Latest news from integrated gas and electricity company Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US) is that its North American subsidiary, Direct Energy, has agreed to sell its Ontario home services business to EnerCare in a deal that will raise around £300 million.
In the scheme of Centrica’s overall operations that’s a minor deal amounting to a spot of nipping and tucking. Right now, bigger fish droop over the edge of the firm’s frying pan as it searches for its next CEO. The directors have their sights set on one of BP‘s directors, Iain Conn, who is in discussions with Centrica and has just announced his resignation from the BP board.
Replacing the occupant of the top seat in a company is never an insignificant event, but in this case, it seems neutral for Centrica’s dividend prospects. Centrica looks set to lumber on regardless.
Diverse operations
Centrica is more than just a utility company. With both upstream and downstream operations in roughly equal proportions, the firm seems well diversified in terms of its operations.There’s also a good geographic spread. Last year, based on location of customer, 66% of Centrica’s revenue came from the UK, 28% from North America and 6% from the rest of the world.
Downstream activities supply both gas and electricity, as British Gas in Britain and as Direct Energy in the US. This utility part of the business delivers steady cash flow to support Centrica’s handsome dividend record.
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
| Net cash from operations (£m) | 2,647 | 2,428 | 2,337 | 2,820 | 2,940 |
| Dividend per share | 12.8p | 14.3p | 15.4p | 16.4p | 17p |
The added excitement for investors comes from upstream operations, which include 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.
Keeping the cash pumping
It isn’t always easy for energy utilities to turn a profit from downstream operations. Warm periods in winter months can quash demand reeking havoc with profitability and cash-flow budgets. The cash availability enables the dividend, of course, and last year Centrica forked out £862 million on dividend payments, which seems well covered by cash flow. However, maintenance and growth capex competes with the dividend for that incoming cash, which if found wanting, can lead to a situation where debt increases. Indeed, absolute debt levels have risen:
| Year to December | 2009 | 2010 | 2011 | 2012 | 2013 |
| Borrowings (£m) | 4,680 | 4,036 | 41,71 | 5,328 | 6,031 |
At the end of last year, net debt ran at around 1.8 times net cash from operations, which seems a manageable debt load.
However, cash flow and debt are two indicators to keep an eye on when judging the security of the dividend. We’ll find out more about Centrica’s progress financially with the half-year results due on 31 July.
What now?
At a share price of 313p, Centrica’s forward dividend yield is running at around 5.8% for 2015, with analysts predicting around 1.4 times cover from forward earnings.
