Choppy outlook as Scottish Gas owner Centrica feels heat from energy cap

● Chief executive describes volumes at Spirit Energy arm as ‘disappointing’

Scottish Gas owner Centrica saw its shares come under pressure after it became the latest utility to warn that its financial performance will be hit by the energy regulator’s tariff price cap.

Reporting results for 2018, the group said adjusted operating profits had risen 12 per cent to £1.39 billion, which it attributed to higher commodity prices and strong gas production. Revenue was up 6 per cent to £29.7bn.

However, Centrica – a key player in the North Sea – expects a number of challenges this year, with cash flow to be affected by the rise in energy price caps by regulator Ofgem. It is anticipating a one-off £70 million hit in the first period of the cap.

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 per cent 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.”

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

John Moore, senior investment manager at Brewin Dolphin Scotland, said: “As highlighted by Centrica’s chief executive these results are mixed. Profits are up 12 per cent, costs reductions and debt levels remain broadly on track, there are positive underlying cashflow trends, and moves to simplify the business will be welcomed. Balancing this, analysts will be disappointed by the performance of its exploration and production subsidiary, Spirit Energy.”

Hargreaves Lansdown’s George Salmon said: “The bad news for Centrica is that the weaker outlook comes from a multitude of factors – the government’s price cap, continued outages in the nuclear business and weak offshore production activity. While it hasn’t called out customer losses as a factor, 742,000 UK retail customers have left over the last 12 months, and surely more will follow.”