British Gas’ parent company Centrica (CNA) has issued an Interim Management Statement discussing 2014 year-to-date performance and provided full-year guidance.
The company does not provide detailed financials but did indicate that British Gas residential energy supply revenue will be approximately 10% lower than last year and post-tax margins are now expected to be about 4%, below management's long-term guidance of 4.5%-5%. In addition to the challenging conditions in the U.K., Centrica experienced higher costs associated with the extremely cold weather in the United States. Centrica expects 2014 full-year adjusted earnings of £0.22 - £0.23 per share, well below our estimate of £0.31 per share.
Centrica also announced it plans to sell the Langage, Humber and Killingholme power stations totaling 2.7 GW of capacity to address the continuing operating loss of its U.K. gas-fired generating fleet. Management expressed confidence that its capacity from retained assets - primarily partial ownership interests in eight nuclear power stations, together with spot purchases in the wholesale market will enable it to cover the retail load requirements of its British Gas unit.
The Centrica update is troubling for two reasons: First, we are concerned that competitive pressures in the U.K. residential energy supply business will linger. Thus, we will lower our estimated long-term operating profit margin for British Gas. Second, although the gas-fired plants were not profitable in the near term, we assumed U.K. spark spreads would recover and these assets would have long-term value. In addition, the strategy of pairing generation with retail electric sales has seen success in the United States and might eventually dig a moat in the U.K.
We will be lowering our fair value estimate to £3.70 per share from £3.80 per share to reflect lower long-term operating margins for British Gas and the sale of the three gas-fired power plants. We are reaffirming our narrow moat and stable moat trend ratings.