30th Jul 2015 11:02
LONDON (Alliance News) - Centrica PLC said it has completed its strategic review of the business which will see it shift investment away from its upstream production and toward British Gas and its other consumer businesses, as it reported a rise in pretax profit but a slight fall in earnings in the first half of 2015.
The FTSE 100-listed electricity and gas provider reported a GBP1.20 billion pretax profit in the first half of 2015, up from a GBP890 million profit a year earlier despite revenue experiencing a slight 2% drop to GBP15.45 billion from GBP15.74 billion.
Earnings before exceptional items was down 3% to GBP1.0 billion from GBP1.03 billion, after higher profit from customer-facing businesses was more than offset by lower profit from upstream gas and power businesses.
Centrica slashed its interim dividend by 30% to 3.57 pence from 5.10 pence following the decision earlier in the year to re-base the dividend.
Centrica shares were down 2.3% to 268.95 pence per share on Thursday, the second worst performer in the FTSE 100.
British Gas experienced higher residential energy consumption due to colder weather compared to a warm first half of 2014 and benefited from falling wholesale gas costs and from other costs falling. Centrica said British Gas's market share is "broadly stable".
Since the end of June 2014, British Gas has made two cuts to residential bills, making a 10% cut over the last year, saving customers on average GBP72 per year, it said. The residential services division of British Gas was "impacted by challenging sales environment" but it said it will be launching new propositions in the second half of 2015.
British Gas's business division was hit by issues following the implementation of a new billing and CRM system, which Centrica aims to resolve before the end of 2015.
The Direct Energy division, which is its North American arm, reported a "significant" rise in operating profit, and Centrica said it is investing for future growth in the solar business.
Centrica Energy, its upstream business, suffered as expected from lower wholesale gas, oil and power prices.
Centrica has been conducting a review of the business "in light of significantly changed circumstances" and said after a "rigorous" analysis, it has concluded it must focus on meeting the needs of its customers and to deliver long-term shareholder value through both returns and growth.
"The conclusion of our strategic review provides a clear direction for the business. Centrica is an energy and services company. Our purpose is to provide energy and services to satisfy the changing needs of our customers, and as such we will focus our growth ambitions on our customer-facing activities," said Chief Executive Iain Conn.
As a result, Centrica said it aims to increase operating cashflow by between 3% and 5% per year, underpinned by near-term efficiencies, and said it will continue with its "progressive dividend policy" in line with its cash flow growth.
Centrica has decided to divert GBP1.50 billion of capital from its upstream business which focuses on exploration, production and central power generation, toward its consumer business such as British Gas.
That further GBP1.50 billion investment will be split into several areas between 2015 and 2020.
It will spend an additional GBP250 million over the next five years growing its service business in the UK and in North America and an extra GBP700 million in the same period on its energy and power distribution. An extra GBP500 million will be spent to improve the capacity of its connected homes segment and another GBP150 million on its marketing and trading activities.
Those extra investments will be made by Centrica cutting its expenditure on exploration and production and its central power generation to lower its "capital intensity". It said resource allocation in these areas will be cut by around GBP1.5 billion over the five year period. It also aims to make GBP750 million in cost savings across these areas between 2015 and 2020.
About two-thirds of those GBP750 million worth of savings are expected to be delivered by the end of 2018.
That turn away from upstream will lead to Centrica transitioning to a smaller exploration and production business of between 40 million and 50 million barrels of oil equivalent per year, focused on the North Sea and East Irish Sea, consuming GBP400 million to GBP600 million of annual capital expenditure.
However, that shift in capital allocation away from its upstream segment will lead to around 6,000 jobs being cut by 2020, however it will also increase its headcount in some areas resulting in a net reduction of 4,000 staff, it said.
Overall capital expenditure will be limited to no more than GBP1.0 million per year in the near-term and no more than 70% of operating cash flow in the longer term in order "to underpin dividend and credit rating", it said.
"With Centrica delivering solid financial and operational performance in the first half of the year, and making good progress in strengthening its balance sheet and reducing net debt, the group is well placed to compete materially against the emerging long-term trends in global energy markets," said Conn.
Net debt fell 6% year-on-year to stand at GBP4.90 billion at the end of June compared to GBP5.19 billion at the end of June 2014.
"Full year outlook broadly unchanged, but uncertainties include continued low wholesale commodity prices and a competitive environment for our customer-facing businesses, as well as the ongoing resolution of British Gas business energy supply billing issues," the company commented.
By Joshua Warner; [email protected]; @JoshAlliance
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