Energy price cap ‘to hit’ Centrica’s profit this year

Centrica, the owner of British Gas, said it expects the default price cap to affect profits for this year as it delivered “mixed” financial results for 2018.

The firm reported that it shed 742,000 UK energy supply accounts in its preliminary results published today (21 February).

Iain Conn, group chief executive of Centrica, said: “As we enter 2019 the year is a little bit uncertain and it’s a little bit different to what we imagined a year ago.”

He said this is due to “three principle differences”.

“There’s firstly the price cap in the UK energy market and the impact of this has been higher than we had expected a year ago. Particularly with a one-off increase in the first period, which we are challenging.

“The second thing is our exploration and production volumes were disappointing last year and are going to continue to be in the lower half of their planned range.

“Thirdly, we’ve got some nuclear power station outages at the moment and we don’t know when they’re going to come back.”

Centrica revealed its adjusted gross margin was up five per cent while its earnings before interest, tax, depreciation and amortisation (EBITDA) was up by 15 per cent.

Its adjusted operating cash flow was up nine per cent at £2.2 billion, within targeted £2.1-£2.3 billion range. Group net debt meanwhile was £2.6 billion.

Centrica’s adjusted operating profit was up 12 per cent to £1.4 billion, with higher commodity prices and strong rough gas production benefiting exploration and production, despite “disappointing” volumes in Centrica-owned oil and gas company Spirit Energy.

The company reported £248 million of in-year efficiency savings in 2018, taking total cumulative savings since 2015 to £940 million. Furthermore last year saw an “exceptional restructuring charge” of £170 million taking total exceptional restructuring costs 2016-18 to £486 million.

Conn said the price cap, exploration and production volumes and the nuclear outages impacted the company’s after tax adjusted operating cash flow “by a total of about £200 million”.

He said Centrica’s three-year cash flow target is “under some pressure”.

In a statement published with the financial results, Conn added: “Centrica’s financial performance in 2018 was mixed against a challenging external backdrop.

“At the headline level, adjusted operating profit was up 12 per cent and adjusted operating cash flow and net debt were within our target ranges.

“We are taking actions to strengthen the company in 2019 and improve underlying performance in 2020, including driving cost efficiency hard and delivering further divestments, and as a result net debt levels remain underpinned.

“We have developed material new customer-facing capabilities in both Consumer and Business, exposing Centrica to an expanding opportunity-set, with encouraging indications of stabilisation and growth potential.

“Our focus is on performance delivery and financial discipline as we satisfy the changing needs of our customers.”

Looking forward to this year, Centrica said it believes its adjusted operating cash flow will be impacted by the UK default tariff cap which was revised by Ofgem to £1,254 on 7 February.

Furthermore it says continued lower exploration and production and nuclear volumes along with cash tax phasing means the company is targeting a 2019 adjusted operating cash flow in the range of £1.8 billion to £2 billion.

In 2019 Centrica’s net debt is expected to be in the range £3.0 billion-£3.5 billion.

Centrica also announced it will sell its North American franchise homes services business, Clockwork, Inc for $300 million (£230 million).