Two FTSE-100 Listed Utility Stocks Facing Cost Pressure Amidst Covid-19 Outbreak: Centrica & National Grid

The Gas, Water Multi-Utilities Companies, Centrica PLC and National Grid PLC have released their trading update recently. Let’s walk through the business model, financial performance, strategies, outlook and recent developments of both the companies.

Centrica PLC (LON:CNA)

(Source: Company Website)

Centrica PLC is a British multinational energy service and solutions company, with major operations in the UK, Republic of Ireland, Canada and the US. It is operating with three business segments, namely Centrica Consumer, Centrica Business and Upstream. Let’s discuss segments briefly below:

• Centrica Consumer: Manages - supply of gas and electricity to residential customers to residential and commercial and industrial customers, the installation, repair and maintenance, power generation and the supply of new technologies and energy efficiency solutions.
• Centrica Business: Engaged in the supply of gas and electricity and provision of energy-related services to business customers and trading counterparties in the UK and North America, the generation of power from the Spalding combined cycle gas turbine and other thermal assets, the procurement, trading and optimization of energy.
• Upstream: Manages the production and processing of oil and gas and development of new fields, especially within Spirit Energy. It is also engaged in the generation of power from nuclear assets in the UK.

Lower Carbon Business Model Generating Returns and Growth

Centrica believes in providing an extensive range of energy services and solutions to residential and businesses with an emphasis on lower-carbon future. Their long-term goals comprise solutions for tackling climate change, innovative services for convenience and creating a stronger community with a talented workforce. The group considers that the following three fundamental trends will impact the industry landscape in future:

• Decentralization: Requires lower carbon and more efficient solutions to reach the consumer as closer as possible.
• Shifting of power to the customer: It will impact alternatives and choice of energy solutions.
• Digitalization: Technological advancement at the level of both physical and digital framework.

Their growth priorities and long-term focus can be seen in the pictures below:

(Source: Annual Report)

Strategic Framework and Focus Areas for Sustainable Growth

The Group states their medium-term objectives as

• Generating customer-led growth in gross margins.
• To become ‘most efficient price setter’ by driving competitive cost-efficiency.
• Organization efficiency and effectiveness.
• Meeting the targets and maintaining capabilities for upcoming years.
• Disciplines capital structure with a robust balance sheet position.

Focus Areas for Long-term Growth

• Energy Supply
  • Gas supply
  • Electricity supply

• In-home Servicing
  • On-demand maintenance and repair
  • Charging point installation for electric vehicles
  • Warranties and Protection plans
• Home Solutions
  • Monitoring and security-related services
  • Remote diagnosis
  • Smart home and appliances control
  • Energy management
• Energy Optimization
  • Asset optimization
  • Access to energy, capacity and flexible markets
• Business Services & Solutions
  • Multi-technology solutions
  • Design, install, maintain and service
  • Energy resource management and monitoring
  • Operational insights from energy data
  • Preventive maintenance

Recent Developments that would Impact the Future

• 17 March 2020: Scott Wheway was appointed as a new chairman of the board while Chris O’Shea has been appointed as Interim Group Chief Executive until Company finds its permanent CEO.
• 4 March 2020: Centrica and Volkswagen had announced a partnership for installing home charging stations for better Electric Vehicle adoption.
• 25 February 2020: Partnered with Centrais Elétricas de Sergipe S.A. and hence, enabling the Brazil’ Liquefied Natural Gas terminal for import purposes.

Key Financial Highlights that Could Impact from COVID-19 Pandemic

• For the financial year 2019, the group revenue included in business performance decreased by £0.6 billion or 2% to £26.8 billion (2018: £27.4 billion), driven by the environment was challenging for Centrica’s portfolio in 2019. Profit for 2019 from business performance reduced to £428 million (2018: £658 million), and after adjusting for non-controlling interests, adjusted earnings tumbled 34% to £419 million (2018: £631 million). This reflects the overall decline in adjusted operating profit, partly offset by the lower net finance costs and adjusted tax charge.
• Meanwhile, the total recordable injury frequency rate for FY19 surged by 4% to 1.06 per 200,000 hours worked. The internal carbon footprint (tCOe₂e) stood at 55,145† (39% reduction against baseline) in FY19. Improvements in customer service, enabled by digital transformation, contributed to the aggregated NPS (Brand net promoter score) improving by 5.1 points.
• As per the recent trading updates, there is a reduction in Brent Oil prices from the previous preliminary results (as on 13^th February 2020) is estimated to negatively impact Exploration & Production AOCF (Adjusted earnings and adjusted operating cash flow) in 2020 by approximately £100 million, representing about the Upstream division. Further, the company has seen additional outages at the Hinkley Point B and Dungeness B nuclear power stations. Considering the ongoing COVID-19, the company has slashed the capex by approximately £100 million and nearly £400 million in Spirit Energy. Following the current situation, the Board has decided not to pay any bonuses relating to 2019, bonus payments have been paused to all other management, and it will be reviewed when the global environment is clear. The Group’s Board has cancelled the 2019 final dividend per share payment of 3.5 pence. The group has stalled its disinvestment plans for Spirit Energy.
• The management stays committed to maintaining a robust balance sheet, with £0.6 billion of available cash and cash equivalents (net of bank overdrafts) and 2.7 billion of undrawn credit facilities at the end of March 2020. The company has got the credit rating through S&P confirmed a BBB (stable) on 31 March 2020 and Moody's confirmed a Baa2 (stable) on 13 March 2020.

