Centrica Slumps Most in a Year as Price Cap to Cut Profit

(Bloomberg) -- Centrica Plc plunged as much as 9.5 percent after the U.K. utility warned profit would be about 70 million pounds ($89.5 million) in the first quarter as it feels the initial impact of the government’s cap on standard tariffs.

  • The cap of 1,137 pounds is in line with the company’s expectations, and Centrica is working to reduce the number of customers it has on the impacted tariffs.
  • Centrica expects to meet its 2018 financial targets despite outages in the U.S. which have lead to lower production from exploration and production.
    • Spirit Energy’s forecast production for 2018 dropped to about 47.5 mmboe from around 50 mmboe at the time of the interim results. That reflected unplanned outages and operational issues. Next year’s production is expected to be similar to 2018.
  • Centrica’s announcement translates to earnings per share for 2018 of about 11.5 pence compared with estimates of 12.9 pence, according to RBC Europe Ltd. That’s likely to decline more in 2019.

Key Insights

  • Centrica also is facing a drop in earnings from generation linked to capacity-market payments in the U.K. since that system was suspended by the government. The company didn’t comment more on the suspension, saying it’s waiting for more information. Suppliers have to pay capacity market charges, which are passed on to customers. These have also been suspended, and pressure is growing on suppliers to cut customer bills.
    • READ MORE: Utility Stocks Plummet as U.K. Capacity Market Suspended
  • Centrica lost market share, with 372,000 customers departing in the four months to the end of October. That continues a trend the government is encouraging to reduce the dominance of the big-six energy suppliers, with Centrica being the biggest. Centrica says its focus on “value over volume” as well as people switching suppliers when prodded to move off the standard tariff.

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  • Adjusted operating cash flow expected to be in the range 2.1 billion pounds to 2.3 billion pounds.
  • Full year dividend seen at 12 pence per share.
  • Full year net debt expected to be in the 2.5 billion pounds to 3 billion pounds range.
  • For a link to the trading statement, click HERE, for a story with more numbers, click HERE.

Market Reaction

  • Shares traded down 6.9 percent at 135.65 pence at 9.12 a.m. in London, the biggest drop since November last year.
  • Centrica had gained 6.2 percent this year through Wednesday. That compares with the FTSE 100’s 8.3 percent decline and a 1.3 percent drop for the STOXX 600 Utilities Index.

Analyst Reaction

  • “With continued competitive pressure downstream and over-arching regulatory pressures the outlook appears to be worsening,” said John Musk, utilities analyst at RBC said in a note. “With the commodity environment reversing in recent weeks one of the supporting tailwinds for Centrica has also been removed.”
  • Jefferies Group LLC said it was “encouraged” by the falling customer loss rate which has dropped to to 90,000 a month from more than 100,000 a month.

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