TIDMCNA
23 November 2017
Centrica plc ('the Company')
Trading Update
Summary
The Company continues to make good progress in the
implementation of its strategy and portfolio repositioning and
remains on track to achieve the 2017 targets set out at its 2016
Preliminary Results in February. However, trading conditions
continue to be highly competitive and performance delivery since
mid-year within the Centrica Business energy supply businesses has
been disappointing.
Iain Conn, Centrica Group Chief Executive, said"Although some
aspects of our delivery in the second half of 2017 have been
disappointing, I remain encouraged by our progress in implementing
our strategy.The balance sheet has been materially strengthened,
and we continue to focus on improving our underlying performance.We
have also provided a broad and definitive set of proposals this
week to improve the UK energy market for customers and look forward
to engaging with the Government and regulator in the coming
weeks."
In Centrica Consumer, delivery from the Group's efficiency
programme is offsetting overall gross margin decline. Energy supply
accounts have fallen, but this largely reflects choices we have
made to focus on customer value, while in recent weeks account
holdings in UK Home Services have stabilised and growth in
Connected Home continues. In Centrica Business, we have experienced
significant market pressures in our North America Business retail
power book, and in UK Business we are not yet seeing improved
operational performance flowing through to the bottom line. We are
also reflecting a one-off non-cash post-tax charge of GBP46m in
North America Business, relating to a reassessment of the historic
recognition of unbilled power revenues. In the asset businesses,
the Morecambe field is back on production and Spirit Energy,
Centrica's E&P joint venture with Stadtwerke München, is on
target to close before the end of the year, subject to regulatory
approvals.
Performance and 2017 Group outlook
We remain on track to achieve our 2017 targets and expect:
-- Adjusted operating cash flow to be above GBP2bn.
-- Group capital investment, including any small acquisitions of less
than GBP100m each, to be below the GBP1bn limit with E&P
capex around
GBP500m.
-- Incremental revenue investment of around GBP100m in growth areas.
-- 2017 efficiency savings approaching GBP300m, in excess of the original
GBP250m target, and in addition to 2016 savings of GBP384m.
-- Like-for-like direct headcount reduction of over 1,500.
-- Net debt to be within the targeted GBP2.5-GBP3.0bn range.
2017 full year adjusted earnings per share are expected to be
around 12.5p, including a 0.8p impact from the North America
Business one-off non-cash charge. This is lower than market
consensus, largely reflecting lower than expected adjusted
operating profit in North America Business and UK Business. We are
also reflecting the expected impact of warmer than normal weather
across October and November. Actual financial performance remains
subject to the usual variables of commodity prices, weather and
asset performance over the balance of the year.
However, with net debt expected to be within the Group's
targeted GBP2.5-GBP3.0bn range, the level consistent with our
financial framework parameters, and 2017 adjusted operating cash
flow expected to be above GBP2bn, the current level of the full
year dividend per share is underpinned. For a period of time, while
the Group is implementing its strategy to continue to shift the
portfolio towards the customer and diversifying and growing new
sources of gross margin, we would be willing to operate with
dividend cover from earnings below historic levels.
Divisional Performance
Centrica Consumer
In UK Home, despite the impact of account losses and warmer than
normal weather in the year to date, cost efficiency delivery means
2017 full year adjusted operating profit is expected to be broadly
in line with 2016. The number of UK energy supply accounts at the
end of October had reduced by 823,000 since 30 June 2017, although
over 650,000 of these losses relate to collective switch,
white-label fixed price and prepayment tariffs, and 150,000 reflect
market switching trends and the impact of our price rise in
September. UK Home services account holdings are down 39,000 since
the half year, having stabilised in recent weeks. Our Ireland
business continues to perform well, while in North America Home
accounts have fallen slightly, with H2 2017 adjusted operating
profit expected to be at a similar level to H1 2017. The cumulative
number of Connected Home hubs installed has now reached 750,000, up
223,000 or 42% since the start of the year, and we have now sold
over 1.2m connected products in total, up 59% since the start of
2017.
Centrica Business
North America Business is expected to report full year adjusted
operating profit of around GBP80m, with highly competitive market
conditions and low price volatility putting significant downwards
pressure on realised power margins, and low volatility also
reducing opportunities for gas optimisation. In addition energy
prices are currently backwardated, meaning the booked profit of
fixed price multi-year power contracts will be weighted towards
latter years, compressing short term realised margins. As noted
above, we expect to recognise a one-off non-cash post-tax charge of
GBP46m (GBP76m pre-tax) in North America Business relating to a
reassessment of the historic recognition of unbilled power
revenues. UK Business is also facing competitive pressures and we
now expect the business to be broadly break-even in 2017. In
Distributed Energy & Power (DE&P), we continue to see
growth with the number of active customer sites up 4% since the
half year. Energy Marketing & Trading (EM&T) continues to
perform well, and as previously disclosed in the Interim results
full year adjusted operating profit is expected to be heavily
weighted towards H1 2017.
