Centrica profits down as customer losses continue

Centrica’s adjusted operating profits were down by 12 per cent year-on-year in the first half of 2016 to £853 million, as its UK Home business shed almost 400,000 customers.

The group said the drop in profits was mainly driven by low commodity prices – gas, power and oil – as well as warm weather in North America, and was offset by cost reductions.  

Adjusted operating profits for the UK Home division fell by 6 per cent to £635 million. Its customer numbers fell by 2.7 per cent over the last six months to 21.8 million, and were down by 3.2 per cent on the same time last year. Centrica blamed the losses on “long-term contract roll-offs and increased competitive intensity”. It said it gained customers in June following the launch of a new tariff. 

The UK Business division “returned to profitability in the first half, with the issues experienced following implementation of a new billing and customer relationship management system having been largely rectified by the end of 2015”. Adjusted operating profits were four times those in the same period last year at £31 million. Customer numbers were down by around 70,000 – or 9 per cent – over the last 12 months. 

Centrica increased its cash balance by more than £1 billion over the first half of the year as it braced itself for potential uncertainty following the EU referendum. This was partly achieved through a £700 million share issuance and was offset by its acquisition of combined heat and power business ENER-G Cogen for £149 million, which was completed in May. Net debts were reduced by 23 per cent year-on-year to £3.8 billion.

Centrica’s overall revenues fell by 13 per cent to £13.38 billion. The group said it made “strong progress” on in its drive to cut annual costs by £750 million by 2020. It slashed costs by £141 million in the first half of 2016 and having previously said it expects to cut costs by £200 million over the whole of the year, now expects to make savings of £300 million. There were 2,500 job losses at the group and the overall headcount fell by 1,500. Centrica said it is on track to reduce its headcount by 3,000 over the full year.

The cost reductions are part of a larger strategy announced last year to pivot the group away from its less profitable upstream gas and power businesses and towards its more lucrative downstream businesses – energy retail, services and technology. It said it would invest £1.5 billion in its customer focused operations over the following five years.

The group has commenced the process of selling its exploration and production business in Canada and expects to complete its purchase of Danish energy management and trading optimisation business Neas Energy for £170 million in the second half of this year.

Centrica chief executive Iain Conn said: “The first half of the year has been demanding for Centrica, but the response has been strong and I am encouraged by the progress we have made. We are delivering underlying performance improvement and are building a robust platform for customer-focused growth. I remain confident in our ability to deliver both attractive returns and underlying cash flow growth, as we continue to implement our strategy.”

Analysts at investment firm Jefferies said: “Overall we see positive takeaways from today’s H1 results. Strong cash flow growth will underpin Centrica’s progressive dividend and a return to profitability of the UK business division is encouraging. The upgrade of 2016 efficiency targets by £100 million to £300 million will help offset unexpected weather conditions in North America and could drive further additional cost savings in the coming years.”