Centrica Profit From Household Energy Seen at Six-Year High

  • British Gas EBIT margin forecast to climb to 7.3% in 2015
  • Earnings boosted by cheapest wholesale gas in almost 6 years

Centrica Plc is forecast to earn more from selling energy to households in 2015 than any time in the past six years as fuel prices languished and cold weather boosted demand.

British Gas Residential, which supplies about 11 million U.K. households, will report an earnings margin of 7.3 percent for 2015, according to the median of five analysts’ estimates. The measure of earnings before interest and taxes was 5.3 percent in 2014. Centrica’s full-year results are due to be published Feb. 18.

Centrica is one of Britain’s six biggest utilities coming under pressure from U.K. Energy Secretary Amber Rudd to cut retail tariffs as consumer lobby groups criticize the companies for not passing on last year’s 33 percent drop in wholesale gas prices. The owner of British Gas, the supplier privatized by Margaret Thatcher in 1986, last lowered customer bills in August and is yet to follow the price cuts announced this year by competitors EON SE, SSE Plc and Iberdrola SA’s Scottish Power.

“Wholesale costs have dropped and there was the benefit of a year-on-year increase in consumption as weather was more in line with normal compared with a warm 2014,” said Lakis Athanasiou, an analyst at Agency Partners LLP who sees 2015 EBIT of 625 million pounds ($914 million) at Centrica’s retail gas unit. 

British Gas Residential is forecast to earn 620 million pounds before interest and tax last year, the median of analysts’ estimates show, up from 439 million pounds in 2014. 

Centrica declined to comment on its earnings before publication of the results. Full-year margins at the residential energy unit will be “broadly in line with recent years,” the Windsor, England-based utility said in its first-half report in July.

Centrica has fallen 11 percent this year, closing Wednesday at the lowest level since 2005. The shares rose 0.3 percent to 194.90 pence on Thursday.

Cool weather in the first six months of 2015 almost doubled operating profit in the period to 528 million pounds. That’s unlikely to be repeated in the second half as the mildest December on record may have cut gas consumption by 24 percent, reducing that month’s profit by 85 million pounds, according to Ashley Thomas, an analyst at Societe Generale SA in London.

Low Prices

The global gas market is oversupplied, contributing to the lowest U.K. wholesale prices since March 2010. Utilities typically don’t pass on the full extent of declines or increases in the market because they have to cover fixed costs, such as hedging against future price swings. Household bills should be cut by at least 10 percent for both gas and electricity, consumer lobby group uSwitch Ltd. said in January.

“To help keep market share, Centrica will have to cut prices and that will impact 2016 margins,” Elchin Mammadov, an analyst at Bloomberg Intelligence, said Jan. 29. 

Most analysts surveyed estimate that British Gas’s EBIT margin will drop in 2016, when the median forecast is 6 percent, according to the survey. 

The U.K.’s Competition and Markets Authority is also investigating energy companies in an industrywide probe into competition among suppliers that started in June 2014. That may put further pressure on margins at British Gas and other utilities, said John Musk, an analyst at RBC Europe Ltd., who estimates EBIT margin at 5.2 percent for 2016.

Utilities “have to find the balance between profit they make” and “customers they may lose” by not cutting prices, Peter Atherton, an analyst at Jefferies International Ltd., said Jan. 29. “Amber Rudd has been putting pressure on them to cut prices, but the biggest pressure is coming from competition in the market.”

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