Upstream top ranking at Centrica

published 23 February 2012

Centrica is best known as a household energy provider operating under the British Gas and Scottish Gas brands, but it is the firm's gas and power producing assets that are driving profits growth.

The firm announced an underlying operating profit of £2,415m for 2011, up a smidgen from 2010's £2,390m, and more or less in line with market expectations.

However, operating profits at its UK residential energy supply business tumbled 30% to £522m from £742m the year before, as the exceptionally mild Spring and Winter reduced consumption, although soaring energy costs might have also played a part in consumers' decision to turn the heating down a bit.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

https://cdn.mos.cms.futurecdn.net/flexiimages/mw70aro6gl1676370748.jpg

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

UK residential energy customer accounts at the end of 2011 stood at 15.88m, down 1% from 2010's end-year figure of 15.98m. The group is seeing decent growth on the other side of the pond, however, with the number of residential customer accounts in North America rising 10% to 5.65m from 5.16m in 2010.

The residential services business - boiler maintenance and so on - saw a 10% increase in operating profits to £264m from £241m, while the business energy supply and services unit's operating profit fell 6% to £219m from £233m in 2010.

In total, what the group calls its Downstream UK operations saw operating profits fall by around one-sixth to £1,005m from £1,216m in 2010, but the Upstream UK business - its gas producing assets and power generating operations - picked up the slack, with operating profits up by a third to £1,023m from £771m the year before.

Profit from continuing operations before taxation and exceptional items rose to £2,062m from £1,929m the year before. That was marginally below consensus expectation of £2.17bn.

Exceptional items put a dent in profits, however. In total, the company took a £794m hit for various one-off items, which included a net exceptional charge from continuing operations after taxation of £466m (2010: net charge of £165m) and a net loss on certain re-measurements of £322m (2010: net gain of £891m).

After the one-off items had been taken into account profit before tax was reduced to £1,268m, versus a profit of £2,809m in 2010.

Following the decision to exit Europe and to close its German wholesale business, a charge of £111m was recorded for a number of onerous European gas transportation contracts, which are no longer used by the business. A further £110m charge was recorded for the onerous fixed-price Rijnmond tolling contract in the Netherlands due to the impact of low market spark spreads.

The company is proposing to close two of its UK combined cycle gas turbine power stations, at Barry and Kings Lynn, while its power stations at Peterborough, Brigg and Roosecote are now configured to run more flexibly and operate in the Short Term Operating Reserve market. Impairment charges of £226m relating to UK generation assets were incurred. These impairment charges are largely non-cash in nature.

Adjusted basic earnings per share edged up 2% to 25.8p in 2011 from 25.2p, while the growth in the full year dividend outstripped earnings growth, rising 8% to 15.4p from 14.3p the year before.

The group is targeting more than £500m of cost savings over the next two years, freeing up cash for investment in the business. The company expects to spend a further £1.4bn in 2012 on investment in its existing business, with around half of that expected to be ploughed into the upstream gas and oil business, in addition to the £1.4bn already committed for the Statoil assets, the additional stake in Statfjord and the package of UK North Sea assets from Total (the latter announced earlier this week).

"We are successfully bringing new investment projects on-stream, and will begin to see a contribution from recent acquisitions, as we integrate them into our portfolio. Overall, we plan to deliver improved year-on-year adjusted earnings growth in 2012, subject to the usual variables of weather patterns and commodity price movements, although we continue to face some of the same headwinds as in 2011, in particular the effects of continued economic pressure on household and business budgets," said Sam Laidlaw, Centrica's Chief Executive.

"In summary, the Centrica business model remains resilient, underpinned by strong cash flows and an attractive pipeline of investment projects. The business is well placed for the long term and we will continue to improve the service offering for our customers, both in the UK and North America. We will also drive further cost savings across the group to enhance our competitiveness, and deliver increasing value through the efficient deployment of capital, in order to continue to enhance returns for shareholders," Laidlaw pledged.

Shares in Centrica were 2.7p firmer at 296.2p in mid-morning trading.