British Gas owner Centrica PLC (LON:CNA) has warned that it expects an energy price cap that is set for January to hit earnings and cash flow in 2019.
The regulator Ofgem confirmed earlier this month a price cap for 11 million customers on “poor value” default tariffs.
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Centrica said the cap of £1,137 a year for a dual fuel customer paying by direct debit is about £68 lower than the current British Gas standard variable tariff.
“As previously indicated, we expect the price cap to result in some negative near-term impact on earnings and cash flow, particularly in 2019 before we have fully realised planned cost efficiencies,” it said in a trading update on Thursday.
It estimates a one-off negative adjusted operating profit impact of about £70mln in the first quarter of 2019.
In reaction, shares fell 7.1% to 135.3p in morning trading.
Centrica has been repositioning its UK consumer energy supply business ahead of the price cap. It now has 3.1mln customers on the standard variable tariff, down from 4.3m at the start of the year, and expects to lower this to below 3.0m by the end of the year. The group has about 500,000 customers on the lower-priced fixed-term default temporary tariff.
2018 earnings set to decline
For the 2018 financial year, the group expects adjusted earnings per share in 2018 to fall to 11.5p from 12.6p last year after dealing with operational issues in the oil and gas arm, outages in the nuclear business and tough competition in the energy supply market. The estimate takes into account an adjusted effective tax rate of 40% due to a “changed profit mix”.
The group plans to maintain its full-year dividend at 12.0p per share if it meets its targets for net debt of £2.5-£3.0bn and operating cash flow of £2.1-£2.3bn. Last year net debt came to £2.6bn and operating cash flow came to £2.1bn.
“Perhaps it would be better if British Gas owner Centrica just cut its dividend and got it over and done with," said Russ Mould, investment director at AJ Bell.
"A 9% dividend yield suggests the market is expecting such a move at some point anyway."
Adjusted operating profit and total earnings (EBITDA) for the year is forecast to be “above 2017 levels” on the back of estimated savings of £200mln as part of the firm’s cost-cutting programme.
“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,” said chief executive Iain Conn.
“Our efficiency delivery and new customer propositions are helping to offset the effects of strong competition and regulation in energy supply.”
Operational issues and tough competition
Centrica said production in the oil and gas arm, Spirit Energy, has fallen to about 47.5mln barrels of oil equivalent (boe) from about 50mln boe in July when the interim results were published due to unplanned outages and operational issues. Production is expected to be broadly flat this year compared to 2017.
The nuclear business has also been hit by extended inspections and outages at the Hunterston B and Dungeness B power stations.
In the consumer energy supply business, Centrica has grappled with competitive trading conditions in the UK, Ireland and North America. In the UK, it lost 372,000 customers in the four months to the end of October.
Centrica said it expects to achieve its 2018 targets despite the problems it has encountered this year. In February’s full-year results, the company said it was targeting some £500mln of additional ‘cost efficiency’ and it has capped capital investments to no more than an average of £1.2bn per year.
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“Our financial performance has remained resilient despite weaker than planned volumes from our E&P and Nuclear activities and cash generation remains strong,” said Conn.
“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."
Nicholas Hyett, equity analyst at Hargreaves Lansdown, said the nuclear and oil and gas businesses are creating problems and earnings are set to be 10% below what analysts had hoped for as a result but these are "short-term" headwinds.
He added: "The longer-term problems lie in the British Gas business, where a price cap and shake-up in regulation is costing the group 100,000’s of customers. Centrica’s making progress in shifting consumers off the single variable tariffs that are being targeted, but it’s a slow process and there are still some 3m customers that will be affected."