UK energy supplier Centrica PLC (LON:CNA) posted its biggest share price fall ever today after the owner of British Gas warned its full year earnings will be lower than market forecasts as it lost 823,000 accounts in the four months from the end of June to the end of October.
Centrica said its second half performance has been “disappointing” due to tough competition and warmer-than-usual weather in October and November.
READ: British Gas owner Centrica to ditch standard variable tariffs as it looks to 'reform UK energy market'
In late afternoon trading, its shares were the top FTSE 100 faller, down nearly 15%, or 24.3p at 139.0p
It expects full year adjusted earnings per share (EPS) to be around 12.5p for the year, below the consensus estimate, largely reflecting lower-than-expected adjusted operating profit in the North America and UK businesses.
The EPS guidance includes a one-off impact of 0.8p per share from a £46mln writedown in the North America division, relating to the "reassessment of the historic recognition of unbilled power revenues".
“A profit warning amid falling customer numbers and price pressure means that shares in Centrica are showing a double-digit fall in early trade, amid worries over the long-term sustainability of the dividend," said AJ Bell's Russ Mould.
“If the shares stay down at those levels the owner of British Gas will become the ninth current FTSE 100 member firm to have suffered a drop of 10% or more in a single trading day this year."
On track to meet full year targets
Still, the group said it remains on track to achieve its 2017 targets, including net debt of between £2.5-£3.0bn and adjusted operating cash flow above £2bn.
At the group’s 2016 results in February, it had said it would resume a progressive dividend when it met its debt targets.
In Thursday’s statement, Centrica said it would be “willing to operate with dividend cover from earnings below historic levels” for a “period of time” while it implements its strategy to diversify and grow new sources of gross margin.
The company expects efficiency savings for 2017 of £300mln, ahead of the original goal of £250mln and on top of the £384mln savings made in 2016. As part of its cost-savings drive, Centrica has cut 1,500 jobs during the year.
“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,” said chief executive Iain Conn.
“The balance sheet has been materially strengthened, and we continue to focus on improving our underlying performance.”
Warm weather and tough competition
Adjusted operating profit in the UK consumer division is expected to be broadly flat in 2017 on the previous year as it lost customer accounts in the second half in a competitive market and as warmer-than-normal weather in October and November meant households had not turned on their heating yet.
In North America, customer accounts have “fallen slightly”, Centrica said, with second half adjusted operating profit expected to be flat compared to the first half.
Bad news in Business
Its corporate division was also affected by fierce competition in both the UK and the US. The North America corporate arm is expected to report full year adjusted operating profit of around £80mln, down from £221mln last year, as competition and low price volatility puts downward pressure on power margins.
The UK corporate business is forecast to broadly break-even in 2017.
Neil Wilson, senior market analyst at ETX Capital, said: "The worst news came from Business, with the group reporting ‘significant market pressure’ in North America while improved operational performance in the UK is not yet being felt on the bottom."
Centrica gets ahead of upcoming price caps
Ahead of the government’s planned price caps on energy bills, Centrica announced on Monday that it would be scrapping its standard variable tariff (SVT) for new UK customers and introducing a new fixed-term default tariff. It aims to move all of its customers on SVTs to other tariffs and to introduce steps to minimise the number of customers ending up on a new default arrangement.
Centrica has also issued further recommendations for regulator Ofgem and the UK government designed to “improve the market further”, including a phase-out of the SVT and all so-called ‘evergreen’ contracts that automatically renew an agreement after the expiry date.
The company added that it has proposed “levelling the playing field” regarding supplier obligations, and moving energy policy costs from energy bills to a “less regressive method” such as general taxation.
E&P hit by Morecambe outage
Its exploration and production division has been supported by a recovery in commodity prices but production volumes were hit by an outage at Morecambe Bay until late October, related to asset integrity works to improve safety and operational efficiency.
The group expects to have completed the first phase of its transformation programme by the end of 2017, shifting its focus from its asset businesses to customer-facing activities.
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