The share price of Centrica (LSE: CNA) is down over 2.6% so far this morning, following publication of an interim management statement in which the gas and electricity supplier revealed that the post-tax margin for its UK residential energy supply business is expected to be around 4% this year, which is lower than its long-term expectation of 4.5%-5% which it believes is necessary to “underpin investment” in its business. The company has accordingly reduced its earnings outlook for 2014, dropping full-year adjusted earnings per share to a range of 22-23p, down from the 26.6p of 2013.
Centrica said that market conditions in both its UK and US markets have been “challenging“, with lower consumption in its UK downstream business owing to milder weather (average residential gas and electricity consumption for the first four months of 2014 were 25% and 10% lower respectively than for the same period last year), a highly competitive energy supply market (Centrica’s number of residential accounts on supply has decreased by 180,000 in the year to date), and what it describes as “an unprecedented focus on the energy sector“. And the company says it incurred significant one-off additional Q1 costs in the US because of extreme weather conditions.
Looking ahead to 2015, Centrica says there will be “upward pressure” on the market cost of energy, including an increase in network charges, and higher costs associated with renewable energy. It also says that it doesn’t expect to be able to increase residential energy prices this year, because of the competitive supply market and wholesale price environment. However, the company says that it expects the Group to return to earnings growth in 2015, “subject to the usual variables of commodity prices, weather and asset performance“.
Commenting on the statement, chief executive Sam Laidlaw said:
“Customer relationships are core to the long term health of Centrica. The investment we are making in smart connected homes and innovation is helping customers reduce and control their energy consumption, which is the most sustainable way to keep bills down.
“Investment in security of supply remains a key priority. We continue to invest in new sources of gas for the UK and we have commitments totalling around £60 billion to help secure energy for our customers.
“We are also refocusing our UK power generation investment towards more flexible plant, with a view to bidding into the capacity market.”
At 320p, Centrica’s share price is down 15% on this time last year, compared to a 3.7% rise in the FTSE 100. The story over five years isn’t as bad, but Centrica still trails the index, having on gained 41%, versus the FTSE 100’s 53%.
