The owner of British Gas has seen its profits plummet dramatically due to a decline in wholesale gas prices and a continued drop in energy prices.
Centrica’s adjusted profits have more than halved to £1.04bn in the first half of the year, down from £2.1bn, a record result for the interim period. The energy group said that this was due to “more normalised markets conditions”.
While profits are back to normal levels, Centrica is now flush with cash. Centrica’s shares fell 9.9 percent, or 128 3/4p, due to unanswered queries about how it will spend its net £3.2 billion. The market was disappointed by both the capital expenditure as well as the cash returned to shareholders.
The company published its interim results at the same time as it announced that Kevin O’Byrne (59), a senior independent board director, will take over from Scott Wheway (57) as chairman of the company this year.
Profits in the City were expected to drop sharply. Ofgem raised the price cap last year to compensate the suppliers who had set it too low previously. Energy regulators set the energy price caps to limit what suppliers can charge as standard energy tariffs. This determines the bulk of their revenue.
The price cap for gas has been steadily falling over the last 12 months, as wholesale prices have fallen after having risen sharply following the start of Ukraine War.
British Gas’ adjusted profit for the first half of the year of £159m was 84% lower than £969m a year ago and fell short of analysts’ expectations.
For the third quarter of 2009, the price cap was £1,568 per year for an average household. This is the lowest since the beginning of the war but still higher than the historical norm.
“I’m sure it’s not a hangover of the energy crisis”, Chris O’ Shea (50), the chief executive officer of Centrica said. He attributed the arrears of payments to a much wider cost of living.
O’Shea stated that the company did not apply to resume installing prepayment meters based on court warrants. British Gas stopped the practice in 2011 after a covert investigation revealed the supplier was forcing customers to install prepayment meters. O’Shea stated that the company continues to “work with customers”.
British Gas household accounts fell by just over 5% in the first half of the year. O’Shea stated that switching providers was on the rise, but it’s “nowhere near what it used to be a few years back”.
Centrica, along with British Gas, operates an energy trading company, as well as infrastructure assets, including Spirit Energy, its gas producer, and the Rough storage facility. It also holds a 20% stake in UK’s nuclear fleet.
Chris O’Shea says that the rise in interest rates makes it more difficult to find investments.
The company has committed to spending between £600 and £800 millions a year on “green” assets until 2028, focusing on renewable energy, energy flexibility, and supply security. The capital expenditure for the first half of 2018 was only £221 millions, as the company’s cash resources were not deployed as quickly and efficiently.
O’Shea stated that the rapid rise in rates made it more difficult to find investments that would meet the company’s return criteria. We’ve seen some projects whose returns were not right for us. So we passed them on. “I think that you also have a situation whereby the higher the capital invested in projects, the lower the return is.”
Energy bosses said that the Sizewell C nuclear plant in Suffolk which received non-binding offers from private investors last year was still of interest as well as converting Rough to hydrogen storage.
Analysts were also disappointed by the share buybacks, despite capital expenditures falling short. Centrica announced that it would extend its programme by £200million, a lower amount than the £450million of the year before. It announced an increase in the interim dividend to 1.5p per share from 1.33p.
By 2026, the company expects to earn an average profit of £800,000,000 for its trading operations and retail activities, including home services. On the basis of current trading, the company is on course to meet those operating profit goals two years earlier than scheduled.
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