UK Centrica has 'Disappointing' Half

UK dominant retailer Centrica is expecting a "disappointing" second half year on both sides of the Atlantic, it said November 23 and its shares lost 15% on the day.

It said it would underperform this year against consensus, mostly thanks to weaker US and UK Business energy supply sectors, and trading conditions "continue to be highly competitive and performance delivery since mid-year within the Centrica Business energy supply businesses has been disappointing." However it was not all bad news: asset sales – power plants and upstream gas – had yielded £946mn ($1.2bn), close to the top end of its expectation of £0.5-1bn. 

CEO Iain Conn said he was pleased with the progress made so far as the company, like its French and German counterparts Engie and E.on, withdraws from upstream activities – which were once key to its strategy – in order to become more retail-focused. But it has lost 820,000 customers in the UK since June. It expects to report operating cash flow above £2bn and to see efficiency savings approaching £300mn, in excess of the original £250m target, and in addition to 2016 savings of £384mn.

"The balance sheet has been materially strengthened, and we continue to focus on improving our underlying performance. We have also provided a broad and definitive set of proposals this week to improve the UK energy market for customers and look forward to engaging with the government and regulator in the coming weeks,” he said.

Higher commodity prices have helped the upstream (E&P) side of business but these gains were offset by the outage at the Morecambe Fields until late October. "We expect H2 2017 E&P adjusted operating profit to be similar to H1 2017.  In Centrica Storage, cushion gas production from the Rough asset has been stronger than expected, with up to 25bn ft³ expected to be produced in H2 2017.  As a result, the business is now expected to be profitable in H2 2017 and be close to break-even for the full year."

This is a one-shot effort as the plant is to be permanently, once the last of the cushion gas is gone: the Competition & Markets Authority is expected to confirm its mid-November decision to relieve Centrica of the statutory obligation to offer capacity to the market, which will leave the UK vulnerable to high prices if this winter drags on. 

In Centrica Consumer, efficiency gains are offsetting overall gross margin decline. In recent weeks account holdings in UK Home Services have stabilised and growth in Connected Home continues. But it is expecting a one-off non-cash post-tax charge of £46mn in North America Business, relating to a reassessment of the historic recognition of unbilled power revenues.  In the asset businesses, the Morecambe field is back on production and Spirit Energy, Centrica’s E&P joint venture with Stadtwerke Munchen, is on target to close before the end of the year, subject to regulatory approvals. It is spinning off other upstream gas assets into a joint venture with Bayerngas with a view to later sale.