ii view: Centrica buys Severn power station for 'energy security'

AGM trading update and power station purchase

• Buying the ‘Severn’ Combined-Cycle Gas Turbine power station for approximately £370 million
• Expects full-year retail generated adjusted profits (EBITDA) at the bottom of a £500-800 million range
• Expects full-year infrastructure generated adjusted profits (EBITDA) at the top end of a £500-650 million range

Chief Executive Chris O'Shea said:

"We are delighted to add the Severn power station and its talented team to Centrica. The importance of reliable, flexible generation to balance the system continues to increase, keeping energy supplies secure and affordable as the energy transition progresses. Severn will play an important role in supporting that journey.”

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ii round-up:

Centrica (LSE:CNA) today forecast annual adjusted profits that broadly matched City expectations, with the British Gas owner also announcing the purchase of a South Wales gas fired power station for about £370 million.

Unseasonally warm weather is now expected to see full-year retail related adjusted profits (EBITDA) at the bottom of a £500-800 million range. Elevated energy prices, however, should now see power station, or infrastructure profits come in at the upper end of a £500-650 million range. The Severn power station, which generates 850 megawatt, is expected to be earnings accretive from 2027.

Shares in the FTSE 100 company fell 5% having come into this latest news up by close to a quarter so far in 2026. The FTSE 100 index is up 4% year-to-date. Gas and renewable power generator SSE (LSE:SSE) is up by just under a fifth.

As well as supplying energy, Centrica also owns a 20% interest in the UK’s portfolio of existing nuclear power stations; energy storage and trading businesses; and oil and gas production assets.

The Severn power station, commissioned in 2010, brings Centrica’s flexible generation capacity to four gigawatts and is expected to produce annual adjusted profits (EBITDA) of between £30 million and £60 million from 2027.

Forecast group capital expenditure for 2026 is now expected to come in at around £1.1 billion. That’s up from a prior estimate of at least £700 million.

First-half results are likely to be announced mid-to-late July.

ii view:

Headquartered in Berkshire, Centrica employs around 20,000 people including approximately 7,000 gas boiler engineers. The group operates across three divisions: Retail, which includes its British Gas and Bord Gáis supply businesses in the UK and Ireland; Optimisation, which serves business customers as well as taking in its energy trading business including Liquefied Natural Gas (LNG); and the Infrastructure division, which includes its gas and nuclear energy production businesses.  

For investors, the weather and its unseasonal swings can cause uncertainty about customer energy demand at its supply business. An increase in expected full-year capital expenditure, while potentially beneficial long term, may reduce potential for shareholder returns in the near term. A forecast price/earnings (PE) ratio above the three- and 10-year averages may suggest the shares are not obviously cheap, while changes by the regulator and government can impact financial performance.

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To the upside, the Severn acquisition is in line with management’s previously outlined strategy and further diversifies its gas-powered exposure. Strong cashflows left Centrica with adjusted net cash of £1.5 billion as of late December, supporting both shareholder returns and required investments. A transformation programme over recent years has looked to offer a more stable platform to build on and includes planned cost cuts of £0.5 billion over 2026, while management continues to assess and invest in energy transition opportunities such as solar farms and carbon capture.  

On balance, Centrica’s target of a more stable platform in profit terms has yet to be achieved and offers room for caution. That said, ongoing investments, exposure to energy transition and a forecast dividend yield in the region of 3% all give grounds for continuing optimism.  

Positives

• A diversity of businesses
• Net cash held

Negatives

• Subject to government scrutiny
• The weather can impact

The average rating of stock market analysts:

Buy