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Direct Energy Profits Down on Margin Pressure, Launches $100M Cost Reduction Initiative, Warns on Impact from Extreme Weather
Direct Energy operating profit fell 11% for the year 2013 to $436 million, as increases in profitability in the residential energy supply and residential services segments were offset by compressed margins for Direct's commercial and industrial energy supply business.
Direct Energy profit for the year 2012 had been $492 million
"[T]otal Direct Energy profitability fell as a result of lower margins in Direct Energy Business, with rising wholesale costs and a highly competitive power market resulting in difficult trading conditions," parent Centrica said in reporting earnings.
"Market conditions for our North American downstream energy supply businesses proved challenging in 2013, as rising gas and power prices, declining barriers to entry and an increasingly competitive environment among both competitive energy suppliers and default utility providers led to a narrowing of margins," Centrica said.
Operating profit for Direct Energy's residential energy supply segment increased by 4% to $258 million in 2013, as the positive impact of previous acquisitions and reduced operating costs were largely offset by, "some narrowing of margins in Texas and the continued decline of our customer base in Ontario as a result of our decision to forgo renewals and new customer sales, due to the Energy Consumer Protection Act (ECPA)," Centrica said.
Direct Energy's number of residential energy supply customers was 3.360 million as of December 31, 2013, down from 3.397 million as of June 30, 2013 and 3.455 million as of December 31, 2012, in part reflecting the expected decline in Ontario, "a highly competitive sales environment in both Texas and the US North East and the expected loss of aggregation customers in the US North East," Centrica said.
In Canada, Direct Energy now has less than 200,000 residential energy supply customer accounts in Ontario. "The business is no longer core to our operations, with the region delivering only 11% of our residential energy supply operating profit in 2013 compared to 20% in 2012 and 29% at its peak in 2010," Centrica said.
"We also experienced a small drop in our regulated customer base in Alberta, although this was partially offset by growth in the competitive customer base in the region. This resulted in an increase in profitability in Alberta," Centrica said.
In the U.S. Northeast, the number of Direct Energy residential energy supply accounts fell by 72,000, to 1.3 million, with the loss of 53,000 aggregation customers and the impact of a competitive sales environment being only partly offset by improved retention rates. Profitability increased in the region, however, reflecting cost efficiencies and the successful integration of customers acquired in 2012 in the Energetix and NYSEG Solutions transactions into Direct's systems.
"In Texas, [residential energy supply] retention rates also improved, with churn improving by 2ppt. However a highly competitive sales environment, with around 50 retail energy suppliers and 200 competitive offers, resulted in reduced renewal margins. To help offset this margin decline, we focused on lowering our operating cost base, with our cost to serve per customer in Texas falling by 24%," Centrica said.
For Direct Energy's business energy supply segment, 2013 operating profit of $122 million was down 36% year-over-year, due to lower margins.
"[T]he power market has been increasingly competitive with, up until January 2014, potential competitors finding it easier to access credit and reduced market volatility providing lower barriers to entry," Centrica said of Direct's C&I supply business.
"In North America, although the Hess Energy Marketing business is performing well, Direct Energy has had a difficult start to 2014," Centrica added. "With a weaker US dollar, continued margin pressures, and exceptionally cold weather which resulted in additional short term system charges, we currently expect Direct Energy operating profit to be broadly flat year on year. Overall for the Group, 2014 trading is in line with recent market forecasts, other than the one-off impact from extreme weather conditions in Direct Energy, with adjusted earnings per share in 2014 expected to be lower than in 2013."
"[M]arket conditions for our residential and business energy supply divisions [in North America] look set to remain challenging," Centrica said.
"Against this backdrop, improving cost competitiveness is a core priority and a cost reduction programme of $100 million is underway, as we deliver synergies from Direct Energy's enhanced scale. We are already benefiting from the creation of an integrated residential energy operations centre in Tulsa and a consolidated energy and services call centre in Phoenix. We are also investing in a new residential energy billing platform for the Alberta market. And in Services, we are transitioning from eight separate operating systems to one, to help deliver simplified processes and operating efficiencies as well as to facilitate a more robust franchising platform," Centrica said.
"In 2014 the [Direct Energy] business will be focused on delivering further cost reductions and building our range of innovative new products and services, with an increased focus on digital channels," Centrica said.
Centrica also noted that Direct Energy now has a relationship with Nest in Canada and launched a bundled thermostat and energy offering in the first quarter of 2014, as first reported by EnergyChoiceMatters.com. "Additionally, we plan to launch a Direct Energy branded smart thermostat in 2014," Centrica said -- it was unclear if this referred to the new Meridian thermostat plan (see prior story).
Regarding the sale of its Texas gas-fired generation, and accompanying heat rate call option arrangement, Centrica said that, "We believe that in the near term this arrangement, together with a liquid physical and financial power market in Texas, can ably support our downstream operations through contractual arrangements rather than asset ownership."
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February 20, 2014
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Copyright 2010-13 EnergyChoiceMatters.com
Reporting by Karen Abbott • kabbott@energychoicematters.com
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