CNG Group Ltd Trading Update

6 November 2020

CNG Group Ltd today issues a trading update for the financial year to 31 October 2020 which summarises the significant trading and corporate developments since the previous financial period, and further updates on COVID-19 and the Group’s winter 20/21 outlook.

Trading performance

Group revenue for the year ended 31 October 2020 was £588M, (2019: £845M) 30% lower than the same period last year, primarily due to CNG exiting a number of shipping services partnerships during the previous financial period.

Gross Margin for the year ended 31 October 2020 was £15M (2019: £16M) 10% lower than same period last year, as Covid-19 had an impact across 2020 on gas demand.

EBITDA for the year ended 31 October 2020 was £3M (2019: -£31M), with the Group returning to sustainable profit despite a challenging environment. CNG Wholesale division, providing shipping services and wholesale gas to a number of domestic and non-domestic energy suppliers in the UK, saw a significant improvement in underlying profitability, following a number of additional risk management improvements implemented across the financial year.

CNG Retail division, supplying primarily gas to UK non-domestic SME customers, endured a challenging year, with gas consumption and demand materially impacted by Covid-19 (discussed in detail below), albeit closing the year with breakeven profitability despite the significant headwinds. The Group closed the year ended 31 October 2020 with Net Current Assets of £4M (2019: -£30M), reflecting the underlying profit generation across the year and restructuring of the balance sheet completed in March 2020 (discussed in detail below). Group free cash as at 31 October 2020 was £36M (2019: £15M), providing sufficient headroom to manage across the next financial period.

Corporate developments

The Group has undergone a period of transition and change across the financial period with additions to the senior management and leadership, and a significant overhaul to the Group’s risk management framework and governance approach. The financial and operational performance of the Group in the year to 31 October 2020, demonstrates the positive impact from the robust framework that has been implemented during this period, with many of the initiatives originating during the financial period to 31 October 2019.

In January 2020, CNG Group appointed a new CEO and restructured its senior management team and Board of Directors. Paul Stanley joined the business as CEO to lead the ongoing turnaround and Amman Boughan took on the role of CFO to support transformation of the Group as it continues to implement increased risk management and controls, embarks on a digital transformation and leverage its significant market position to diversify the Group’s trading activities.

The Group commenced a reduction in force programme in January 2020, that was concluded in March 2020, that saw 40 people leave the Group following a period of consultation. The programme was designed to better align teams to ensure control over key risks areas, stop non-core activities and eliminate non-essential projects that delay the organisation, whilst maintaining a structure, processes and controls to the scale required to be operationally competent, compliant and deliver accepted levels of customer service.

In February 2020, to further drive efficiency, the Group completed a corporate restructure, formally separating its principal activities between Wholesale and Retail divisions, by affecting a migration of its Retail non-domestic supply business from Contract Natural Gas Limited to CNG Energy Limited (an existing non-domestic supply licenced business within the Group).

The Glencore Group, a long standing supplier and a shareholder in the Group, renewed its long term commitment by entering into a new structured supply agreement extending the existing credit facilities for Natural Gas supply to £30.0m across the Group. In March 2020, the Group entered into a six-year loan agreement with Glencore Energy UK (a trading subsidiary) for £35.0m, providing long term security for the Group.

Covid-19 update

Across April and May there was a 40% reduction in gas consumption across the Group UK SME customers vs Seasonal Normal Demand (“SND”). Leisure and Hospitality sectors experienced a 70% reduction across the period as most businesses were closed and had restrictions on trade. A reduction in gas sales and a resulting loss on over hedged gas sold back to market with falling global oil and gas prices resulted in a gross margin loss for the period.

In the subsequent months to October 2020, the Group has traded robustly, with financial performance in its Retail division generating positive margin and its Wholesale division trading strongly, generating positive margin. To date, in the seven months to the end of October 2020, actual consumption has resulted in 27% reduction to SND, compared with management’s forecast of a 34% reduction, as Leisure and Hospitality sectors have recovered better than forecasted, supported by the Eat Out to Help Out scheme in August 2020.

The Group anticipates that Covid-19 will result in increased credit defaults from SME business failures and have ensured it has specifically provisioned for this outcome in year to 31 October 2020. The forecasts assume late customer payments and credit terms being stretched across the next twelve months even though cash collection throughout Covid-19 has performed above expectations, with the majority of the contracted customer book on monthly direct debit.

Operationally the Group has continued to provide industry leading customer service and support during the Covid-19 pandemic and has been successfully working from home, following a decision to transition colleagues to working from home in mid-March 2020. The Group continues to support colleagues, customers and partners during the current government restrictions on movement and trade and remained open for business during the pandemic, where many of its competitors have retrenched and operationally struggled to maintain service levels.

Winter 20/21 and future outlook

The Group anticipates a 15% reduction in contracted revenue, volumes and margin over the next twelve months. It has adjusted its medium-term hedging outlook to reflect the prevailing view of demand consumption and is currently positioned appropriately into winter 2020 as it remains cautious on future demand. Lower wholesale gas market prices compared with the weighted average hedged position on the contracted margin means the Group has sufficient headroom to ensure it can manage its overall exposure profitably.

The Group is prepared for Lockdown in the UK from 05 November 2020, with data driven detailed forecasts in relation to the pandemic and exposure to sectors which are expected to be materially impacted by the ongoing government restrictions on movement and trade, assessing a number of variables and its short and medium term impact on Natural Gas demand consumption, wholesale market Natural Gas prices, credit default risk and price elasticity on customer margin. The Group has segmented its contracted book into risk categories to manage the future exposure across its hedging position, credit and risk approach and cash collections from stretched credit terms.

For the full year to 31 October 2021 we remain cautious and CNG remain open for business, operationally robust and continue to expect strong progress against the Group’s objectives to i) enhance sustainable profitability, ii) digital transformation and iii) revenue and product diversification.

Amman Boughan, Chief Financial Officer

On behalf of CNG Group Ltd

For further information:

Jo Parkinson, Head of Marketing

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