* Warm Front scheme phase-out means significant funding loss
* Firm will restructure in face of government cuts
* Restructuring to cost 20 mln stg, hitting cash balance
* Shares slump 21 pct early trade, pare losses to 14 pct
(Adds shares, analyst comments)
LONDON, Nov 3 (Reuters) - British energy-saving scheme operator Eaga Plc EAGA.L said it would have to restructure to cope with a 70 percent slash in government funding for a major programme, sending its shares plummeting to a two-year low.
Last month the British government said it would phase out the Warm Front programme, which is run by Eaga and gives grants to low-income households so that energy-saving improvements can be carried out on their properties. [ID:nLDE69J0G8]
Government funding for Warm Front will be cut to 100 million pounds ($160.4 million) by 2013, from 345 million, Eaga said in a statement on Wednesday, leading it to forecast lower activity.
"As a result of this lower funding, activity in both our Managed Services and Heating and Renewables segments, during the current and next financial years, will be significantly lower than the board expected," a company statement said.
"To deal with the scale and speed of the reduction in Warm Front activity, the group is taking steps to significantly reshape its operational structure and as a result we expect to incur significant exceptional restructuring-related charges."
Eaga's shares shed 21 percent at the start of trade, but by 0842 GMT they pared losses to 14 percent, trading at 61 pence.
The firm said restructuring would cost 20 million pounds over the next two years and will affect its cash position.
"We expect the group's forecast current year cash balance to reduce by approximately 25 million pounds," Eaga said.
Eaga, which floated in 2007, said it had made good progress on its project to install solar panels in the social housing sector.
"Whilst further work is required to bring this project to fruition it has the potential to deliver revenue from a significant number of installations," the company said
Analysts at Brewin Research retained their "buy" rating on Eaga's stock and said the solar panel project offered future growth prospects. Other analysts were, however, less convinced.
"It is hard to see where new buyers will come from at this stage and we see the share price as "dead money" so have cut our recommendation to a sell," Panmure Gordon's Andy Brown said.
Execution Noble analyst David Brockton retained his "hold" recommendation but downgraded earnings forecasts for 2011 and 2012.
Other government-backed energy efficiency schemes such as the Green Deal, feed-in tariffs (FITs) and the Renewable Heat Initiative will provide growth opportunities, the company said.
(Reporting by Golnar Motevalli; Editing by David Hulmes)