As is often the case in life sometimes, enough elements will build up and move you to look more deeply at something. Your own health could be a good example — you might notice a few warning signs that prompt you to visit your GP! Today, though, it involves re-visiting Centrica (LSE: CNA) and SSE (LSE: SSE).
The British gas and electricity companies have both had a few things going for them recently, but also have quite a number of things stacking up against them — so it’s worthwhile getting out the magnifying glass.
Pricing
Around 50 energy companies lined up last month to take part in an auction. Why? Well, in order to secure capacity payments. In return, the companies make a promise to keep their plants available during periods of peak demand.
Centrica secured 49 gigawatts of capacity were for delivery in 2018-19 at a price of £19.40 per kilowatt. Its stock rose 0.5% on the news that it was a beneficiary of some of the available pay-outs. Considering the demise of its share price over the past six months, it must have been cold comfort for investors. Energy security is an issue in Britain but, despite the hype, it’s probably not something that will make or break Centrica in the next decade.
SSE said it was pleased that the majority of its plants were successful in the first Capacity Market Auction but said it would continue to analyse market conditions and opportunities for all their plants going forward. Lead balloon, methinks…
Politics
What could boost Centrica’s bottom line is lower wholesale gas prices. Just like oil, the price of natural gas has fallen significantly over the past 12 months. Outgoing CEO Sam Laidlaw would like to pass that onto customers, but says the government’s financial commitment to wind farm projects and green energy is hampering that, commenting:
“By the end of this decade, under current plans, we’ll be spending £7.6 billion a year through the levy control framework, much of it to support wind turbines that have not come down in cost.”
In addition, if Labour wins the next election, it plans to impose a two-year price freeze on energy companies. The result of all this of course is a price squeeze for Centrica.
As far as SSE is concerned, the energy provider announced last year that it would put a freeze on its household electricity and gas prices until at least January 2016. That’s the longest price freeze the energy market has seen to date. Expect the company to be heavily focused on costs over the medium term.
US exposure
Centrica’s US operations are set to contribute further growth for the company in 2015. Laidlaw has gone so far as to say that this year Centrica will be selling more gas in North America than in the UK. The energy company will also benefit from the rising US dollar and the growth of the US economy. However, SSE doesn’t have US exposure.
Other considerations
Centrica has issued three profit warnings within the past 12 months. With a price-to-earnings ratio of 15, a dividend –- by one measure — of 6%, and dividend cover of 1.5, it’s clear the company is by no means on its last legs. However, any skim of recent news and you’ll notice Centrica’s had its fair share of challenges over the past 12 months.
Centrica’s customer satisfaction statistics seem to be going in the wrong direction, too. The gas company said last week that it’s lost 50,000 British Gas customer accounts since July.
In addition, the falling price of gas, while potentially helping to bring down costs, is hurting the company’s exploration activities. That’s a real sore point for the utility company.
Centrica’s got more than a few challenges ahead of it. It’ll be interesting to see whether a new CEO can make the future brighter for the company.
SSE’s current “principal financial objective” is to deliver annual above-inflation increases in its dividend. That should bring a smile to the face of any retiree (especially with a yield of close to 5.5%).
There’s a bit going on there. Hopefully that gets you up to speed somewhat on two very competitive players in this sector.
