceptional items and certain non-cash mark-to-market remeasurements (ie write downs or write ups to bring values in line with current prices) of commodity contracts and financial instruments that are held for economic hedging purposes; which gives (in our opinion) a reasonable assessment of operational performance.
The company’s statutory accounts showed a 14% increase in operating profits and a 28% increase in pre-tax profits.
National Grid owns and operates the high-voltage electricity transmission network in England and Wales and Great Britain’s principal natural gas transportation system.
The company’s business operating profit rose 3% (to £2,527m) which was partly due to increased efficiencies, particularly in UK gas distribution. A full-year contribution from its Wireless infrastructure business and volume growth in the US also helped.
UK gas distribution reported a 14% increase in profits to £483m compared with £424m last year. A cost cutting programme delivered savings of £52m. Cost control in the gas business appears to have been very successful with controllable costs (excluding increases in ongoing pension costs) said to have decreased by 17% in real terms this year, and by 35% in real terms since March 2002, representing cumulative savings of around £375m.
The small wireless infrastructure business reported strong growth with operating profit rising to £75m, compared to £42m last year. A full year contribution from the enlarged business and cost savings were responsible for the growth.
High depreciation costs (up £83m) offset operating profit growth (up £70m) in the transmission business. In the US distribution business a £23m increase in pension costs offset an increase in operating profits.
The company is planning a huge expansion programme, which is expected to cost £12bn over the next five years. A large chunk (£9bn of the investment) will be in the UK transmission system which is needed to accommodate the nation’s switch from being self-sufficient in gas to becoming a large importer. The largest single investment will be a connecting pipeline between LNG terminals at Milford Haven and the existing national gas grid. A further £2bn is to be spent on the US business and the rest set aside for other investments.
In the short-run, given the massive investment planned, we can expect further increases in depreciation charges, which may offset growth in operating profits
The main risk to earnings comes from consumer resistance to higher electricity and gas prices, and margins are likely to remain under pressure dampening growth prospects.
The share trades at 604p, on a prospective PE (2007 earnings) of 12x with a yield of 4.9%.
Random picks: Bradford & Bingley | British Airways | Colt | De Vere | Pearson | Marconi | McCarthy & Stone | Misys | Next | Spirent