Centrica issues profit warning as it feels the heat

The latest update from energy provider Centrica suggests that every silver lining has a cloud, as the company warned that the recent warm spell in the UK will hit full-year earnings.

The company, which operates under the British Gas and Scottish Gas brands, said full-year earnings may be marginally below current market expectations. The market is currently expecting pre-tax profits of £2.28bn on revenue of £22.2bn.

The company said the reduction in operating profits caused by the unseasonally warm weather will be partially offset by lower interest and tax charges, and that, subject to weather conditions for the remainder of the year, it continues to expect growth in full year earnings, despite significantly lower margins in its downstream residential business than in 2010.

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The company grumbled that UK wholesale gas costs this winter are 26% higher than they were last year which, together with higher non-commodity costs, means that the British Gas residential business has been making a loss since April, at least until the company whacked up prices by an average of 16% in August. That price hike provoked a number of customers to defect to other suppliers, resulting in a slight drop in customers this year to 15.9m.

Average residential gas consumption in the first 10 months of the year was down 17% on the same period of last year, while electricity consumption was down 3%. Business customers have also been cutting back on usage, with gas and electricity consumption down 15% and 12% respectively.

The market for central heating installations has been subdued, down 10% on last year, prompting the company to announce yesterday it is to turf 850 staff members on to the dole.

That won't be the end of cost-cutting moves, the company pledged. "To date we have already identified a number of areas of potential cost reduction, including initially in our UK downstream business and in UK power generation. As a result, we expect to incur a number of associated one-off charges in the second half of this financial year. We also expect to record a substantial credit in respect of changes to the pension scheme arrangements across the group," the group said.

The group's interest charge this year is expected to be around £160m, and the group's effective tax rate is expected to be around 42%. At the end of October, net debt stood at £3.2bn.

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