Centrica cuts jobs as weak economy hits profits

February 23, 2012 | Employment

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The U.K.’s biggest energy supplier Centrica Plc Thursday said it had cut around 2,300 jobs as part of its plan to deliver GBP500 million in cost savings as weaker economic conditions and higher wholesale gas prices pressured profits.

Of the job cuts, 1,900 were at Centrica’s residential gas and power supply unit British Gas, 400 were in its North America division Direct Energy and the remaining 162 jobs were at Centrica Energy and its corporate centre, a spokesman said. The job cuts total included 850 that it had announced last November.

The company, which employs around 40,000 people, said it will drive further cost savings across the group to enhance competitiveness.

The job-cuts disclosure came as Centrica said it had decided not to convert its Bains gas field in the east Irish Sea into a storage facility, saying that three-dimensional seismic data indicated the reservoir would not be sufficiently attractive. Centrica said its Caythorpe storage project in Yorkshire remains on hold until the market improves.

The U.K. has significantly less gas storage than its European counterparts. As it grows more dependent on imports, the government is worried there could be a shortfall in times of peak demand. But companies have been reluctant to invest in storage, saying the economics are not attractive enough.

Centrica is also proposing to close two gas-fired power stations, at Barry in Wales and Kings Lynn in northeast England, as the older less-efficient plants are not economically viable with the current high gas prices.

But overall, analysts said Centrica, which posted a 1% increase in adjusted operating profit from continuing operations for 2011, appeared to have turned a corner following last year’s double whammy of higher wholesale gas prices and a surprise increase in taxes for oil and gas production in the U.K.

“These were decent results in a difficult environment, and our view is that the majority of the bad news is behind them now,” said Liberum Capital analyst Guillaume Redgwell. Liberum has a buy rating on the stock and a target price of 370 pence.

Going forward, Chief Executive Sam Laidlaw said Centrica plans to deliver improved year-on-year adjusted earnings growth in 2012, even as it faces the same economic challenges as in 2011.

“Overall, we plan to deliver improved year-on-year adjusted earnings growth in 2012 although we continue to face some of the same headwinds as in 2011, in particular the effects of continued economic pressure on household and business budgets,” Laidlaw said.

Centrica’s full-year dividend was up 8% at 15.4 pence per share.

Group adjusted operating profit, or earnings before interest, tax and depreciation, rose to GBP2.42 billion from GBP2.39 billion in the previous year. Analysts consider group adjusted operating profit a crucial indicator of Centrica’s performance.

The operating profit results were 2.4% below analysts’ expectations of GBP2.48 billion in a consensus poll of 15 analysts provided by the company.

Profit at Centrica’s downstream supply business fell 17%, mostly due to higher gas prices. This was partly offset by a 33% increase in profits in its U.K. upstream business due to the higher oil and gas prices and a 33% rise in profits at its North America business.

Centrica’s net profit attributable to equity shareholders for the full year fell 78% to GBP421 million, compared with GBP1.94 billion for the same period in 2010.

The fall was attributed to an GBP844 million charge due to revaluation of contracts, pension changes, losses on disposals and “mark to market,” which indicates the most current market valuation of its gas contracts, but is an accounting note and not a reflection of the company’s cash position.

Group revenue for the year was up 2% at GBP22.8 billion from GBP22.4 billion in 2010.

At 1507 GMT, Centrica shares were up 0.9% at 296.10 pence, outperforming the broader FTSE 100 index.

Centrica’s shares are down around 12% from a year ago, underperforming the broader U.K. stock market due to the surprise tax increase on U.K. gas and oil production last March and a slowdown in revenue at its home services business due to weaker economic conditions, analysts said.