Centrica to post low income as not surprising

Energy company Centrica said that, as expected, first-half group operating profit would be materially below that of last year due to lower profitability at its British Gas retail business, hitting its shares.

Photo: Centrica to post low income as not surprising

Britain's biggest domestic energy supplier said in a trading update on Monday the year to date had been dominated by high UK wholesale gas and power prices, driven by record oil prices, Asian demand and a lack of imports from continental Europe.

British Gas raised its gas and electricity prices by 15 percent in January, but wholesale gas prices continued to rise and led to profit margins being squeezed to below its long-run expectations.

On average, month-ahead prices for gas and power were up 92 percent and 100 percent respectively from the same period last year.

Looking to the full year, Centrica said forward wholesale gas and power prices in the UK remain stubbornly high, and those for the second half of this year are double those seen in the same period of 2007.

"While the current outlook for gas prices does create a challenging environment for energy suppliers, we will take the necessary action to deliver reasonable margins in the retail business," Centrica said.

Shares in Centrica, which have underperformed the FTSE 100 index.FTSE by almost 22 percent in the past 12 months, were down 1.6 percent at 283 pence by 0705 GMT, valuing the company at around 10.4 billion pounds ($20.3 billion).

"Today's announcement is likely to put downward pressure on consensus of 2008 estimated EPS of 26.2 pence, but this should not come as a surprise to investors given the current commodity price environment," Cazenove analysts said in a note.

The company is expected to report operating profit of some 1.8 billion pounds for 2008, according to the average forecast of 13 analysts down from about 1.95 billion last year.

Centrica said sales of energy accounts had slowed since the January price increases, and British Gas ended April with 15.9 million customers, against more than 16 million at the end of 2007. It lost nearly a million customers in 2006 when it lifted prices.

The gas production business has been particularly strong this year, although losses from legacy industrial and commercial gas sales contracts are expected to be materially higher than previous guidance, Centrica added.