Utility Week

20 | 2ND - 8TH MARCH 2018 | UTILITY WEEK Policy & Regulation Analysis O ver three years ago, in January 2015, Iain Conn took the helm as the chief executive of Centrica. He came on board following a difficult 12 months for the group, which saw it post a statutory operat- ing loss of more than £1.1 billion. Announc- ing the annual results in February that year, he slashed the dividend by 30 per cent and launched a wide-ranging review of the com- pany's strategy. Six months later in July, Conn revealed its conclusions. The group would undergo a major pivot away from its struggling gas and power businesses and towards what he saw as the company's future: energy supply and services. Thousands of jobs would be cut in an effort to rein in costs by £750 million a year by 2020. Investments in power would be refocused on distributed and flexible generation. Peter Atherton, an analyst at investment firm Jefferies at the time, said the strategy would be "challenging" with "no guarantee of success". "But," he added, "Centrica's manage- ment have at least now given shareholders a plausible business plan that offers a chance that the business can survive, and possibly flourish." Restructuring Last year saw the completion of the first phase of the transition. The company ended its foray into wind in January with the sale of its stake in the Lincs offshore windfarm. In June, it disposed of its last large-scale generation assets – the Langage and South Humber gas plants – as well as agreeing the sale of its exploration and production busi- nesses in Trinidad and Tobago and Canada. Centrica ended the year with the merger of its European exploration and production portfolio with that of Bayerngas Norge to create a new company, Spirit Energy, in December. Last week, the group released its prelimi- nary financial results for 2017. Explaining progress so far, Conn told reporters: "We've repositioned the portfolio; we've reallocated resources towards the customer; we've deliv- ered on our major efficiency programme of £750 million per year three years early." Despite a 3 per cent rise in revenue to £28 billion, adjusted operating profit was down 17 per cent at £1,252 million. Earnings before interest, tax, depreciation and amorti- sation (Ebitda) dropped 9 per cent to £2,142 million and statutory operating profit fell four-fihs to £486 million. The number of household customer accounts for both home services and energy supply plunged by 1.725 million – or 7 per cent – to 24.4 million. This included the loss of 1.4 million energy supply accounts, corre- sponding to 750,000 customers. Conn gave assurances that this was a not a sign of failure. It instead reflected a deliber- ate attempt by the company to shed around one million loss-making accounts. Most were acquired through collective switching schemes at a breakeven margin as part of an unsuccessful attempt to later upsell home services to the new customers – a mistake that would not be repeated. These customers had little interest in Centrica's other offerings and just wanted a cheap deal. Many were loss-making even before overheads. Just 200,000 of the dropped accounts were actually generating any profit for the company. "While we don't like losing any custom- ers," said Conn, "clearly our focus is on selling energy to make a profit, not to make a loss." He said the dip in group profit resulted from the "weak" performance of its busi- ness division, particularly in North America, where it was hit by changing market condi- tions and an accounting error dating back several years. Adjusted operating profit fell two-thirds to £161 million. The consumer division, by contrast, was "very resilient", with adjusted operating profit down just 1 per cent at £890 million, despite warmer weather and the introduc- tion of the prepayment price cap. Adjusted operating profit for its UK opera- tions rose 1 per cent to £819 million and earnings from energy supply increased 5 per cent to £572 million. The profit margin per customer, which since 2009 has ranged between £42 and £65, remained broadly level at £59 – or around 6 per cent. Nevertheless, Conn said the company needs to be leaner still. He outlined plans to slash annual costs by a further £500 mil- lion a year by the end of the decade. To do this, a further 4,000 jobs will have to be cut, bringing total losses to 9,500. This will be offset somewhat by the addition of around 2,000 new roles, roughly half of which have already been created. Conn said the decision was partly driven by the trend towards lower-cost online and digital interactions with consumers, as well as "fierce" competition in the retail sector from nearly 70 suppliers, "most of whom lose money". However, he also attributed some of the job losses to the looming introduction of a price cap on default energy tariffs. He refused to quantify the impact of the cap or rule out further job cuts in future. Conn denied that he was trying to pin the blame on government. "We are not blam- ing anybody," he remarked. "We're not in a blame game here. But we're a business. We've got to respond to the circumstances." That said, he was keen to emphasise where the jobs cuts would likely fall, not- ing that 80 per cent of its UK workforce is based outside of the South East, much of it in "some of the more challenged areas of the country". Conn confirmed the price cap would affect British Gas's margins but said the company was aiming to reduce costs by £20 per dual fuel customer by 2020 to counteract its effect. "That way we think we can handle, as best we can, the price cap without fundamentally making the business unattractive," he said. British Gas is withdrawing its standard variable tariff (SVT) from the market at the end of March. The supplier moved a net total of 700,000 customers from its SVT on to fixed price deals last year and Conn said it would do the same for another 1.3 million custom- ers in 2018. As of the end of 2017, British Gas had 4.3 million customers on SVTs. Conn said the company was already less Centrica fights its corner Its financial results for 2017 saw profits dive, prompting Centrica to announce further job losses and cost cutting. Its share price has rallied, but has it done enough? Tom Grimwood reports.

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