Price cap hits Centrica as it aims to be cheapest supplier on market by 2022

Price caps, nuclear outages and falling natural gas prices have hit British Gas owner Centrica’s finances. Still, the company is aiming to become the cheapest energy supplier by 2022. Outgoing chief executive Iain Conn described the sector as being a “challenging environment” when the company unveiled its preliminary financial results for year ending 31 December 2019. Utility Week takes a look beyond the headline figures.

Centrica hs continued to put the blame on the price cap for its heavy losses in its financial results for 2019 which were posted today (13 February).

The group is vying to become the cheapest energy supplier on the market by 2022 as numerous challenger energy brands continue to erode the dominance of the more-established players.

Centrica posted a loss of almost £1 billion this morning and outgoing chief executive Iain Conn said operating profit and earnings were “materially impacted by a challenging environment”.

He said: “Against this backdrop Centrica delivered growth in customer accounts, higher net promoter scores, significant cost efficiencies in excess of our target, and full year adjusted operating cash flow and net debt within its target ranges.

“As expected, performance during the second half was much improved compared to the first half, demonstrating momentum as we enter 2020.

“Looking to 2020, we expect to deliver earnings momentum relative to 2019 from our core customer divisions, but upstream earnings are likely to be impacted by the lower commodity price environment.”

Group

In its preliminary financial results for the year to 31 December 2019, Centrica reported a statutory loss of £849 million.

Furthermore, its group adjusted operating profit was down 35 per cent, from £1.3 billion to £901 million.

There was a 13 per cent decrease in earnings before interest, tax, depreciation, and amortisation (EBITDA) from £2.4 billion to £2.1 billion.

Adjusted operating cash flow of £1.8 billion was within the group’s 2019 targeted range of £1.8-£2 billion and net debt of £3.1 billion was within the targeted range of £3-£3.5 billion.

Centrica Consumer

In the UK, Centrica says it is focusing on moving towards being the lowest cost supplier by 2022. It added that achieving “cost leadership” would enable sustainable customer and margin growth.

The adjusted gross margin of Centrica Consumer was down £291 million (11 per cent) to £2.3 billion, while adjusted operating profit was down £245 million (33 per cent) to £505 million.

This includes a £300 million hit from the price cap.

The company did however report its overall Consumer customer accounts were up 3 per cent to 722,000.

In the UK, total accounts increased by 451,000, with a 364,000 growth in services due to higher sales of products bundled with energy and 373,000 growth in cumulative home solutions customers, including growth from Centrica’s remote boiler diagnostics proposition, BoilerIQ, and cloud storage offer.

UK Home accounts were up 78,000. British Gas reported a loss of 286,000 customers, significantly lower than the 742,000 it lost in 2018.

Cost per British Gas customer was £109 in 2019 compared to £103 in 2018, although the underlying figure in 2018 was £111 when excluding the impact of a one-off bad debt credit.

UK services cost per customer meanwhile decreased by £18 to £330. Revenue per customer was flat.

Centrica Home Solutions revenue increased by 10 per cent to £74 million and the gross margin percentage increased to 22 per cent compared to 19 per cent in 2018.

The company said that since May it has sold more than 100,000 Hive thermostatic radiator valves which allow customers to digitally manage the temperature in individual rooms in their homes

Additionally, the company took action during the second half of the year to cut operating costs and reduced the headcount in Centrica Home Solutions by around 40 per cent.

As a result, it expects to deliver £15 million of operating cost savings and £10 million of capital expenditure savings in 2020 when compared to 2019.

British Gas’ net promoter score (NPS) improved to +12.

Centrica Business

Centrica Business’ adjusted gross margin was up £148 million (17 per cent) to £1 billion and adjusted operating profit was up £142 million (189 per cent) to £217 million.

The company said these increases reflected a “significant improvement” in achieved power retail margins in North America, good European trading and optimisation performance, as well as a benefit from the decision to defer delivery of gas from 2019 into 2020 from the one remaining large legacy gas contract.

Its UK business delivered growth in small and medium enterprise (SME) energy supply customer accounts, including from the online only British Gas Lite tariff.

The Centrica Business Solutions order book has increased by 19 per cent compared to the end of 2018, revenue in 2019 was up 36 per cent to £285 million and the adjusted operating loss reduced.

Upstream

Outages at the Dungeness B and Hunterston B nuclear power stations resulted in nuclear adjusted operating profit down by £27 million (59 per cent) to £19 million. This largely reflects the lower output.

Furthermore, the company reports that these operational issues mean it may not be able to sell off its 20 per cent stake in nuclear by the end of 2020 as planned.

Group cost efficiency progress

Centrica is targeting £1 billion of efficiency savings across the group between 2019 and 2022, with the total cost of restructuring expected to be around £1.25 billion. This will take total efficiency savings across the 2015 to 2022 period to around £2 billion.

In 2019 £315 million of cost efficiency savings were made, with a significant proportion of these coming from transforming its customer and field operations.

Specifically Centrica continued to further digitalise its customer experience, including a focus on self-serve and automation, and simplification of core business processes.

In UK Home, for example, the company saw a 16 per cent increase in “digital visits” (any interaction online) – with its digital app having more than 2 million downloads. Furthermore, 55 per cent of all transactions were completed online compared to 50 per cent in 2018.

It also added that it has more ‘online only’ than ‘offline only’ British Gas customers.

Outlook

In 2020 both Centrica Consumer and Centrica Business are expected to benefit from adjusted earnings and cash flow momentum, reflecting the improved performance in the second half of 2019.

However, it expects the remaining legacy gas contract in Centrica Business to be loss-making in 2020. In addition, recent significant commodity price falls are expected to negatively impact achieved prices in both E and P and Nuclear in 2020, despite some benefit from forward hedging.

The company said that taking these factors into account, it expects 2020 adjusted operating cash flow to be in the range £1.6 billion-£1.8 billion, lower than 2019.

Succession programme

Last year it was announced that Iain Conn would be stepping down from his role as chief executive in 2020.

During a conference call with the media this morning Conn was asked about his successor as chief executive.

He said that no one has been nominated yet and that there is no timeline for his departure, only that he is expecting to step down following the company’s AGM.

Yesterday it was announced that chairman Charles Berry is taking a leave of absence due to an “unanticipated medical condition”.

In the meantime Scott Wheway, chair of the company’s remuneration committee, will be acting as interim chairman.