Covid and strike action cost Centrica £87m

A combination of Covid-19 and the recent industrial action from British Gas engineers cost Centrica an estimated £87 million, as well as a reduction in customers in the first half of this year.

Announcing its interim results to 30 June the group reported a nine per cent reduction in earnings before interest, taxes, depreciation, and amortisation (EBITDA) compared to the same period last year at £682 million.

Group adjusted operating profit remained broadly flat at £262 million, while British Gas Energy profits increased by £94 million driven by cold weather, a reduction in Covid related costs and material efficiencies.

Additionally, the group has massively reduced its levels of debt from almost £3 billion at the end of H1 last year to just £93 million. This includes the impact of $3.6 billion received from the sale of US business Direct Energy in January.

However, it said, the process to update employee contracts as part of its major restructure announced last summer had been “challenging”.

In response to the changes thousands of British Gas engineers took part in the longest industrial dispute in Centrica’s history.

The combined net negative impact of Covid-19 across the group and the industrial action in British Gas Services and Solutions was estimated to be £58 million higher than H1 2020. Although a number of mitigating actions were taken last year which were not repeated, such as £27 million from the government’s furlough scheme.

Specifically, the adjusted operating profit of British Gas services fell by 36 per cent to £60 million, reflecting approximately £50 million of negative impact compared to H1 2020. Covid and industrial action resulted in additional costs due to the increased use of third-party labour and refunds to some customers for annual service visits not completed.

Despite having contingency plans in place and prioritising emergency visits and vulnerable customers, Centrica saw a “deterioration in operational performance” over the first quarter which resulted in a drop in customer satisfaction levels and was a factor in the loss of customers.

British Gas services customers fell by 144,000 (four per cent) during the first six months of the year. Covid and industrial action resulted in reduced proactive selling and marketing in Q1, while “fiercely competitive” pricing on energy supply switching sites reduced sales of energy products bundled with services.

Service levels were also impacted in Q1, with reduced appointment availability and higher job reschedule levels than in H1 2020. As a result, the number of customer complaints increased and engineer NPS reduced to +61. However, both of these metrics improved over Q2 2021, with NPS moving up by three points between March and June.

Due to reduced Covid restrictions overall in H1 2021 the total number of installs and on demand jobs for the half year was up 16 per cent compared to H1 2020. Within this, boiler installations were up 39 per cent.

Speaking on a conference call with journalists this morning Chris O’Shea, group chief executive, said most customers understood why Centrica halted some service visits due to concerns over Covid.

He added: “The number of our customers who were impacted by Covid-19 and the industrial action was in the minority. I always want to give our customers better service, I want to get to customers quicker than the competition so there are lots of areas that we can improve and that’s why we changed our terms and conditions.

“The industrial action was painful, the change in terms and conditions is about driving an increase in productivity and therefore an increase in customer satisfaction. The productivity towards the end of the second quarter of this year is back at levels that we haven’t seen since before Covid, so we have really seen an improvement. There’s still more to go but better productivity means happier customers and that’s the basis on which we will rebuild this business.”

British Gas Energy

Meanwhile the company updated on British Gas Energy, its new residential arm which now has more than 250,000 domestic customers and 450,000 small business customers.

Adjusted operating profit in this area increased by 121 per cent to £172 million thanks to colder than normal weather resulting in higher consumption. This was partly offset by additional costs associated with commodity volatility and balancing.

It also includes the benefit of cost efficiencies, reduced Covid-19 impacts including a return to historic levels of bad debt provision, and a one-off benefit of around £20 million related to an adjustment in the price cap following Centrica’s successful judicial review in 2019 to allow partial recovery of wholesale costs incurred in the first period of the price cap.

However, these benefits were partially offset by the impact of higher Energy Company Obligation (ECO) costs, which were up £55 million compared to H1 2020, and lower customer numbers.

British Gas Energy residential customers fell by 114,000 (2 per cent), reflecting the announcement in February of a significant increase in default price cap tariffs from 1 April, which resulted in increased levels of market switching across March and April.

Again Centrica blamed fierce competition in the price comparison websites (PCWs) markets, with some of its competitors continuing to price at negative gross margins. This resulted in the company reducing activity through PCWs, while focusing instead on customer retention.

Cost per customer reduced by £7 to £95 which reflects a reduction in overhead costs due to the restructure, as well as a lower bad debt charge.

In order to more effectively compete with its challenger brand rivals the retail arm is utilising a new, low-cost ‘software as a service’ IT platform with more modern ways of working. This new platform, the company said, will allow it to launch customer propositions more quickly, improve the customer experience and further reduce costs to serve.

Due to the company now running two systems, it expects to incur some additional operating costs. However to mitigate this it is also reducing capital expenditure on the legacy IT system as it migrates customers onto the new platform.