Centrica’s Half-Year Profit Drops 31% on Unprofitable Gas

(Corrects currency of polar vortex charge in 14th paragraph of story first published on July 31.)

Centrica Plc (CNA), grappling with a competition probe and the resignations of three senior managers, said first-half profit dropped 31 percent because of losses at its gas-fired power-generation business.

Adjusted net income fell to 530 million pounds ($897 million) from 767 million pounds a year earlier, the Windsor, England-based company said today in a statement. Adjusted earnings per share fell to 10.5 pence from 14.8 pence. That compares with the 10.3 pence average of six analyst estimates compiled by Bloomberg. The shares fell the most since May.

Centrica announced two days ago a new chief executive officer to replace Sam Laidlaw who headed the company for eight years. The largest energy supplier to U.K. households issued a lower profit guidance in May, its second in six months, as a public outcry over increasing living costs prompted it to freeze tariffs. Today it reduced by a penny its expected range for full-year adjusted earnings per share. The new band is 21 pence to 22 pence.

“It is clear that across many of its business lines Centrica faces both cyclical and structural challenges,” Liberum Capital Ltd. analysts Peter Atherton and Mulu Sun wrote today in a note to investors. “The tough operating conditions are well understood by investors in our view and are therefore likely to be priced in.”

Centrica shares fell 1.7 percent to 309 pence in London today, the biggest decline since May 8.

“With challenging trading conditions on both sides of the Atlantic in the first half, earnings will be lower in 2014 than in 2013,” Laidlaw said in the statement.

Profiting Probe

The U.K.’s six biggest utilities are facing a Competition and Markets Authority investigation to check if they were unfairly profiting from their market positions, which may lead to a breakup of the generation and supply businesses. The probe will push up costs for the utilities and may lead to additional asset sales, according to Fitch Ratings Ltd.

The biggest utilities include SSE Plc, RWE’s nPower, Iberdrola SA’s Scottish Power, Electricite de France SA, and EON SE’s U.K. unit.

Moody’s Investors Service today confirmed Centrica’s A3 issuer and senior unsecured debt ratings, its fourth-highest assessment, while assigning a negative outlook to the utility. Centrica, which is still on review for a downgrade by Standard & Poor’s, said in May it was planning to sell three of its biggest gas assets in the U.K. It sold offshore blocks in Trinidad and a unit in Ontario earlier this month. The company is also looking to sell some U.K. wind power assets, Chief Financial Officer Nick Luff said.

‘Reduce Debt’

“All told we’re looking to take a billion pounds of capital out of the business and use that to reduce the debt level the business is carrying,” Luff told reporters on a conference call today.

“Moody’s expects that these disposals will substantially improve the company’s financial flexibility and support the A3 rating,” it said today. The assessment is constrained by regulatory and political risk in the U.K. and exposure to volatile gas prices, Moody’s said.

Luff announced his departure earlier this year to join Reed Elsevier Plc. He’ll be replaced “on an interim basis” by Jeff Bell, currently director of corporate finance, starting Sept. 1, Centrica said today. Chris Weston, head of the British Gas unit, also quit this year amid reports he’d lost out on the top job to Iain Conn, BP Plc’s head of refining, who will join Centrica as CEO from January.

For Weston, “a succession process is under way, and further details regarding his succession will be given in due course,” Centrica said.

‘Polar Vortex’

Centrica said it will take charges on full-year earnings of 40 million pounds after writing off its Celtic Array offshore wind project, and another $110 million associated with the “polar vortex” adverse weather conditions in the U.S. It said the average customer bill for British Gas is expected to be about 90 pounds this year, 7 percent lower than last.

The company also said it expects to complete a 420 million-pound share repurchase program in the second half.

The utility expects deliveries of 2.4 billion cubic meters of gas from Russia’s OAO Gazprom to start in October under a three-year deal announced in 2012, Luff said. The company will have to “see what happens” with the European Union stepping up sanctions against Russia, he said.

“We expect to take delivery of that gas,” Luff said. Still, “that contract is a relatively small portion of our overall contracts,” he said.

To contact the reporters on this story: Nidaa Bakhsh in London at nbakhsh@bloomberg.net; Alex Morales in London at amorales2@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net; Alex Devine at adevine3@bloomberg.net Alex Devine

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