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20 | 28Th NovEmbEr - 4Th DEcEmbEr 2014 | UTILITY WEEK Finance & Investment Analysis O ver the past month, there has been a flurry of news from the UK energy sec- tor as the leading energy companies have updated the market on current trading conditions. Centrica's Interim Management State- ment (IMS) released last week set out the many challenges that it currently faces, aside from the impact of Ed Miliband's proposed 20-month energy price freeze. Its IMS confirmed that mild weather had reduced average residential gas consump- tion in the first ten months of this year by a whopping 21 per cent, compared with the same period in 2013. On the nuclear front, the ongoing prob- lems at the Heysham 1 and Hartlepool plants, in which Centrica has a 20 per cent stake, have also reduced expected revenues. Furthermore, with the pronounced fall recently in the benchmark Brent crude oil price, Centrica has had to pare back its earn- ings per share (EPS) expectations. The range for the 2014 full year is now 19p-20p compared with 21p-22p previously. For 2015, projected growth may well be hit by weak oil prices. Given the many challenges facing Cen- trica on the political and regulatory fronts, these factors raise real questions about the sustainability of Centrica's ongoing dividend level. A cut next year certainly cannot be discounted. With new management in place, Centrica is expected to ring the changes in 2015, espe- cially once May's general election has taken place. And, on a positive note, Centrica's bal- ance sheet, with net debt of £5.2 billion, is in far better shape than those of the other inte- grated energy suppliers. SSE recently published its half-year results. The key numbers looked satisfactory, with adjusted EPS up by 5.8 per cent at 31.2p; the dividend, too, inched up to 26.6p. With electricity distribution and transmis- sion operating profit exceeding £310 million for the six months, SSE looks well placed. But, on the generation front – like its competitors – SSE certainly has challenges. Although the Electricity Portfolio and Management (EPM) and Generation division did report an operating profit, it was – at below £12 million – decidedly modest. Aside from recurring weak spark spreads, SSE was also affected by the fire at the Ferrybridge plant in Yorkshire, which sub- stantially reduced output. Furthermore, its much-cherished renew- able generation portfolio seriously under- performed. Over the past six months, lower wind speeds contributed to a decline of no less than 22 per cent in onshore wind output compared with 2013. SSE is also seeking to sell some £1 billion of surplus assets in order to lower its near £8 billion of net debt. With its 2015/16 EPS forecast being similar to this year's full-year figure, SSE is review- ing its existing asset base and exerting greater rigour in determining its investment programme. In its own IMS earlier this month, Power confirmed that trading conditions were chal- lenging, although it did conclude forward sales at approximately £52/MWh. Considerable focus has been on its quest to secure further lavish biomass subsidies – and its share price has reacted accordingly. Drax also indicated that its 2014 full-year earnings expectations remain unchanged. Compared with the big six integrated energy companies, National Grid – with a market capitalisation of approximately £35 billion – finds itself in an enviable position. Much recent public comment has con- cerned the possibility of widespread power cuts – not just this winter, but beyond – and the various measures that National Grid is taking to minimise the chances of blackouts. Its recently issued – and very solid – half- year figures were well received by the mar- ket, while its current share price is close to a record high as investors increasingly value the comfort of its eight-year UK regulatory deal with Ofgem – and the robust dividend payments that it underpins. At the 2014/15 half-year, National Grid reported operating profit from its UK elec- tricity and gas operations of more than £1.2 billion; no wonder chief executive Steve Holliday stated "the UK is performing well". National Grid's US business is also recov- ering, although major price filings are com- ing up in both Massachusetts and New York. Significant progress was also reported in reducing interest payments – down by an impressive 19 per cent over the comparative period last year. With net debt now just shy of £22 billion, such savings are undoubtedly material. National Grid also confirmed a London- centric property deal with the flourishing Berkeley Group, run by Tony Pidgley Senior; this joint venture will build houses on redun- dant brownfield sites. The four overseas-based members of the big six still face major challenges as the eurozone finds sustained recovery elusive. France's EDF reported an underlying 1.3 per cent fall in revenues over the first nine months of 2014. While French nuclear output has risen, EDF's UK revenues were flattered by a major currency gain – but the Heysham 1 and Hartlepool outages had a marked negative impact. EDF is still confident of growth in earn- ings before interest, taxes, depreciation and amortisation (Ebitda) for this year, if its Edison division is stripped out. Importantly, too, aer many years of Testing times for trading Statements from the energy giants about their trading conditions reveal that the majority are facing a number of challenges – which is bad news for their share prices, says Nigel Hawkins. cenTrica'S adjuSTed expecTaTionS Full year adjusted earnings per share for 2014 are now expected to be in the range 19-20p, compared with a range of 21-22p at the time of the company's interim results. The change was blamed on mild UK weather in the second half of the year so far, trading conditions for British Gas, and the impact of boiler spine inspections at the Heysham 1 and Hartlepool nuclear power stations. British Gas Residential post-tax margins are expected to be around 4 per cent this year, lower than long-term expectations. For 2015, the company expects group adjusted earnings to grow. Weather conditions are expected to return to normal, increasing underlying profit in retail energy, but Centrica warns that it could be significantly hit by lower oil and gas prices on its upstream business, and a higher effective upstream tax rate as small field tax allowances in 2014 are not repeated.