Share Price Performance over the last 1 year

Daily Chart as of April 3^rd, 2020, before the market close (Source: Thomson Reuters)

Centrica PLC’s shares were trading at GBX 30.5900 at the time of writing before the market close (at 10.05 AM GMT) on 3^rd April 2020, down by 9.82% versus the previous day closing price. Stock's 52 weeks High is GBX 115.00 and Low is GBX 30.53.

Business Outlook Reflecting Crucial Movement

The company is focusing on growing customer relationships and delivering further efficiencies which could benefit in the growth of the company. Improved retail power margins in business energy supply in North America could improve the financials of the Group. The company is anticipating reduced losses in Home Solutions and Business Solutions segments. In 2020, the business is targeting an additional 350 million pounds of efficiencies in the core programme, which is expected to result in exceptional cash restructuring costs of approximately £300 million. Centrica stays on track to have delivered cumulative efficiencies of £2 billion over the period 2015-2022. In FY2020, the Group expected capital expenditure of around GBP 800 million in the expansion of its business. The total cash outflow from the 2019 final dividend was projected to be £204 million. Presently, there is only one crucial thing that could hamper the financial and operational performance, i.e. COVID-19 outbreak. However, the management is committed that the company has acted prudently to reinforce the long-term strength of CNA.

National Grid PLC (LON: NG.)

National Grid PLC is operating as a multi-utility investor-owned company, providing electricity and gas in the United Kingdom and the United States. It is committed on transmission and distribution of electricity and gas.

Business functioning to Create Value

In a nutshell, the group provides the transmission of the heat, light and power that customer needs to their homes and business.

For this, they rely on their physical assets across the UK and US, adhere to regulatory guidelines and maintain a relationship with stakeholders; and by using their technical expertise, they serve customers with reliable and sustainable energy solutions.

Strategic Priorities for Building Foundation of Future

The group states three strategies focus on achieving future vision:

• Find new ways of optimizing our operational performance
  • Creating new ways to improve performance and build future capabilities.
  • Customer-focused approach while yielding productivity.
• Growing business through new opportunities
  • Capture opportunities lying in electricity and gas transmission in the US.
  • Opportunities pertinent to United Kingdom’s Interconnectors and competitive onshore transmission
• Make sure National Grid is better equipped for the future
  • Building the operational network to meet future demands.
  • Focusing on National Grid Ventures in the US and UK
  • Example: the group has partnered with Sunrun (a residential solar company in the US) for improving capability in energy distribution space.

(Source: Annual Report)

Recent Actions to Ponder Over

• 2 April 2020: The Group appointed Badar Khan as the president of US Business. He has been working as interim President since November 2019.
• 26 March 2020: Announced donation of £500,000 to aid the National Emergencies Trust amidst coronavirus crisis.
• 27 January 2020: The group has partnered with Natural England and a local landowner to install a tilting weir on Tickenham Moor Site.

Key Financial Highlights

• For the first half of the fiscal year 2020, the company’s underlying operating profit grew by 1 per cent to GBP 1.3 billion due to an increase in US Regulated profits. Led by a US tax settlement relating to prior periods, the underlying EPS of the company increased by 2 per cent to 20p. Statutory profit before tax decreased by 23% and earnings per share dipped by 11 per cent in H1 FY2020. The company’s capital investment rose by 28 per cent to GBP 2.72 billion, driven by an increase in US capital spending. The Board declared a dividend per share of 16.57p in the first half of FY20.
• In the first six months of the year, the net debt surged to £27.8 billion and represented an increase of £1.3 billion from the previous period (31st March 2019). The company also raised more than £2.4 billion of new long-term financing during the first half of the financial year 2020. On 30th September 2019, the cash equivalents and current financial investments stood at £3,619 million, an increase from the previous period (31 March 2019: £2,233 million).
• From the perspective of pre-close update ahead of 2019/20 full-year results, the company is expected to be in line with previous guidance. The balance sheet stays robust, with £5 billion of undrawn committed bank facilities.

Share Price Performance over the last 1 year

Daily Chart as of April 3^rd, 2020, before the market close (Source: Thomson Reuters)

National Grid PLC’s shares were trading at GBX 849.00 at the time of writing before the market close (at 10.04 AM GMT) on 3^rd April 2020, down by 2.53% versus the previous day closing price. Stock's 52 weeks High is GBX 1,073.80 and Low is GBX 772.50.

Business Outlook for FY20 – Reflecting Decent Growth Drivers

Due to COVID-19 chaos, the company intend to publish full-year results in mid-June. The company expect to deliver underlying earnings for the financial year 2020, before any coronavirus (COVID-19) impacts, in line with the technical guidance provided at the half-year results last November 2020. Presently, there is no material impact on the financial performance as a result of COVID-19. However, the company is starting to see some delays and disruption to the capital programme. In the US, the group has suspended debt collection. The UK business is expected to stay on track to deliver continued performance. In the near term, the company anticipates delivering asset growth of approximately 7% with around 5 billion pounds of annual capital investment. The company is increasing the National Grid’s emissions reduction target from 80 per cent to net-zero by 2050, underlines the commitment to lead the industry towards a cleaner energy future.

Comparative Stock Performance of Centrica PLC & National Grid PLC with FTSE-100 Index

In the last one-year, CNA and NG share price has decreased 72.51 per cent and increased 1.48 per cent, respectively as compared to the FTSE 100 index performance.

(Source: Thomson Reuters)

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