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Just when Centrica shareholders thought it could not get any worse.
Having watched the value of their holdings in the UK’s biggest energy supplier fall 30 per cent this year — as the company battled a tough home market — they now have a fresh problem: North America.
Centrica, which owns British Gas and supplies more than 26m customers worldwide, warned on Thursday that its operation supplying businesses in the US and Canada had suffered in recent months from “highly competitive market conditions”.
While the group said it had flagged rising competition back in August, when it presented half-year results, it had underestimated how quickly that would intensify. In recent months, Centrica appears to have been blindsided by the threat posed by other suppliers and power generators in North America.
Shareholders had been primed for a further loss of UK household supply customers at British Gas — although the 823,000 reduction in accounts between the end of June and October was described as “alarming” by John Musk, an analyst at RBC Capital Markets.
But analysts said the issues in North America, and at the UK business division, which was also hit by tougher competition, had further knocked confidence in the management team, led since January 2015 by chief executive Iain Conn.
Centrica’s share price tumbled 17 per cent at one point on Thursday, putting it on course for its worst-ever one day performance.
“We believe that management credibility with investors is now at an all-time-low,” said Deepa Venkateswaran, a utilities analyst at Bernstein, who added that Centrica’s relatively new leadership had caught shareholders off-guard on several occasions in recent years. In May 2016, for example, it raised £700m through an equity placing with institutional investors that was launched with little prior warning.
One top 20 shareholder told the Financial Times on Thursday that there was “frustration” among investors with management.
“When did management know about [the problems in North America]? Why didn’t they warn us? And couldn’t they have flagged it as a risk?” the shareholder said. “The pressure is on the management and they need to deliver.”
Mr Conn admitted the recent performance in the North American business was “deeply disappointing” but stressed the business was likely to improve.
“We didn’t expect this dramatic shift in the outcome at the middle of the year.” he said on Thursday.
Centrica’s North American business division, which supplies energy to companies, including many industrial groups, typically attracts less attention than its dominant UK household supply operation but it is the second-largest contributor to group profits.
In the company’s last full financial year, the division generated adjusted operating profit of £221m — around 15 per cent of the group total — from 590,000 customer accounts. It is one of the biggest business-to-business gas and electricity suppliers in the region and also advises enterprises on how to make best use of their energy.
The problems have stemmed from warmer weather in North America this year, which has contributed to a period of lower demand and plentiful supply, hitting power prices. Centrica said rivals and new entrants had been cutting prices in the business supply market, putting pressure on profit margins across the industry.
In recent weeks, the group discovered that certain revenues at the North American unit had been over-booked for several years, which would result in a one-off non-cash charge of £76m — or £46m after tax — for the full year.
It is a similar picture to the UK, where Centrica also reported “competitive pressures” at its unit supplying and advising British businesses.
Royal Dutch Shell said this year that it planned to start selling electricity direct to industrial customers. Drax, the owner of the UK’s biggest power station in Yorkshire, has beefed up its presence in the business market through the acquisition of Opus Energy, a supplier of gas and electricity to small and medium-sized companies, while companies such as French utility Engie are also big suppliers of energy to UK enterprises.
Centrica said it expected its UK business unit to be “broadly break-even” this year, having achieved an adjusted operating profit of £50m in 2016.
Overall it cautioned that adjusted earnings per share for 2017 would be around 12.5p, nearly 20 per cent lower than market expectations. Around 0.8p of the impact was due to the one-off charge against the North American division, the company said.
The latest issues in North America come at a difficult time for Mr Conn, who was previously head of BP’s downstream business, and who last year received a near 40 per cent rise in his remuneration package to nearly £4.2m.
Having taken a decision shortly after he took the Centrica job to focus on customer-facing businesses such as energy supply, and downsize oil and gas production operations, the company has found itself at the centre of a political and regulatory storm in the UK around “rip off” electricity and gas bills.
The UK government last month published a draft bill to introduce a price cap on the most common energy tariff in the market, called the standard variable tariff. Moody’s, the credit rating agency, expects the cap to reduce the operating profits of the “big six” suppliers in the UK combined by more than £1bn. Centrica is particularly exposed as roughly three-quarters of its customers are on standard tariffs, according to the regulator, Ofgem.
The “big six” energy suppliers in the UK have for several years been losing customers to new market entrants, which now number around 60, from just 11 ten years ago.
With that showing no sign of abating for Centrica, the added pressures from the North American business are an unwelcome second blow for Mr Conn.
Centrica’s chief executive Iain Conn plans to update shareholders in February on how the company can maintain a “sustainable and attractive” household supply business in the UK, even if a government price cap on electricity and gas bills comes into force in 2019.
The UK domestic supply business is by far the biggest contributor to the company’s earnings, generating £810m of adjusted operating profit last year.
Centrica hopes to generate more revenue per customer by selling products such as its Hive smart thermostat and lighting, which allow consumers to control heating and lights through their mobile phones.
A number of energy companies believe supplying electricity and gas will become a very low margin business in future and are investing in what Centrica calls “connected home” services. They believe the power sector could follow a similar route to telecoms, where a lot of extra profit is generated from services such as broadband and mobile that are packaged with a traditional landline.
Centrica is also hoping to sell more services such as boiler repair and recently launched “Local Heroes”, a website that puts households in touch with tradesmen.
However, analysts at investment bank Jefferies highlighted that even Centrica’s connected homes business — which sells Hive products and has been growing relatively well — appears “unlikely” to reach certain sales targets by the end of the year.