British Gas owner Centrica warns energy price cap will hit 2019 performance

British Gas owner Centrica has warned that its financial performance in 2019 will be hit by the energy regulator’s tariff price cap as it reported a double-digit increase in annual operating profits.

Adjusted operating profits rose 12% to £1.39 billion in 2018, which the company attributed to higher commodity prices and strong rough gas production. Revenue increased 6% to £29.7 billion.

However, the energy provider expects a number of challenges in 2019, with cash flow to be affected by the rise in energy price caps by regulator Ofgem. It expects a one-off £70 million hit in the first period of the cap.

Last July, the Government passed a Bill which called on Ofgem to impose a cap on all default energy tariffs, including the standard variable tariff, which came into effect at the start of the year.

The company lost 742,000 customers last year, which it said was due to heightened competition in the energy supply sector with more customers switching providers.

Centrica is aiming for operating cash flow to be between £1.8 billion to £2 billion in 2019, which is below the targeted range of £2.1 billion to £2.3 billion on average over 2018-2020.

Group chief executive Iain Conn said: “Centrica’s financial performance in 2018 was mixed against a challenging external backdrop. At the headline level, adjusted operating profit was up 12% and adjusted operating cash flow and net debt were within our target ranges.

“However, volumes in Spirit Energy and nuclear were disappointing and recovery in North America business was slower than expected.

“Our 2019 financial performance will be impacted by the UK default tariff cap and continuing lower volumes in E&P (exploration and production) and nuclear, meaning our 2018-20 target range for average adjusted operating cash flow is under some pressure.”

He added: “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.”

Centrica expects to make £250 million of savings in 2019 and is targeting an additional £500 million of savings beyond this year.

George Salmon, equity analyst at investment firm Hargreaves Lansdown, said Centrica’s warning about cash flow could affect the group’s shareholder payouts in the long term.

He said: “The dividend is starting to creak. It’s been held at 12p this year, but Centrica is increasingly relying on cost-cutting and disposals to prop up the payment. Neither can continue forever.

“We wouldn’t be surprised if a cut was around the corner, especially given the group has previously stated it was only comfortable committing to the dividend if it could generate over £2.1 billion of adjusted operating cash flow, a figure that now looks out of reach next year.”