Utility Week

26 | 30TH AUGUST - 5TH SEPTEMBER 2019 | UTILITY WEEK Customers Analysis W here did Centrica's 2019 go so wrong? The recent interim results from the company were dire as its woes continue. Its shares fell by more than 9 per cent on the day of reporting and are now testing their lowest level since the demerger from British Gas in 1997. The profit figures were way down on the corresponding H1 period in 2018 and, not surprisingly, the dividend was slashed – by no less than 58 per cent. There was confirmation, too, that much- criticised chief executive Iain Conn has now become semi-detached and will depart next year. This is not surprising. Few FTSE-100 chief executives who preside over two divi- dend cuts survive – especially when one of them is almost 60 per cent. Conn summed up H1 2019 as "an excep- tionally challenging environment" for Centrica. So, what might he have done differently? Smart home strategy Was Conn's focus on heavily expanding smart home products and services a flawed strategy? Or was it a plan that was moving in the right direction but needed more time to deliver decent returns? It was certainly overhyped, especially in terms of its potential to boost underlying earnings. Furthermore, setting up a separate accounting division to highlight growth rev- enues was probably an own goal. Indeed, back in February when Utility Week interviewed Claire Miles, the outgoing managing director of Connected Home, she had exuded confidence about its potential in providing home energy management, home remote diagnostics and monitoring. With the benefit of hindsight, the wis- dom of Centrica's smart tech focus is now being questioned by many in the market, as the plunging share price suggests. Although some still contend that Conn had the right idea, albeit very much on a long-term perspective. Certainly, in the overall H1 figures, the so-called growth revenue businesses – Con- nected Home, and Distributed Energy and Power (DE&P) – barely featured. Although their combined revenues of £154 million in H1 were up by 47 per cent, this was from a very low base. Undoubtedly, the returns from Connected Home's Hive brand, a leading smart home technology, have been profoundly disap- pointing. Its operating loss rose to £49 mil- lion, compared with £44 million in H1 2018 – unquestionably a big loss from a small turnover. Subsequently, Centrica decided to exit various overseas markets, such as the US, Canada, France and Italy, where Connected Home was developing its business. Only the UK and Ireland remain. As such, its future revenues projections have been harshly stripped back, so that Connected Home can no longer be consid- ered the "star child of Centrica's stable". The bigger picture At a more general level, Centrica's overall fig- ures are revealing. Adjusted operating profit at £399 million was almost half that of H1 2018: the fall in adjusted earnings per share was even more marked – to just 2.4p com- pared with 6.4p in 2018. The 58 per cent dividend cut and a near £500 million rise in net debt capped Centri- ca's depressing six months of trading. All of Centrica's main business streams reported major setbacks. Its most profit- able business, Centrica Consumer, in effect underpins the dividend – or what remains of it. The adjusted operating profit for this divi- sion was £240 million, compared with £430 million in H1 2018. The UK Home element of this division is pivotal. However, it is suffering grievously from the controversial imposition by Ofgem of retail price controls or, more specifically, the UK residential energy supply default tar- iff cap. Undoubtedly, it has severely squeezed margins and seems set to continue to do so. Furthermore, since 1 January, UK tem- peratures have generally been mild, thereby reducing demand for Centrica's gas. Indeed, it has confirmed that the average energy use per residential account over the H1 2019 period was 238 therms, compared with 263 therms in H1 2018. Perhaps the brightest spot in UK Home was the doubling of adjusted operating profit Centrica's H1 horribilis The recent focus on Centrica's smart homes strategy as the root of its poor interim results is overhyped and masks much deeper financial woes for the group, says Nigel Hawkins. FIRST HALF FINANCIAL RESULT Period ended 30 June 2018 2019 Adjusted revenue (fm) 14,020 1 13,808 (2%) Adjusted gross margin (fm) 2,256 1,927 (15%) Adjusted operating profit (fm) 782 399 (49%) Adjusted effective tax rate 39% 47% 8ppt Adjusted earnings (fm) 358 134 (63%) Adjusted basic earnings per share (p) 6.4 2.4 (63%) Statutory basic earnings per share (p) 4.3 (9.6) nm Interim dividend per share (p) 3.6 1.5 (58%) EBITDA (fm) 1,324 1,075 (19%) Adjusted operating cash flow (fm) 1,101 744 (32%) Group net investment (fm) 463 139 (70%) Net debt (£m) 3,280 2 3,376 3% Net debt as reported (fm) 2,886 3,376 17% The above adjusted figures are before exceptional items and certain re-measurements. Adjusted operating profit includes share of joint ventures and associates before interest and taxation. Reconciliations of adjusted operating profit, adjusted earnings and adjusted operating cash flow are provided in the Group Financial Review and other adjusted performance measures are explained on pages 58 to 61 of the Interim Results announcement.

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