Centrica shrugs off massive loss

It's all about cuts at Centrica just now, some good, some bad. Just days after British Gas announced prices would fall by 5.1% from next month - the third cut in 12 months - its parent company has announced much lower annual profits and a cut in the dividend. It's spending less, too.

However, Centrica first warned on profits and the dividend a year ago now, with the shares at 287p, so there is already a lot of bad news in the share price. With the British Gas supply business making £574 million in 2015, up 31% on last year, and the 6% yield a major attraction, investors are piling back into the country's largest energy supplier Thursday.

Yesterday, our technical analyst Alistair Strang suggested Centrica shares would need to rise above 206p to "indicate some optimism", but must better 250p to "escape the immediate drop cycle". That the shares have bounced by as much as 4.4% to 202.6p, and before hitting their predicted bottom at 168p, does indicate strength.

Despite that, falling commodity prices created "major challenges" for the firm's exploration and production (E&P) and nuclear power businesses last year, and a big drop in wholesale gas prices means these numbers still look grim.

Another £2.3 billion of write-downs, largely on oil and gas assets following the plunge in energy prices, meant Centrica lost £1.14 billion in 2015, slightly less than the £1.4 billion deficit the previous year when impairments were even larger.

Strip them out and adjusted pre-tax profit still fell over 15% to £1.13 billion. A new billing and Customer Relationship Management (CRM) system plunged the British Gas business supply operation into a £22 million operating loss, and profit at the services division fell 5% to £257 million. Overall, British Gas made £809 million, 2% less than in 2014.

And shareholders will be out of pocket. Centrica had already slashed the interim dividend by 30% to 3.57p, so keeping the final dividend unchanged at 8.43p shrinks the total payout by 11% to 12p from 13.5p in 2014. It means the dividend is covered 1.4 times by earnings.

And chief executive Iain Conn is confident that operating cash flow, up 2% to £2.3 billion, will remain above £2 billion in 2016. It's helped trim net debt by 9% to £4.7 billion.

"We remain confident that our plans and underlying performance momentum will allow us to more than balance cash flows and deliver at least 3-5% per annum underlying operating cash flow growth to 2020, even in the current environment, so underpinning a progressive dividend policy," said Conn.

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