Centrica reported 2012 adjusted EPS of GBP 0.27, in line with consunsus estimates and an increase over 2011 adjusted EPS of GBP 0.26. Although the company did not provide 2013 earnings guidance, management did update investors on its five-year outlook.

Investors were pleased to see British Gas grow operating profit 8% in 2012 versus 2011 despite pressure from higher energy costs that have reduced margins. The U.K. does not benefit from shale gas like the U.S., creating significantly higher energy costs for consumers.

As the U.K.’s largest energy supplier, the company has taken the brunt of the public criticism of higher utility bills and could face regulatory pressure that could affect future profitability of this business unit. In the U.S., Direct Energy has benefited from low gas and power prices, reducing customer switching. In management’s strategy presentation, we were not surprised to see them focus on opportunities at Direct Energy to pursue bolt-on acquisitions and leverage existing customers with additional products and services.

Centrica also appears to be successfully executing its hedging strategy. The company is projecting significant increases in oil and gas reserves, driven by its Norwegian asset acquisitions. Management expressed confidence they can achieve their production goal of 75 million barrels of oil equivalent (MMboe) per year by the end of 2013.

In U.K. power generation, new investment depends on significant regulatory outcomes, especially for capacity payments. Spark spreads remain low for Centrica’s gas-fired power plants. Earlier this month Centrica announced it would not participate in new nuclear build in the U.K. Management cited the lengthening time frame for return of capital invested in these massive projects as an unacceptable risk for Centrica shareholders.


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