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Warm Front cut forces Eaga to adjust

Heating and renewable supplier Eaga will take a £20 million restructuring charge as it adjusts its business to cope with lower revenues following the dramatic scaling back of the government’s Warm Front scheme.

The firm is “taking steps to significantly reshape its operational structure” and expects to see a cash outlay of around £25m over the next two financial years, which will include the costs of what is likely to be a raft of redundancies as it scales back its activities.

It is also reviewing the value of goodwill on its balance sheet, which could lead to further write-downs if the value of companies it previously acquired is reduced.

The company’s shares fell by 40 per cent as soon as the Chancellor announced the cuts to the Warm Front programme in his spending review (CN, p5, 28 Oct).

The green energy and retrofit specialist last week quantified the full extent of its exposure to the programme.

It said the Warm Front scheme represented 44 per cent of group revenues in the financial year ending 31 May 2010.

The funding that is supporting the programme for 2010/11 is £345m. This will be reduced to £110m during 2011/12 and to £100m in 2012/13. During 2009/10, funding was around £369m.

Given the scale of the cuts to the group’s biggest revenue-generating business, it is unclear how many jobs could be at stake. At the end of the 2009/10 financial year, Eaga employed 1,668 people.

The company is discussing the cuts with the Department of Energy and Climate Change and will also try to “redeploy” staff to other work, such as the installation of solar panels, for which there is increasing demand.

The statement said: “As a result of this lower funding, activity in both our managed services and heating & renewables segments, during both the current and next financial years, will be significantly lower than the board had expected prior to the CSR announcement.

“Given the change in scale of the operations in these divisions, the operating margins (excluding restructuring charges) are likely to be lower than our previous estimates unless significant new work is won.”

The firm’s statement added: “Our carbon services segment will be minimally impacted by the changes to Warm Front programme and indeed demand in this part of the group’s business remains strong.”

While there is the potential for the firm to recoup some of its lost revenue from expanding other parts of its business, this is unlikely to have the desired effect immediately.

At the Comprehensive Spending Review, when the Warm Front cuts were announced, Eaga shares fell from 108.25p the day before the CSR to just 63p on 5 November - a fall of 42 per cent.


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