Centrica Plc’s 2 Greatest Strengths

When I think of integrated gas and electricity company Centrica (LSE: CNA), two factors jump out at me as the firm’s greatest strengths and top the list of what makes the company  attractive as an investment proposition.

Diverse operations

Despite a difficult trading environment, Centrica turned in a workmanlike set of full-year trading results recently. The firm’s financial record looks steady:

Year to December 2009 2010 2011 2012 2013
Revenue (£m) 21,963 22,423 22,824 23,942 26,571
Net cash from operations (£m) 2,647 2,428 2,337 2,820 2,940
Adjusted earnings per share 21.7p 25.2p 25.6p 26.6p 26.6p
Dividend per share 12.8p 14.3p 15.4p 16.4p 17p

British utility providers seem to be having their time in the spotlight of scrutiny just now, but it doesn’t appear to be easy for our energy suppliers to balance the books for profitability. Demand for energy is a variable number, influenced by factors such as differing weather patterns from year to year. Downstream energy suppliers also have to contend with fluctuating wholesale prices, which can also make it hard to turn a profit.

centrica / sseCentrica is different to some utility providers because it derives profits from both upstream and downstream operations roughly equally. Last year, based on location of customer, 66% of revenue came from the UK, 28% from North America and 6% from the rest of the world. The firm’s downstream operations supply both gas and electricity, as British Gas in Britain and as Direct Energy in the US. Upstream operations, involve oil and gas exploration, production and storage activities; owning and operating combined cycle gas turbine (CCGT) electricity-generating power stations; offshore wind generating operations; and a 20% stake in EDF Energy’s UK nuclear power stations.

Diverse operations like that constitute a reassuring feature to underpin an investment in Centrica.

Under-control debt

Some utility companies, particularly those supplying water services, seem burdened with high debt. Maintaining and improving distribution infrastructure is a capital-intensive business. On that point, Centrica appeals because of the way it seems to have debt under control. Net debt is running at around three times the level of operating profits, which looks comfortable. The firm’s record on debt looks like this:

Year to   December 2009 2010 2011 2012 2013
Net debt (£m) 3386 3569 3653 4397 5312
Net gearing 81% 61% 65% 74% 102%

So, although the absolute level of debt is in a rising trend, gearing levels do not seem to be excessive.

What now?

Centrica’s forward dividend yield is around 5.7% for 2015 and the P/E rating is running at about 12. City analysts following the firm expect earnings to grow by around 5% that year, so the valuation isn’t excessive.

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Kevin does not own shares in Centrica