Asset businesses
In E&P, higher commodity prices have been beneficial for
unhedged volumes, although production volumes, and therefore the
full year E&P result, will be impacted by the outage at
Morecambe until late October related to asset integrity works to
improve safety and operational efficiency. We expect H2 2017
E&P adjusted operating profit to be similar to H1 2017. In
Centrica Storage, cushion gas production from the Rough asset has
been stronger than expected, with up to 25bcf expected to be
produced in H2 2017. As a result, the business is now expected to
be profitable in H2 2017 and be close to break-even for the full
year.
Group net finance charge and tax rate
The 2017 full year net finance charge is expected to be
approximately GBP350m, consistent with the H1 2017 run rate. The
2017 full year effective tax rate is expected to be around 26%,
lower than the H1 2017 rate of 29% reflecting changes in operating
profit mix and the settlement of provisions. In 2018, we would
expect the effective tax rate to return to a higher level.
Strategic progress
As referenced at its Interim results in August, the Group
expects to have completed the first phase of its portfolio
transformation by the end of 2017, fundamentally repositioning the
Group as it continues to shift resources from its asset businesses
to its customer-facing activities, and as it pursues long-term
shareholder value through returns and growth. The Company has
continued to make good strategic progress during H2 2017,
developing capabilities and technology in its customer-facing
Centrica Consumer and Centrica Business divisions, and reducing
scale in and strengthening its asset businesses.
Customer-facing progress
-- Continued investment in customer service and digital platforms
resulting in a further reduction in energy supply complaints
to
October across all businesses relative to the same period in
2016.
-- Over 500,000 customers now signed up to British Gas Rewards, providing
them with personalised offers including those that reward
loyalty.
-- Acceleration of growth in technology-led 'Local Heroes' on-demand
services platform, with around 6,000 tradespeople signed up and
over
17,000 jobs now completed.
-- Connected Home partnership agreed with Italian energy company Eni gas
e luce, enabling 8m energy customers to purchase Hive products
and
solutions; Hive leak sensor launched.
-- Enhanced DE&P capability through EUR70m acquisition of REstore NV,
Europe's leading demand response aggregator.
-- Continued development of EM&T route-to-market services, including the
signing of a balancing and hedging contract for the 650MW
Markbygden
wind farm in Sweden.
Asset business progress
-- Completion of CCGT and Canadian E&P disposals in H2 2017, taking total
proceeds over 2016 and 2017 to GBP946m, at the upper end of
the
GBP0.5-1.0bn targeted range.
-- The formation of Spirit Energy, the E&P joint venture between Centrica
and Stadtwerke München, is on target to be completed by the end
of the
year, creating a self-financing, more sustainable, more
capable
European E&P business.
-- Provisional decision from the CMA announced on 15 November to
terminate the Rough undertakings and release Centrica Storage
from its
obligation to offer storage capacity from Rough; publication of
final
decision expected in December.
UK energy supply market
On 11 October, Ofgem announced an extension of the pre-payment
tariff cap to a further 1m vulnerable customers, in addition to
those already covered by the cap. They also announced they would
permit the use of default tariffs other than "evergreen" contracts.
Following the Prime Minister's speech at the Conservative Party
Conference in early October, the UK Government also published a
draft bill on 12 October designed to give Ofgem powers to impose a
cap on all default energy tariffs.
On 20 November, we announced a comprehensive package of actions
and proposed measures to reform the UK energy market and benefit
customers. We have announced seven unilateral steps we will take,
including withdrawing the standard variable tariff (SVT) for new
customers, and introducing new propositions and a new fixed-term
default tariff. We will aim to move all of our SVT customers to
other tariffs and to introduce engagement steps to minimise the
number of customers ending up on a new default arrangement. We are
also proposing a further seven recommended actions for Ofgem and
the UK Government designed to improve the market further. These
include the phase-out of the SVT and all "evergreen" contracts, a
levelling of the playing field regarding supplier obligations, and
the move of energy policy costs from energy bills to a less
regressive method such as general taxation. We believe our package
of proposals will increase customer engagement and choice, give
people better deals and make the market fairer and more
sustainable. We believe they will be significantly more effective
than further Government intervention through temporary price
controls.
As the UK's largest energy supplier, we will continue to work
constructively with the Government, Ofgem and the industry to
ensure we have an energy market that works for everyone. Whichever
final path is chosen to improve the energy market for UK customers,
we believe we can deliver a sustainable and attractive business in
UK energy supply and will update on our progress at our 2017
Preliminary Results in February 2018.
Centrica will be hosting a conference call for institutional
investors and analysts at 08:00 GMT on 23 November 2017 to cover
the Trading Update and Centrica's proposals for the UK energy
market. Please dial in using the following number:
+44 (0) 20 3059 8125
The call title is "Centrica investor and analyst call". A full
transcript of the call will be available on www.centrica.com from
Monday 27 November 2017.
Centrica is due to release its 2017 Preliminary Results on 22
February 2018.
Enquiries
Centrica Investor Relations: +44 (0)1753 494900Centrica Media
Relations: +44 (0)1784 843000
ENDS
Centrica plc is listed on the London Stock Exchange
(CNA)Registered Office: Millstream, Maidenhead Road, Windsor,
Berkshire SL4 5GDRegistered in England & Wales number:
3033654Legal Entity Identifier number: E26EDV109X6EEPBKVH76ISIN
number: GB00B033F229
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