British Gas owner Centrica plc (LON:CNA) said it plans to raise the price of electricity by 12.5% and reported a slump in first half profit but shares rose as it made headway on its strategy to streamline the business to focus on its core energy and services.
The utility company will implement the hike in electricity prices from mid-September while gas prices will be held at the current level. Average dual fuel bills "for a typical household on standard tariff" will rise by £76 to £1120, an increase of 7.3%.
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Theresa May’s government has watered down its general election vow for an energy price cap for 12 million families. Instead the plan is to safeguard customers on the poorest value tariffs.
Centrica will give £76 worth of credit to 200,000 “vulnerable” customers to protect them from the price rise,
Mark Hodges, the chief executive of Centrica’s consumer business, said the company has made a number of proposals to the government and to regulator Ofgem, including phasing out the standard variable tariff and "levelling the playing field" so all suppliers pay a share of energy policy obligations.
“We also welcome and share Ofgem’s focus on vulnerable customers,” said Hodges. “That is why we have decided to give a special credit this winter to the most vulnerable British Gas customers, protecting them from the impact of this price increase.”
He said increasing electricity prices was a “difficult decision" and that Centrica had held off on doing so for many months longer than most suppliers in order to protect customers.
Centrica's first half profits tumble as it sheds assets
The announcement on energy prices was made alongside the company’s results for the six months to 30 June 2017, which revealed statutory profit attributable to shareholders plunged 96% to £44mln compared to the same period a year ago
An exceptional charge of £268mln was recognised in the first half for shedding oil and gas assets to focus on its core energy supply and services.
Adjusted pre-tax profit, excluding this exceptional charge, fell to £639mln from £688mln.
Last month, Centrica said it was closing its Rough gas storage site, the UK’s biggest. It also sold the Langage and South Humber Bank combined cycle gas turbine power stations to the UK unit of Czech-owned Energeticky a Prumyslovy Holding.
In oil and gas, Centrica has decided to sell its Canadian assets and is spinning off its European exploration and production (E&P) business to form a joint venture with Bayerngas Norge AS.
The company achieved £124mln of cost savings during the period and said it remains on track to deliver £250mln in fiscal year 2017. That would take total savings since 2015 to about £650mln as part of its £750mln cost efficiency programme. To achieve these savings, the group plans to cut 1,500 jobs in 2017.
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Revenue boosted by consumer energy services
Revenue rose 7% to £14.3mln, driven by its consumer energy services business Connect Home and its Distributed Energy & Power arm.
The interim dividend was left in line with the previous year at 3.6p, equal to 30% of the 2016 full year dividend. Net debt at the end of the period fell to £2.9bn from £3.5bn at 31 December. Centrica expects debt to reach its target of £2.5bn to £3.0bn in 2017.
The group is also aiming to reach full year adjusted cash flow above £2bn after falling 9% to £1.2bn in the first half.
Centrica on track to achieve 2017 targets
“Centrica delivered a solid first half financial performance despite reduced energy demand due to warm weather and strong competitive pressures, and we remain on track to achieve the 2017 targets we set out in February,” said group chief executive Ian Conn.
“We have made further significant strategic progress, continuing to reallocate resources away from our asset businesses towards our customer-facing businesses.
Following the asset disposals and the creation of a new European E&P joint venture, Conn said the company expects the first phase of its portfolio transformation to be complete by the end of 2017, leaving the group “well-positioned to deliver longer-term returns and growth”.
Shares in Centrica rose 2.32% to 203.10p in morning trading.
Centrica could become a takeover target, says UBS
UBS said while Centrica is making progress on its 2015 strategy, it still has a "mountain to climb" and the restructuring may not be enough to offset all headwinds.
"This could in turn trigger a review of further possible streamlining actions, in our view, and the prospect of a smaller, leaner Centrica to becoming a takeover candidate (as discussed in 2015 and again in July 2017 here), combined with a forecast dividend yield of 6%, could provide some offsetting support for the shares."
George Salmon, equity analyst at Hargreaves Lansdown, said the company's decision to sell E&P assets should mean the visibility of cash flow improves and the chances of being hit by the oil price slump eases.
"However, there is still some way to go before Mr Conn’s vision of Centrica’s future becomes reality, Salmon said. "For example, British Gas managed to lose 377,000 UK customers in the first half of the year, despite waiting until after its rivals had increased prices before following suit."
"While it must be acknowledged that most of the fall in customer numbers comes from collective switches, and Centrica is making progress in other areas including improving customer service, it is clear the group still has some work left to do.”