15th Dec 2006 07:00
15 December 2006 CENTRICA FULL YEAR 2006 TRADING UPDATE Centrica plc has today issued the following trading statement ahead of enteringclose period on 1 January 2007. The Company will announce its 2006 full year results on 22 February 2007. Headlines -- Full year Group earnings per share* ahead of consensus; expected to marginally exceed 18 pence -- British Gas Residential Energy returns to profit in the second half -- Fall in wholesale prices will trigger a retail price reduction in spring of 2007 -- £300 million additional exceptional charge, of which £200 million is non-cash -- 6% customer account losses (978,000) year-to-date; losses slowing in recent weeks -- Growth businesses of North America and British Gas Business performing well and British Gas Services on track 2006 update Centrica expects full year Group earnings per share* to marginally exceed 18pence, slightly ahead of current market consensus. This has been deliveredagainst a backdrop of extreme volatility in commodity prices and a verycompetitive retail marketplace. British Gas Residential Energy Since the last trading update on 27 July 2006 the warmest autumn on record inthe UK has coincided with the predicted additional supplies of gas beingdelivered through the Langeled and BBL pipelines from Norway and Holland. Bothof these pipelines were underpinned by British Gas long term contracts and havecontributed to the fall in fourth quarter wholesale gas prices. Although British Gas had already secured substantial supplies at previouslyhigher price levels, these recent wholesale price falls will still reduce thecost of energy in 2006 for British Gas to below the previously predicted levels.This has been partially offset by a recent decline of approximately 15% inresidential gas demand, caused by the warm weather. We currently anticipatetherefore an operating margin in British Gas Residential Energy of around 1% for2006 as a whole. Although the winter is still ahead of us, margins are improving as a result ofthe recent falls in wholesale energy costs. Against this background we havedecided to absorb additional distribution costs of around £100 million perannum, recently approved by the regulator to commence in March 2007, and we planto reduce prices for our customers in the spring. We remain resolute in our belief that British Gas must establish reasonable andsustainable profitability to provide long-term energy security of supply whiledelivering value to the customer. Residential energy churn in the UK remains high and to date in 2006 British Gashas lost 978,000 accounts. However, we have been encouraged by the reduction inrecent weeks in net weekly losses and the fact that account sales have averagedover 60,000 per week since September. Our "Fix and Fall" offer was extremelywell received, with around 500,000 sold, and the sales and marketing team arenow focused on developing further propositions to keep us at the forefront ofcustomer product innovation in the year ahead. British Gas has 95% of its customer base on the new SAP billing platform and isnow working through the challenges associated with the remaining more complexaccounts. The process of migration has adversely affected customer service overthe last six months. In order to improve customer service levels we haveemployed an additional 500 frontline staff in our call centres. Additionally wehave focussed our IT resource on delivering improved system performance as animmediate priority and we will now complete the migration of the remainingaccounts during the first quarter of 2007. Gas production We continued to utilise the inherent flexibility provided by the Morecambe gasfields in periods of low gas prices. As a result gas production levels atMorecambe are now forecast to be down year-on-year by around 50%, partiallyoffset by an increase in other equity gas production, leading to a forecast dropin overall volumes of around 40%. This lower level of production in our upstreamgas business will reduce the proportion of our total profits attracting a highertax charge, thereby reducing the Group's effective tax rate to below 45% in thecurrent year. Other businesses In British Gas Services new management has driven improvements in sales,operating efficiency and customer service. As forecast, British Gas Business hashad a much stronger second half and will deliver a result ahead of consensus.The North American business continues to trade strongly in line with ourexpectations at the half-year, and we anticipate that profit growth will bearound 20% this year. Elsewhere in the group, the lower wholesale gas priceshave reduced losses in the legacy industrial and commercial contracts, with thisbusiness segment now forecast to lose around £250 million. Business restructuring and exceptional charge During the last three months, under Sam Laidlaw's leadership, the Groupsharpened its strategic focus, completed an operational review and isconcentrating management attention on the twin priorities of achieving areduction in the ongoing operating cost base and delivering a marked improvementin customer service. In addition, a full appraisal of all recent major systemsdevelopments has been conducted to ensure that they will deliver theiranticipated benefits or are written off. The effect of this review will be a pre-tax exceptional charge for the year ofaround £300 million, in addition to the exceptional charge of £46 millionrelating to the Rough incident. The charge is made up of several elements. Themain element of the charge is a non-cash systems write-off of around £200million, with the removal of an associated 2007 depreciation charge of £31million. The review incorporates the write-off of systems functionality which isno longer required within the more focussed Group and an assessment of theappropriate remaining asset value. The remaining £100 million exceptional cash costs are associated withperformance improvement and streamlining our operations and will deliverbenefits of £24 million in 2007 and approximately £34 million in 2008. The majorcomponents of this include a streamlining of the British Gas Residential Energyback-office with the loss of 700 roles. This will include the closure of theheadquarters building at Stockley Park, with staff being relocated to Staines.It also incorporates a restructuring of the British Gas Services team with theloss of 340 roles and a further streamlining of the group corporate structure,with the loss of 270 roles. The above are in addition to previously announced cost reduction commitments. Outlook The marketplace remains extremely competitive and the outlook for 2007 isdominated by the prospect of lower wholesale energy prices. Against thisbackground we are committed to achieving an improved competitive position,enhanced energy procurement, improved customer service in British Gas at areduced cost to serve and continued growth in our other businesses. Enquiries: Centrica Investor Relations 01753 494900 Centrica Media Relations 01753 494085 * including joint ventures and associates stated net of interest and taxation,and before exceptional items and certain re-measurements Copyright Business Wire 2006Related Shares:
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