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Solid Credit Metrics, Weak P&L

14 February 2020 by jbchevrel

Centrica plc (CNALN) is the U.K.’s biggest domestic energy supplier (incl. British Gas and Direct Energy). It is an integrated energy company offering home and business energy solutions. That credit belongs to the Main index since series s05. Rated Baa1n/BBB for currently 82bp on the 5y, it is the 8th widest name in Main index s32, 7th widest name in non-financial Main index s32. Yesterday, this CDS was the worst performing in Main on weak results for FY 2019, despite credit highlight indicators kept in line with previous guidance and market consensus. Indeed, in the autumn they had guided on FY £1.8-2b OCF, EOY net debt £3-3.5b, FY capex £800m. Yesterday, net debt was reported £3.2b as of the end of 2019 (i.e. up +£525m, of which £394m come from lease adjustments) roughly the middle of what had been guided. And going forward, net debt was guided at £3.2-3.6bn before disposals, for the end of FY 2020. Adjusted Operating Cash Flow came £1830m (-18%). This was also in line with previous guidance. CNALN is targeting cash neutrality in FY 2020, although Cash Flow guidance for 2020 has been lowered from £1.8-2b to £1.6-1.8b. This is due to the weaker commodity price outlook. The dividend has also been cut -58%: final dividend per share was announced at 3.5p per share vs. 8.4p a year ago. Now the widening is probably due to the weak part, the P&L side, which took the stock down. CNALN indeed reported weak FY 2019 results with an adjusted EBIT down -35% oya to £901m, below consensus (£975m median point, with a range £901m - £1.09b of analyst’s estimates registered on Bloomberg). They booked a net exceptional charge before tax of £1.1b. The write-down also includes restructuring costs of £356m. Thus interestingly, CNALN became the 1st energy company to book a major write-down on production assets (E&P arm) in Europe as the global natural gas glut slashed valuations. The causes for the slump in the heating and power-plant fuel that’s sent gas prices to their lowest level in 10y in Europe include a not-cold-enough winter and what’s going on in China as well.