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UTILITY Week 27th February 2015

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16 | 27Th FEbrUarY - 5Th March 2015 | UTILITY WEEK Finance & Investment Analysis I n recent months, there has been a chang- ing of the guard at Centrica, with ex-BP director Iain Conn assuming the chief executive's role. And it is abundantly clear that not eve- rything is rosy in the Centrica garden as last Thursday's 2014 full-year results amply demonstrated. On the back of some decidedly poor – though not unexpected – numbers, Centri- ca's shares fell by over 8 per cent on the day. Investors have become increasingly con- cerned on three counts. First, Centrica's adjusted operating profit, at £1,746 million, was down 35 per cent com- pared with the £2,695 million achieved in 2013: the fall in adjusted earnings per share was somewhat lower at 28 per cent, partly because of a more beneficial tax rate. Second, there was a dividend cut of 30 per cent, the first since Centrica was demerged from British Gas 18 years ago. Third, on the back of the halving of oil prices in recent months, there were impair- ment charges of over £1.9 billion; these have effectively cut Centrica's net asset value by a thumping 42 per cent. All in all, 2014 was an annus horribilis for Centrica as an analysis of its underlying trad- ing performance shows. Of its £1,746 million of underlying operat- ing profit, £823 million was attributable to its domestic British Gas business. In 2014, operating profits from this mar- ket segment fell by 20 per cent, mainly because the weather was far warmer than average – never good news for Centrica, which thrives on lengthy periods of pro- longed cold weather. Indeed, it sold about 20 per cent less gas in the UK last year than it did in 2013. This business continues to be dragged through the political mill with leading politi- cians persistently agitating for price cuts. In fact, domestic gas margins have already been cut. With the ongoing 5 per cent reduction in household prices, they would fall further if the Labour Party were in a position to impose its widely-publicised 20-month price freeze from next May. Even more seriously under pressure is Centrica's Energy division, which has con- sumed the lion's share of investment funds in recent years. Of course, with the Brent Crude oil price plunging from over $115 per barrel to below $60 per barrel in a matter of months, Centri- ca's exposure to this development has been self-evident. Indeed, Conn was splendidly laconic in pointing out that "we are stuck with $100 a barrel costs and $50 a barrel revenues". If the two figures were reversed, all would be fine and dandy. But the oil price is not expected to breach the $100 threshold again for some years, short of major international crises or an unexpected U-turn from swing producer Saudi Arabia. Last year, Centrica's exploration and pro- duction (E&P) returns were almost half those of 2013. And its E&P prospects for this year and for 2016 do not look that rosy either. Neither is there good news for Centrica on its UK power station portfolio. Its gas-fired plant segment reported another substantial operating loss of £120 million. It was slightly less disastrous than the 2013 £133 million loss, but that is hardly encouraging. Such figures discourage potential inves- tors that will help build the new gas-fired baseload capacity that is desperately needed; UK plant margins are now wafer-thin. Furthermore, Centrica has confirmed the closure of its Brigg and Killingholme gas- fired plants, which were put up for sale last year. Centrica also reported lower operating profits – £210 million against £250 million in 2013 – from its UK nuclear power station holdings with EdF. In responding to these setbacks, Conn has not only cut the dividend by 30 per cent but also confirmed that capital expenditure will be cut by about £400 million over the next two years: Centrica's net cash flow fell to just over £1.2 billion last year compared with almost £3 billion in 2013. Even so, the increase in net debt – from £4.9 billion in December 2013 to £5.2 billion in December 2014 – was hardly excessive, although it was curbed by some material disposals. Above all, though, Conn has presided over a 30 per cent slashing of the dividend, primarily on the pretext of preserving Cen- trica's credit rating, which lies at the mercy of fluctuating energy prices. Centrica: a year in numbers Last year was not a good one for Centrica, as its disappointing full-year results and a 30 per cent dividend cut demonstrate. Nigel Hawkins considers the company's prospects. centrica's annus horribilis, as revealeD by its share price 260p 270p 280p 290p 300p 310p 320p 330p 340p Jan Feb Mar Apr 2014 2015 May Jun Jul Aug Sep Oct Nov Dec Jan Feb

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