Centrica expects price cap to dent profits by £70m

Centrica expects its profits to be reduced by £70 million in the first quarter of 2019 due to the introduction of the price cap on default tariffs at the beginning of January.

In a trading update, the British Gas owner also revealed it lost 372,000 domestic energy supply accounts in the four months to the end October after the supplier announced a 3.8 per cent increase to its stand variable tariff over the summer – its second price hike this year.

Nevertheless, Centrica expects adjusted operating profits and earnings before interest, tax, depreciation and amortisation (EBITDA) to be higher in 2018 than the year before. Adjusted operating cash flow is anticipated to fall somewhere between £2.1 billion and £2.3 billion.

Earlier this month, Ofgem confirmed the price cap on default tariffs will be set at £1,137 per year for a typical direct debit customer – £68 less than the current price of British Gas’ standard variable tariff (SVT).

The supplier now has 3.1 million customers on its SVT, down from 4.3 million at the start of 2018. It is planning to remove another half a million customers from the tariff by the end of the year. There are additionally around 500,000 customers on its temporary fixed-term default tariff.

Centrica said it is hoping to mitigate the impact of the price cap on its bottom line through efficiency savings. At the end of October, the company had already slashed annual costs by £189 million and it is aiming to raise the figure to £200 million by the end of the year.

But the firm warned that the price cap will still dent earnings and cash flow over the short-term: “The ongoing impact of the level of the cap is in line with our base-case assumption, which was based upon previous statements from the UK government.

“However, Ofgem’s revision to the methodology for calculating supplier wholesale and hedging costs during the transitional period, and our inability to retrospectively mitigate this change, is expected to result in a one-off negative adjusted operating profit impact of around £70 million in the initial period of the cap in the first quarter of 2019.”

Centrica chief executive Iain Conn said: “As we have done over the last four years, we are focused on driving significant underlying improvements in performance and delivering attractive returns while re-positioning the portfolio towards the customer.

Our efficiency delivery and new customer propositions are helping to offset the effects of strong competition and regulation in energy supply.”

He continued: “Maintaining a focus on performance delivery and financial discipline and demonstrating resilient cash flows remain our objectives for 2019 and beyond, as we deal with the impact of the UK energy supply default tariff cap.”

According to the update, Centrica has so far gained 280,000 connected home customers during 2018 and shifted 767,000 products. Gross revenues from the business in the four months to the end of October were up 74 per cent when compared to the same period last year.

The company is due to release its preliminary result for 2018 on 21 February.