Direct Energy Focused on More "Sustainable" Business Model, Focuses on Delivering Organic Growth

Direct Energy is focused on, "developing a more sustainable business model," for its residential business, Centrica Chief Executive Iain Conn said in presenting earnings and a results of a strategic review last week.

See last week's stories on Direct Energy first-half results:

Centrica Strategic Review Says Direct Energy "Important" Part of Group, Sees Opportunities To Increase Market Share; Group Emphasizing Its Customer-Facing Businesses

Direct Energy Records "Significantly Higher" Profit

"In North America, for residential customers we are focused on developing a more sustainable business model, with the potential to access additional market share in the United States," Conn said.

"Two thirds of our business is in Texas and Alberta which are fully or materially deregulated and where we can compete effectively. The focus on developing a more sustainable model is therefore largely about the US North East," Conn said.

"This will require delivery on three dimensions -- improved propositions, including adding higher-retention Connected Home offerings, greater focus on customer mix, and achieving lower churn. We believe this will allow for the possibility of market share growth, targeting the 60% of customers who have not yet switched from the default supply in the US North East and also the potential of expansion into other States," Conn said.

Conn noted that Direct Energy's residential energy supply business saw a decline of 68,000 accounts during the first half of 2015 as the company, "deliberately focus[es] on the more valuable customer segments and the quality of our offerings and on sales margin discipline." As previously reported, Direct Energy Residential saw organic growth in Texas, although this was more than offset by the expected decline in Ontario.

Badar Khan, CEO of Direct Energy, further told investors that Direct Energy is focused on delivering organic growth.

"I think the most important takeaway that you should take from North America is that we are focusing on delivering organic growth. So over the last decade you will recall that we have relied quite significantly on M&A to grow the business. What we have been saying over the last two years and what we are currently saying today is that we are looking for organic growth and we think it can be delivered in three forms," Khan said

"Firstly, in actually differentiating our offer for both homes and businesses. We provided you with some sound bites in the materials today of where we are bundling our energy offer with our services offers and Connected Homes offer where over the last six months we have seen 42% of new residential customers choose a bundle versus 10% in the same period last year, so we're making real progress on differentiating at the residential [level] and for businesses," Khan said

"Secondly, we are delivering organic growth through efficiencies. A year and a half ago we announced and disclosed that we were bringing together all of our back office, front office, IT, [and] third party spend activities under a single accountability to deliver the same kinds of efficiencies we are talking about today and we delivered a $100 million dollar cost reduction program last year which we used for price competitiveness. I think that the efficiency program that you have just heard about today continues with that theme quite significantly over the next five years," Khan said

"And the third area that we believe gives confidence for organic growth does come from the acquisition of the Hess energy marketing business, and in particular as you saw on some of the slides, the business is now more balanced between power and gas. What we got from the Hess acquisition was not only significant scale in gas, but also an understanding of where gas demand is, particularly in the North East of the United States, but it's also coupled with a significant amount of storage and pipeline capacity positions. And it is the combination of knowing where demand is located at a very, very localized level and being able to move gas from supply to demand in a very complicated North East environment that allows us to capture additional margins when there is price volatility at a localized level. That is what has contributed to our over-performance on the Hess acquisition in the last two years and it is very hard for others to replicate, so we see it as a sustainable source of growth for our business," Khan said