Centrica ‘on track’ despite hits to British Gas

Centrica expects to deliver full year earnings in line with expectations while pushing ahead with its new strategic vision despite a weaker performance from supplier British Gas.

British Gas residential profit margins are expected to be “materially lower” in the second half of the year after the supplier offered customers a second tariff cut this year.

In addition, its business energy supply unit is expected to report an operating loss for the second half of the year after billing problems plagued the supplier as a result of new IT systems.

But parent company Centrica said that the group nonetheless expects to report full year earnings in line with expectations and “remains on track” to deliver a baseline level of over £2 billion in 2015 in the company’s adjusted operating cash flow.

In July this year the company concluded a six month strategy review with new plans for a raft of investments in its customer facing businesses totalling £1.5 billion over the next five years through a focus on energy supply, services, distributed energy and power, the connected home and energy trading.

The new group strategy will be effective from 1 January 2016 but Centrica said it has already established Connected Home, Distributed Energy and Power (DEP) and Energy Marketing and Trading (EMT) business units.

“Connected Home has now sold over 250,000 smart thermostats in the UK and 3 million customers now have access to our analytics and insight products in the UK and North America,” Centrica said.

The strategy shift towards its customer-facing business comes at the expense of its beleaguered upstream E&P and centralised energy investment, however these units have still shown solid operating performance over the second half of the year, according to the trading statement.

Centrica said its E&P oil and gas production is now expected to be above 75mmboe, which is higher than previous guidance and reflects continued good well performance. In addition the negative impact of Rough’s gas storage capacity cut earlier this year is expected to “be broadly offset” by the sale of storage facility’s cushion gas.

Centrica’s share in the UK’s nuclear fleet will also boost the group’s overall earnings after good operational performance and stronger output year on year.

Centrica chief executive Ian Conn said 2015 had been a “difficult year” for the company against a backdrop of continued weakness in commodity prices and power generation margins.

“Against challenging external factors Centrica is establishing a solid base from which to deliver for our customers and shareholders. We are seeing underlying performance improvement against a softening commodity market, and have concrete plans for executing our strategy,” Conn said.

Centrica said it will provide more detail on its strategic progress in its 2015 preliminary results announcement on 18 February 2016.