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Centrica Slumps Most in 20 Years on Full-Year Profit Warning

Updated on
  • U.K. customer accounts dropped by 823,000 in July-October
  • Utility says it will be able to deliver on dividend this year

Centrica Plc plunged the most in 20 years after Britain’s biggest energy supplier to homes warned profit would be lower than expected as an increasing number of customers are leaving.

The utility is grappling with government efforts to cap some household energy bills, and announced this week that it will voluntarily phase out its most expensive tariffs. Its market share is also shrinking amid an increasing range of suppliers, with Centrica losing more than 800,000 customer accounts in the four months through October, after shedding 750,000 in the first half.

“The scale of customer losses in the residential market in the U.K. is alarming,” said John Musk, an analyst at RBC Europe Ltd. in London.

Centrica is forecasting earnings per share of 12.5 pence, down 26 percent from last year, according to a trading statement published Thursday. The average estimate by 20 analysts polled by Bloomberg is 15.5 pence. The drop reflects lower-than-expected adjusted operating profit in North America and the U.K., the Windsor, England-based utility said.

Read more about Centrica’s difficulties here

Adjusted operating profit for the North American Business unit is expected to plunge by 64 percent to 80 million pounds, from a year earlier. The North American retail power unit is taking a one-off non-cash post-tax charge of 46 million pounds related to billing.

“I am deeply disappointed with our performance in the second half and I am particularly disappointed in our North America Business,” Chief Executive Officer Iain Conn said on a call with analysts. “We didn’t expect the magnitude of impact from the shift in the second half of year.”

The company’s stock fell as much as 18 percent to 133.7 pence and traded at 138.9 pence at 3:57 p.m. in London. It’s down 42 percent this year, the worst performer in the 29-member Stoxx 600 Utilities Index, which has gained 7.2 percent this year.

Price Cap

The plan by the government would reduce margins that utilities earn from customers on so-called Standard Variable Tariffs. Conn expects the U.K. price cap to come into place by the end of 2018 or early 2019 and last for as long as three years. Analysts have also said it might take more than a year to put in place.

The government intends to legislate on price caps “as soon as parliamentary time is available,” Energy Secretary Greg Clark said last month, adding that the plan is also subject to scrutiny of lawmakers.

Opposition party Labour has long pushed for an energy price cap, and while it supports the government’s measure, it says ministers aren’t acting quickly enough. A Labour government would bring in the cap immediately, the party says.

Centrica will probably announce “more efficiencies” in February and has set a plan for the next five years, Conn said on the call, without providing details. The company will also update investors on its dividend policy then, he said.

Maintaining Dividend

Centrica will be able to maintain its dividend with debt and cash flow on target. The company is “willing to operate with dividend cover from earnings below historic levels” if necessary, according to the statement.

HSBC Bank Plc said that due to deteriorating credit metrics they don’t hold much certainty on the dividend.

“Unless trading conditions improve and Centrica can deliver further significant cost savings, we find it hard to see how the dividend is completely secure,” Verity Mitchell, an HSBC analyst, said in a note to clients.

The number of U.K. customers at the end of October fell by 823,000 since June 30, when the company had 25.5 million accounts. Of those, 150,000 switched after a price rise in September, Centrica said.

Read more about how Europeans are abandoning their utility companies in droves

Updates to annual targets:

  • Adj. operating cash flow expected to be above 2 billion pounds
  • Net debt to be within targeted range of 2.5-3 billion pounds
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