Centrica profits soar even as power prices slide

However you square it, British Gas owner Centrica (CNA) had a highly successful 2023. On a reported basis, its profits soared thanks to the unwinding of paper losses from the prior year. The £3.6bn re-measurement gains, some of which are related to hedge purchases, took pre-tax profit up to £6.5bn from a £383mn loss in 2022. 

British Gas Energy itself reported a tenfold profit increase to £751mn, thanks to a “an industry-wide one-off recovery of around £500m of prior period costs”. Shareholders will see this flow through with a one-third increase in the full-year dividend, to 4p a share.

The drop in volatility compared with 2022 also played out in the trading unit, which saw its adjusted operating profit fall by almost half to £774mn. This is still leagues ahead of the £70mn seen in 2021. 

Centrica boss Chris O’Shea said the current year would likely see a drop in earnings if energy markets stay subdued. “As you would expect, sharply lower commodity prices and reduced volatility will naturally lower earnings in comparison with 2023 as we return to a more normalised environment,” he said. 

The company’s divisions cover renewable and thermal power generation, energy retail through British Gas, energy trading as well as storage. The distinct drivers of each area means they are unlikely to all be firing at once. O’Shea called it “a lot of compensation in the portfolio”. The past two years look pretty close to perfect for Centrica, however, with high energy prices, high bills supported by government payments, big trading profits and good payments coming through for its gas storage facility, Rough, which reopened at the end of 2022 and saw its capacity increase in June. 

For 2023, the biggest single contributor to operating profit was the infrastructure business, with £1.1bn. Within that unit, nuclear generation provided half of the total, even with the electricity generator levy in place. Two of Centrica’s nuclear power stations, Heysham 1 and Hartlepool, could have their lives extended beyond 2026 (itself an extension from the previous closure date of this year), keeping earnings higher.  

There are long-term questions about the company given the slow shift from gas boilers, but a heat pump dominated Britain looks some time away. The company also installs these, but is not diving into this new technology in any major hurry.

In past years we’ve raised Centrica’s poor dividend cover as a reason to stay away, but this is now close to two times, including the ongoing £1bn buyback programme. Net income is set to fall to below £1bn for this year, however, so it is unlikely returns will continue at this pace. Buy.

Last IC View: Buy, 133p, 27 Jul 2023