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Centrica North America Business (C&I) Segment Returns To Profitability, But Earnings Down 50% Versus H1 2017

Segment Still Challenged By Capacity Market Charges, Low Unit Margins

North America Home Business Sees Great Improvement In Net Churn, Earnings Flat

July 31, 2018

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Copyright 2010-17
Reporting by Paul Ring •

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Centrica reported that its North America Business (C&I) segment returned to profitability in the first half of 2018, having made a loss in the second half of 2017

However, North America Business (C&I) segment adjusted operating profit for the six-month period ended June 30, 2018 was down 50% at $69 million, versus $141 million a year ago, on lower realized unit margins in the power retail business

For the North America Business (C&I) segment, Centrica reported, "retail power net margins on multi-year fixed price contracts signed in earlier periods continued to be squeezed by the timing effect of capacity market charges in the US North East that were higher in this period and will be lower in subsequent periods."

As a result, total North America Business (C&I) segment power (retail and wholesale) adjusted gross margin fell by 58% to $66 million for H1 2018, versus $156 million for H1 2017.

"We expect this dynamic to continue in retail power through the remainder of 2018, but margins from these contracts are expected to recover in 2019, with total net margin under contract for 2019 at the end of June 2018 higher than the net margin under contract for 2018 at the end of June 2017," Centrica said of the North America Business (C&I) segment

"We currently expect gross margin to improve in H2 2018 relative to H1 2018, and we are seeing a return towards more historically normal unit net margins in future periods, with 2019 margin under contract ahead of where 2018 margin under contract was at this time last year," Centrica said of the North America Business (C&I) segment

Total North America Business (C&I) segment natural gas (retail and wholesale) adjusted gross margin was up by 7%, at $231 million, for H1 2018, reflecting stronger gas optimization margin compared to H1 2017, as the segment captured value in the cold weather environment in Q1.

The North America Business (C&I) segment had 538,000 customers as of June 30, 2018, versus 570,000 as of December 31, 2017, and 577,000 as of June 30, 2017.

The 32,000 decline in North America C&I customer accounts versus December 31, 2017 largely reflects the segment's exit from the door to door and third-party telesales sales channels. "These channels have higher cost to acquire, higher regulatory risk and deliver relatively lower value and less loyal customers. Sales activity from these channels is being replaced through lower cost channels and reflecting this approach, we have revamped the web enrolment experience and our customer targeting model. As a result, digital sales are up 52% compared to H1 2017 and in addition, our recently launched rewards programme, targeted at higher value SME customers, is also helping enhance customer lifetime value," Centrica said

"In North America Business energy supply, despite the near-term margin pressures we are experiencing in 2018 we retain a strong position with good growth prospects. During H1 2018 we implemented changes in our sales channel mix and products and propositions, including our new Fixed Energy Plus offer, that gives high consuming customers access to real time usage and alerts them when system load is peaking allowing them to proactively reduce their consumption. In addition, system enhancements are providing us with greater granularity of gross margin drivers, underpinning our confidence in our forward order book. We have now completed two small bolt-on acquisitions in line with our strategy, adding customers in our core regions of the US Northeast and Mid-Atlantic and in states in which we have less of a footprint, specifically Indiana, Kentucky, Tennessee and Ohio. These transactions add around 150bcf to our annualised customer gas consumption," Centrica said

Details on the two North America retail businesses acquired by Centrica are in our related story today: Direct Energy Acquires Retail Customer Books

North America Home

Centrica's North America Home Energy Supply segment reported adjusted operating profit for the first half of 2018 of $100 million, versus $101 million a year ago.

Centrica said that increased cost efficiencies across its operations largely offset the impact of lower customer count in its North America Home Energy Supply segment

Centrica's North America Home Energy Supply segment saw a net decline of 33,000 customer accounts since December 31, 2017; however, this was a significant improvement from the decline experienced during the first half of 2017

"Energy account holdings reduced by 33,000 in the period, a significantly reduced level of losses compared to a reduction of 232,000 in H1 2017, with improvements across all regions. Despite increased competitive pressures in certain US North East markets we delivered improved sales performance, particularly through digital channels, while in Canada we continue to rebuild sales channels following our exit from door-to-door sales activity. We continue to focus our acquisition and retention on the most valuable customer segments, using data analytics to identify customer groups with higher estimated lifetime values. This enabled us to target the proactive renewal of more valuable customer segments on fixed price contracts in the important Texas market," Centrica said

While North America Home Energy Supply customer count declined, "our use of data analytics in North America is allowing us to focus on acquiring and retaining the most valuable customer segments through cost effective channels and we delivered a significant increase in sales to higher usage customers at a lower cost to acquire," Centrica said

North America Home Energy Supply segment customer count was as follows:

North America Home Energy Supply
Customers (In Thousands)

As of     6/30/17  12/31/17   6/30/18
Texas        677     654       640
Northeast  1,031     983       975
Canada       957     933       922

Total      2,665   2,570     2,537

Across its Consumer division (all geographic markets) Centrica said, "we are investing in the data science that underpins customer segmentation, to understand our customers better and create products and services that are tailored to their needs. Our enhanced capabilities are allowing us to optimise sales and marketing spend towards the most valuable channels and customers, target personalised offers at high value customers, and develop new customer offers, including bundles, that are tailored to different customer segments."

Connected Home

Across all of its geographic markets, Centrica said of its Connected Home segment, "We saw further growth in Connected Home products, hubs and subscriptions in H1 2018. We reached 1m customers in May and the cumulative number of customers increased by 135,000 in H1 2018. We also sold 352,000 products in the first six months and have now sold over 2m connected home products in total, nearly twice as many as 12 months ago. This reflects the wider range of products now available on the Hive ecosystem, including our Hive View camera, our advanced hub, Hive Hub 360 and our new GU10 light product range, all of which we launched in H1 2018. We have also introduced subscription options for camera storage, video playback and water leak detection."

Centrica said of its Connected Home segment, "We continue to develop and build strategic partnerships. In the UK, we announced a partnership with EE, allowing customers to bundle Hive with their monthly mobile subscription. We have also now expanded Hive into mainland Europe, with our commercial partnership with Italian energy company Eni gas e luce going live in April and the launch of the Hive website in France. Most recently, we entered into a partnership with Wave, a joint venture between Anglian Water and NWG Business, to offer our water leak detection product to their business customers. All the products, services and channels we launched during H1 2018 will be fully available in H2 2018 and we are also planning further launches of products, propositions, subscriptions and partnerships in H2 2018. As a result, we expect growth to accelerate in H2 2018, and for the full year we continue to target a doubling of Connected Home revenue, as well as 500,000 new customers and over 1m product sales."

Connected Home reported an adjusted operating loss of £44 million for H1 2018, flat versus the year-ago

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