Centrica to cut 4,000 jobs as price cap looms and profits slump

Centrica has announced the loss of 4,000 jobs in the face of stiff competition and the looming price cap on energy tariffs.

Despite a 3 per cent increase in revenues to £28 billion, the group reported a 17 per cent fall in adjusted operating profits to £1,252 million in its preliminary financial results for 2017.

Earnings before interest, tax, depreciation and amortisation (EBITDA) dropped by 9 per cent to £2,142 million and statutory operating profit was down four fifths at £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, corresponding to 750,000 customers.

Speaking to reporters, Centrica chief executive Iain Conn said the fall partly reflected a deliberate attempt by the company to shed around a million loss-making accounts, many of which were acquired at a break-even margin as part of an unsuccessful attempt to later upsell home services to the new customers. He said only 200,000 of the accounts were actually generating any profits for the company.

Adjusted operating profits from Centrica’s UK Home division accordingly fell by just 1 per cent year-on-year to £890 million, despite warmer weather and the introduction of the prepayment price cap. The profit margin per customer, which has ranged between £42 and £65 since 2009, remained broadly level at £59 – or around 6 per cent.

The dip in group profits was instead the result of the “weak” performance of its business supply division in North America over the second half of 2017, partly due to changing market conditions but also an accounting error dating back several years.

Centrica has previously announced thousands of jobs losses as part of a drive to cut annual operating costs by £750 million between 2015 and 2020. Conn said the group has achieved this target three years ahead of schedule but revealed it will now slash another 4,000 jobs, the majority of them in the UK, as it seeks to make £500 million of further cost savings over the next three years.

He said the cumulative job cuts of 9,500 by 2020 would be partially offset by the addition of roughly 2,000 new positions, around half of which have already been created over the past three years.

Conn said the expansion to the scope of its cost cutting efforts is partly a response to “fierce” competition in the retail market from nearly 70 suppliers, “most of whom  lose money”, as well as the trend towards online interactions with customers.

However, he also attributed some job losses to the pending price cap on energy tariffs, although he refused to quantify the impact. He also refused to rule out further job cuts in future.

“We are not blaming anybody,” said Conn. “We’re not in a blame game here. But we’re a business. We’ve got to respond to the circumstances.”

British Gas is withdrawing its standard variable tariff (SVT) from the market at the end of March. Conn said it moved 700,000 customers from its SVT onto fixed price deals last year and will do the same for another 1.3 million customers in 2018, putting the supplier in a good position to cope with the price cap.

Conn said British Gas is already less exposed than many competitors: “Relatively our [SVT] is already £41 below the average of the other large suppliers, and actually its £100 below some of the highest prices in the market. That means others are going to hurt first and more than us as long as we maintain that competitive position.”

He said the company is driving down costs as hard as it can and is aiming for a reduction of £20 per customer by 2020. “That way we think we can handle, as best we can, the price cap without fundamentally making the business unattractive”.

Centrica also announced plans to divest its interests in existing nuclear generation in the UK by 2020. Conn said the group is looking at the possibility of selling to infrastructure funds, given the otherwise limited pool of potential buyers. He said the company has “no regrets” over its decision to sell its stake in Hinkley Point C in 2013.