Centrica has reported a rise in profits in 2016 despite reduced earnings from its UK Home business due to customer losses in the first half of the year.
Adjusted operating profits were up by four per cent year-on-year to £1.5 billion, assisted by higher earnings from its UK business, exploration and production and markets and trading divisions. Revenues fell by three per cent to £27.1 billion.
There was an eight per cent decrease in adjusted operating profits for the UK Home business to £810 million, and an 11 per cent drop to £553m when looking at energy supply alone. This followed a three per cent reduction in customer accounts in the first half of the year, in part due to “a significant roll-off of long-term contracts”.
Centrica said the launch of “competitively priced customer offers” helped to stabilise customer numbers in the second half of 2016. The UK Home division ended the year with around 14.3 million energy supply accounts (equating to 8.5 million actual customers) and around 7.53 million services accounts.
Yesterday, Centrica-owned British Gas announced it will invest £100m in schemes to improve customer loyalty.
Value not volume
Chief executive Iain Conn said Centrica’s focus is now on “value not volume. We’re not going to be chasing customer numbers for the sake of it.”
The average duel fuel profit per customer was £52 in 2016, compared to £61 last year, and the energy supply profit of £553 million equated to a post-tax profit margin of 6 per cent. Centrica estimated that the introduction of a cap on pre-payment tariffs in April this year will result in a £50 million reduction in revenues in 2017.
Following a £19 million loss in 2015, the UK Business division posted an adjusting operating profit of £50 million in spite of a six per cent fall in customer accounts to 717,000. The billing issues which hampered its performance last year are now “fully resolved”.
In July 2015, the group announced a major strategic shift away from its upstream operations and towards its customer-facing activities, including an increased focus on the connected home, distributed energy and power, and markets and trading. Centrica said it is making “significant progress” on this front.
The connected home business posted an adjusted operating loss £50 million in 2016, down from a loss of £49 million last year, “reflecting investment in infrastructure, product development and capability to support business growth”. Gross revenues grew by 74 per cent to £33 million due to rising product sales and increased installations of Hive hubs.
Centralised generation down
The distributed energy and power division similarly posted an adjusted operating loss of £26 million, up from a loss of £32 million in 2015, as it focused on “investments to build its distributed energy capability”. Gross revenues rose by 69 per cent to £161 million.
Adjusted operating profits from markets and trading were up 144 per cent to £161 million. Earnings were boosted by volatile prices in Europe as well as the acquisition of Danish firm Neas Energy which made a “strong initial contribution” to the results.
The central generation business saw a 41 per cent fall in adjusted operating profits to £75 million. This was attributed to low wholesale prices, “reduced benefit from historic hedging” and £51 million of repayments relating to the disposal of its shares in wind developer GLID and the Lincs offshore wind farm.
Adjusted operating profits from exploration and production increased by 97 per cent to £187 million. Centrica said capital expenditure was within its target range of £400 to £600 million, having fallen 28 per cent year-on-year to £518 million.
Cutting heads
As part of its strategic shift, Centrica is also aiming to make annual cost savings of £750 million and reduce its headcount by 4,000 over the five years to 2020. The group cut the number of employees by 3,400 during 2016 and slashed costs by £384 million, putting it more than halfway towards the target. It expects to deliver further costs savings of £250 million in 2017.
Centrica Storage posted an adjusted operating loss of £52 million, down from a profit of £37 million last year. This was the result of maintenance outages at the Rough long-term gas storage facility, which limited injections and withdrawals and increased costs, and the continuation of “historic low” seasonal gas price spreads.
“2016 was a year of robust performance and progress in implementing our customer-focused strategy,” said Conn. “We delivered our key objectives including improved customer service and more innovative offerings and solutions – while repositioning the portfolio, building capability and driving significant cost efficiencies.
“2016 was a busy year for the team, but we have delivered a lot, and Centrica enters 2017 a stronger company – with encouraging underlying momentum and positioned to deliver longer-term returns and growth.”
Analysts at investment firm Jefferies commented: “Today’s announcement highlights to us that Centrica is set to be conservative given the looming headwinds. In the UK Centrica achieved a seven per cent EBIT margin across energy supply, with a 15 per cent margin in gas supply.
“This continued high level of supply margin is likely to grab the attention of policy makers ahead of a green paper on markets which don’t work for consumers in the spring.”