National Grid's revenue rose 17% to £21.7bn. Underlying operating profit grew 10% to £4.6bn, ignoring the impact of exchange rates. This reflects a full year contribution from UK Electricity Distribution as well as strong performances from the UK Electricity System Operator and Ventures division. This helped underlying earnings per share (EPS) grow from 65.3p to 69.7p.
Net debt fell 4% to £41.0bn. Free cash flow fell from £1.2bn to £660m as the group spent more on physical assets.
Due to the previously announced change in the UK Government's capital allowance regime, there is set to be a 6-7p impact per share meaning underlying EPS is expected to come in lower this year. Longer term guidance out to 2026 remains unchanged.
A final dividend of 37.60p per share has been recommended, taking the full-year dividend up to 55.44p representing growth of around 8.8%.
The shares were broadly flat following the announcement.
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Our view
As the energy landscape changes, National Grid's full-year results showed good progress in its attempt to plant itself at the centre of the electric revolution. Its strategic pivot is now complete, with its portfolio of assets now weighted 70% towards electricity.
Not stopping there, capital investment increased by 8% to £7.7bn last year in a bid to drive the energy transition forward. That number's expected to rise above £8bn this year, with a good chunk of that ear marked for the decarbonisation of energy networks.
In return for investing those billions to maintain and upgrade its infrastructure, regulators allow National Grid to earn a reasonable profit, with the potential to earn more if it exceeds targets. That translates into predictable revenues, low borrowing costs, and feeds into what should be a relatively dependable dividend. But remember, no dividend is ever guaranteed.
The regulatory environment can be a double-edged sword, though, as regulators have the final say over National Grid's profit potential. As the government prepares for the UK's electric future, the group was forced to give up control of the networks it owns by separating the Electricity System Operator business. This serves as a reminder that National Grid's fortunes aren't completely under its own control.
The ongoing cost-of-living crisis is another to National Grid's profits. As the drive for electrification accelerates, the group's needing to invest heavily to prepare for an influx of electric connections. In the past, Ofgem has rewarded investment with permission to improve profits, but the recent surge in energy costs means consumers are already struggling to pay their bills. That's put a lot of pressure on regulators to start slicing into utilities' profits which could put a brake on future growth.
A recent change in the UK Government's capital allowance regime throws a spanner in the works for hitting this year's earnings target too. However longer term, the associated impacts look to be negligible, so we're glad to hear guidance for 6-8% annual earnings growth out to 2026 remains unchanged.
There's also the impact of higher interest rates on the cost of debt. Finance costs rose 43% last year as repayments on index linked debt rose. The rise was absorbed, and then some, by higher profits but it's something to keep an eye on moving forward.
National Grid has the traditional pros of a utility, but also growth opportunities - a rarity for the sector. And we commend its willingness to pounce on shifting energy trends. Compared to some peers, the valuation doesn't look too demanding. But potential investors should be aware that to a large extent, the group's fortunes are in the hands of the regulators.
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