Centrica profits to take a hit but price cutting pays off for retail arm

Published on Saturday 7 November 2009 16:37

CENTRICA, owner of Scottish Gas, is this week likely to reveal it has attracted more customers to its retail arm after a 10 per cent cut in prices in the past year.

Chief executive Sam Laidlaw is expected to say the company remains on track to meet profit expectations for the full year to December.

The consensus figure for operating profits for the year is 1.86 billion, down from 1.94bn in 2008 as Centrica's upstream business of gas production and power generation has been hit by falling wholesale gas prices.

However, Laidlaw is expected to say at Thursday's update that this negative impact has been partly offset by an increase in profit at British Gas.

The subsidiary, which trades as Scottish Gas north of the Border, revealed in the summer that its 10 per cent price cut attracted 60,000 new customers in May and July. This trend of customer growth is believed to have continued, say analysts.

Like some of its rivals, the company was able to cut gas prices because it did not have to pay as much for wholesale supplies. Further attention will focus on additional cost-cutting at British Gas. About 200 million has been taken out of the business's cost base in the past two years, and Centrica has said there will be another 100m cut over the next two years.

Analysts will also be interested in how the integration of Aberdeen-based North Sea oil and gas explorer Venture Production is going. Centrica captured the group in a 1.3bn hostile takeover battle last summer.

&#149 Scottish & Southern Energy (SSE) is expected to shrug off falling power prices and depressed profit margins by unveiling a rise in underlying interim earnings and dividend this week.

SSE guided the market to a "moderate" increase in profits in a recent trading update. The City expects that adversely impacted earnings from generation due to the lower prices will be balanced by an easing of pressures on the supply business.

The company's supply business now has more than 9.1 million customers, having gained about 600,000 last year.

Of the major vertically integrated utilities, SSE is seen as the least exposed to wholesale power prices. This was shown by a recent note from broker Citigroup, which cut earnings forecasts for vertically integrated utility groups by 20 per cent given falling prices, compared with a 6.4 per cent cut at the Scottish group.

SSE is expected to unveil underlying earnings for the six months to September of 527.5m against 430m last time, according to the City consensus.

Analysts will be particularly interested in what the company, led by Ian Marchant, has to say on its big capital investment programme.

Tina Cook, utilities analyst at broker Charles Stanley, said: "Capital expenditure in the current year (at SSE] is expected to be around 1.5bn, with 50 per cent allocated to renewables (offshore and onshore wind investment]."