Centrica blames price cap as it axes 4,000 jobs

A weak second half in Centrica's UK business, due to falling customer numbers and a possible government-imposed price cap led to a 17% fall in adjusted full year operating profits to £1.25bn as the company announced it was axing 4,000 jobs by 2020.

Chief executive Iain Conn apologised for what he called a “very poor shareholder experience”.

“Our financial result in the second half of 2017 was weak, primarily reflecting poor performance in business energy supply and particularly in our North America Business unit,” he said.

The British Gas owner also booked a £476m post-tax net exceptional charge, predominantly relating to impairments of exploration and petroleum assets and the Rough gas field.

The dividend was maintained at 12p a share, while EBITDA was down 9% to £2.14bn.

Consumer adjusted operating profit of £890m was down 1% year-on-year, while business operating profit was down by 67% to £161m.

"Pretty much everything is being blamed for the hit to business profits from the impact of high electricity cost volatility in the UK to low gas price volatility in North America," said Neil Wilson at ETX Capital.

The company also lost more than 1.7m customers, or 8% after raising standard electricity prices by 12.5%.

"Although less of an impact on profits this year, arguably the real worry for Centrica lies at its core – the business continues to lose customers in the UK domestic market," Wilson said.

"Management has to find a way to staunch the flow of losses, which seems to be getting worse, not better. As noted in November in the four months between the end of June to the end of October, Centrica lost 823,000 UK energy supply accounts. Competition is fierce as smaller players take on the big six."

The company said capital reinvestment, including consolidating 100% of Spirit Energy capital investment, and any capability-building bolt-on acquisitions, will be limited to no more than £1.2bn a year to 2020.

"We also do not plan to pursue any major growth acquisitions, reflecting the uncertainty surrounding the UK energy supply market and our desire to maintain balance sheet strength consistent with our targeted strong investment credit ratings," Centrica said.

"In 2018, competitive pressures, the impact of a full year of the prepayment price cap and the implementation of a price cap for vulnerable customers, and our actions to move customers off the standard variable tariff are likely to put pressure on gross margins in our UK residential energy supply business."

"We expect to maintain the current level of the dividend per share, subject to generating adjusted operating cash flow within the target range and net debt remaining within a £2.25bn-£3.25bn range. Growth in the dividend will only be possible when adjusted operating cash flow growth has been demonstrated."

'Whine and wail'

"There is a link between our cost efficiency programme and preparing for any price cap in the UK.

"We've got to be competitive and this measure means we've got to drive more efficiency."

Parliament's powerful all-party Business select committee last week said an energy price cap should be introduced “urgently” to stop vulnerable customers on variable tariffs being ripped off.

It said the domestic energy market was “broken”, with suppliers punishing loyalty to subsidise cheap deals for customers who switch regularly and concluded that the so-called “Big Six” suppliers had brought the introduction of a price cap on themselves by raising prices in 2017 and failing to take effective action on standard variable tariffs (SVTs).

Committee chair Rachel Reeves said a cap should be in place by next winter.

“The Big Six energy companies might whine and wail about the introduction of a price cap but they’ve been overcharging their customers on default and SVTs for years and their recent feeble efforts to move consumers off these tariffs has only served to highlight the need for this intervention," she said.

ETX's Wilson said while Centrica's vow to bear down on financial discipline was welcome, the question was whether "Conn and co have more in mind to fix Centrica than just wielding an axe to costs".

"Despite today’s small uplift, shares are down two-thirds from the September 2013 peak and are now trading where they were in 1999. Not a great performance by any stretch and it will take more than just slicing costs here and there to fix it,” he said.