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Bitterly cold weather in Britain and much of the United States may have meant an increase in the consumption of gas to warm homes and businesses, but this increased volume couldn’t help Centrica, the UK energy conglomerate that owns British Gas and Direct Energy, a North American utility.
The cold snap during the first three months of this year increased average British gas consumption by fully 10 percent, while US consumption rose by 1 percent. Yet because of the long, steep drop in the price of crude, the company said it is suffering financially in its oil and gas production sectors.
One result is that Centrica has had to reduce the value of its once plentiful assets in the North Sea, now that operations there are becoming less productive and more expensive. The price of Brent crude from the region has dropped from more than $110 per barrel in June 2014 to the mid-$60 range today.
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As a result, Centrica warned in a statement on April 27 that increased sales won’t necessarily translate into generous profits. “Improved year-on-year profitability downstream [retail sales] is expected to be more than offset by the impact of lower commodity prices on the upstream [production] business,” it said.
The bad news is only a continuation of 2014. For example, the profits of British Gas, owned by Centrica, plunged by 23 percent to about $670 million, in large part because the utility lost nearly a half-million customers and average bills declined around $150 due to lower consumption during a warm year. Overall, Centrica’s profits were down by fully 35 percent last year.
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Even politics has become part of the mix. Centrica’s statement said its earnings “remain subject to the usual variables of commodity prices, weather and asset performance, and the uncertain outcomes of the UK general election.”
Like many large energy companies, Centrica is working to maintain its financial strength by saving money at a time when earning it is difficult. In its statement, the company said it is likely to meet its goal of cutting capital expenditures by about $12 million this year and an additional 40 percent cut to less than $100 million in 2016.
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Despite these cuts, Centrica said it would invest more than $75 million to hire 350 new employees over the next three years in an effort to improve service for British Gas customers.
Because of heavy losses in 2014, Centrica suggested it may cut its dividend by 30 percent to maintain its credit rating for investors. But the very next month, Moody’s downgraded the rating anyway.
Moody’s chief analyst for Centrica, Helen Francis, said the credit rating service acted “primarily because lower energy prices and generally poorer trading conditions have hurt the company’s profitability and weakened its financial profile to a level that can no longer support [a higher] rating, despite efforts to implement restorative measures.”
By Andy Tully of Oilprice.com
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Andy Tully is a veteran news reporter who is now the news editor for Oilprice.com