19th May 2006 07:01
Centrica PLC19 May 2006 19 May 2006 Centrica 2006 AGM Statement At the Centrica Annual General Meeting to be held today, Chief Executive Sir RoyGardner will update shareholders on the Group's trading position in theyear-to-date and on the outlook for the remainder of the year. Period Review The first two months of the year were particularly challenging with the positivefinancial effect of the recent retail tariff increase in British Gas not beingfelt until March. Even after our pricing announcement the wholesale cost of gasand electricity continued to escalate. This adversely impacted theprofitability of British Gas Residential Energy, which will be loss-making inthe first half, and the large industrial contracts. The relatively cold winteralso placed exceptional demand on our engineers within British Gas Services andthe resulting additional costs reduced profitability in the period. Having started 2006 with a period of customer growth in British Gas ResidentialEnergy, as anticipated we experienced an increase in churn following theannouncement in February of our price rise. However, sales of energy accountsremained strong as a result of our sales and marketing activity and recoveredwithin 4 weeks to pre-price rise levels. Sales of our 2009 fixed price productwere particularly strong with around 700,000 sold, taking the total number offixed price accounts to around 2.5 million. In the year to date, we haveexperienced a net loss of 350,000 energy accounts. Over recent weeks net losseshave slowed substantially. In parallel with the increased sales activity, after a number of successfulmigrations British Gas now has over 6 million customer accounts on the newbilling system and we remain confident of completing the migration by the end ofthe year. All newly acquired energy accounts are also being placed directly onto the new system. We have also successfully begun operations in India with theoutsourcing of certain non-customer-facing activities to our partners. British Gas Business grew its customer base over the first few months of theyear. Despite rising prices its strong contract renewal rate has continued,coupled with improved electricity account sales in the SME sector. Upstream businesses have performed well, with the high wholesale prices bringinga year-on-year increase in profit levels in gas production. In March weannounced progress on our upstream investment plans with the acquisition of afurther stake in the Statfjord oil and gas field. Earlier this month weannounced that we were bringing forward and extending the maintenance period atthe South Morecambe field in order to carry out remedial work on the coolerunits. We currently expect overall gas production volumes in 2006 to be down byaround 15% on 2005. Centrica Storage operations at Rough suffered a major interruption caused by afire in February. Our investment in new emergency shutdown systems and promptmanagement action mitigated the damage to ensure no loss of life. Following afull assessment of the work needed to restore operations, and given our ongoingcommitment to the customers of Centrica Storage, we now predict that the directcash cost of the recent incident will result in an exceptional charge of around£40 million being recognised in the Interim results. Even after this charge,the forecast full year results for Centrica Storage remain in line with marketexpectations due to increased space availability and higher SBU prices, whichaveraged 65.6p for 2006/7, up 74% on the prior year. Internationally our North America operations performed well. We added to ourposition in Texas with the acquisition of a third power station and a smallcustomer block and continued to grow our Business markets operation in allregions. Profits in the year-to-date have been above management expectations.In Europe we saw signs of real progress in the regulatory landscape with theEuropean Commission beginning to take steps against several companies over theslow progress towards competition and, in the Netherlands, the lower house votedin favour of separating monopoly network assets from commercial supply andgeneration activities. As anticipated, the higher retail pricing has led to a rise in absolute customerdebt levels and contributed to increased working capital requirements within thegroup. A restructuring of our upstream operations which was completed in late2005 should result in a reduction in the group effective tax rate in the yearfrom the previous estimate of 58% to a current estimate of 54%. Outlook Looking forward, with effect from 1 July, Sam Laidlaw will take up the role asChief Executive following the retirement of Sir Roy Gardner. Over the past nineyears, Sir Roy has led the transformation of Centrica into a successful energybusiness, delivered considerable shareholder value and created a strong platformfor future growth. He leaves with the grateful thanks of the Board for hisconsiderable dedication. Through the remainder of the year, the group will benefit financially from thehigher retail prices implemented in March, the effect of the continued strengthof wholesale energy prices on our upstream activities and a return to service ofthe Rough storage platform. Management will continue to reduce costs and increase efficiencies in theResidential Energy business, while investing in the further development andpromotion of innovative customer offerings, designed to stabilise market shareand maximise value. Additionally, the successful migration of all residentialcustomers to our new billing system will reduce ongoing costs and improve ourcustomer service capabilities. These positives must be viewed against the background of record oil prices andcontinued high prices in the wholesale gas and electricity markets. There isstill considerable volatility in the forward cost curve with wholesale gasprices in the fourth quarter currently 17% higher than at the time of thecompany's last retail tariff pricing announcement. At current retail tarifflevels and without a drop in wholesale energy prices, British Gas ResidentialEnergy would be loss-making in 2006. As we said at the time of our last pricing announcement, whilst we willendeavour to hold residential price levels during the year, we will not beimmune from these external pressures and remain committed to our policy of fullyrecovering costs over time to return the business to acceptable levels ofprofitability. Summary In summary, it has been a tough start to the year and at the operating level theGroup has to date traded below its expectations due primarily to higher thanexpected commodity costs. This is partially offset at the earnings level bylower forecast tax charges. Overall these factors, combined with the one-offimpacts of extending the South Morecambe maintenance period and the inability towithdraw gas from the Rough storage field, will mean that group earnings for thefull year are forecast to be towards the lower end of market expectations. However, operationally and strategically the group has made progress. We havealso seen good industry progress towards bringing onstream further UK gasinfrastructure, which should apply downward pressure on gas prices over thecoming winters. We will continue to seek ways to mitigate the impact of thecurrent high wholesale prices on our customers through rigorous operating costcontrol and innovative product offerings. Enquiries: Centrica Investor Relations +44 (0) 1753 494900 [email protected] Centrica Media Relations +44 (0) 1753 494085 [email protected] This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
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