What Does Energy Freeze Mean for Utility Stocks?

The Labour Party's proposed freeze of gas prices could result in significant value impairment for UK utilities such as SSE, Centrica and National Grid

Charles Fishman 26 September, 2013 | 11:04AM

In a surprise announcement, the UK’s Labour Party proposed freezing power and gas prices from 2015 to 2017, a move that could result in significant value impairment through lower investor returns for UK utilities such as SSE, Centrica, and National Grid. The proposal also would replace Ofgem with a more powerful regulatory body, potentially jeopardizing the constructive regulatory environment that supports our earnings and dividend growth forecasts for SSE and National Grid.

We think the proposal is unlikely to become policy in its current form and are reaffirming our fair value estimates for SSE ( SSE) (£16.70 per local share, $26 per ADR share), Centrica ( CNA) (£3.80 per share), and National Grid ( NG.) (£8 per local share, $60 per ADR share). We also are reaffirming our narrow moats and stable moat trends for all three utilities but would consider downgrading our moat trends if the proposal were to gain traction. SSE and Centrica would face the biggest impact because of their retail operations. National Grid likely would be less affected because it has no retail operations.

Ofgem's newly instituted eight-year rate cycle supports our forecast for £7.2 billion of generation and transmission investments in 2013-17 at SSE, and National Grid's recently approved plan to invest £20 billion in UK electric and gas infrastructure in 2013-21. The investment plans and regulatory structure support our 6% regulated asset value growth and 5% dividend growth forecasts for SSE and National Grid.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Centrica PLC50.12 GBX0.04
National Grid PLC881.00 GBX0.59
SSE PLC1,553.00 GBX0.39

About Author

Charles Fishman  Morningstar Equity Analyst, Equity and Credit Analysis

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