Putting all of its eggs in one basket was always going to be risky for Centrica (CNA). The big six energy supplier lost 823,000 customers between June and October this year, prompting its largest ever one-day drop in share price. Chief executive Iain Conn described the results as disappointing, and the group warned that its adjusted EPS for the year would be around 12.5p, below consensus forecasts. This was due to lower than expected adjusted operating profit in both North America and the UK business, combined with the impact of mild weather in October and November.
Falling customer numbers have been an ongoing challenge for the group. This has partly been caused by collective switch deals in the UK, where groups of consumers club together to collectively agree better energy prices. Unsurprisingly, these tend to be lower margin and so Centrica has been looking to move away from the deals. Centrica said 650,000, or 79 per cent, of the customers it lost in the period were from collective switch deals, white-label fixed-price deals or prepayment tariffs.
The group insisted the dividend was safe, with adjusted operating cash flow expected to be above £2bn for the year, while net debt is expected to be within the £2.5bn-£3bn range. However, as it works to shift resources towards customer-facing parts of its operations, management said it was “willing to operate with dividend cover from earnings below historic levels”.
Customer losses have been a common story for the larger energy suppliers in recent years due to efforts from regulator Ofgem to increase competition by facilitating switching between suppliers. In November this year SSE (SSE) announced that its total retail customer numbers for the UK and Ireland were down 410,000 in the year to September 2017 compared with 2016. However, SSE also operates wholesale and infrastructure businesses, which may give it higher fixed costs but provide greater diversification. Meanwhile Centrica threw its lot behind its customer-facing operations in 2015 following a downturn in oil prices.
The increasing competition for customers has been complicated by a draft bill from the government, proposing a cap on energy prices for households on the standard variable tariff (SVT) – a default tariff that accounts for the majority of customers at all of the big six suppliers. A few days before Centrica’s trading statement was released, it published a series of proposals including plans to scrap the SVT for its customers, and called on others to do the same.
