July 30, 2019 / 12:05 PM / 23 days ago

Breakingviews - Centrica’s CEO exit is only partially deserved

A British Gas sign is seen outside its offices in Staines in southern England, July 31, 2014.

LONDON (Reuters Breakingviews) - Iain Conn has got the message. The Centrica chief executive on Tuesday said he would step down next year as the UK utility announced plans to slash its full-year dividend. Conn made plenty of missteps, but Centrica’s woes defy easy fixes.

The rap sheet against the former BP executive starts with Centrica’s share price. An investor who bought into the FTSE 100 index in January 2015, when Conn took charge, would have pocketed a 40% total return, according to Refinitiv data. Anyone who bought the utility’s shares at the same time is down 61%, including a 15% drop on Tuesday morning, after the company said its full-year dividend would more than halve to 5 pence per share.

Conn’s main mistake was not to quit the oil and gas exploration business earlier. Instead, half measures left the group vulnerable to sagging gas prices – as when they dropped 35% in the second quarter compared with the previous three months. Had Centrica instead ramped up investments in wind and solar power, to look more like domestic peer SSE, its bottom line might have looked healthier.

Still, Conn lacked the support of a steady, profitable energy distribution business like SSE’s. And his broad strategy made sense. Centrica supplies gas and electricity to a quarter of British homes, so pivoting away from producing energy towards supplying it and providing services was logical. But as banks which seek to overhaul antiquated systems can attest, such overhauls are expensive: Centrica expects to spend 1.3 billion pounds between 2019 and 2022. The process also upsets customers and workers.

A further blow came from the UK government’s price cap for energy customers, which Centrica had already said would help knock 300 million pounds from its operating cash flow in 2019. The restriction should make customers less likely to switch providers, helping incumbents like Centrica, which lost 3% of its UK consumer customer base last year. However, the company still had 2% fewer consumer customers in the first half than in the same period a year earlier.

The 4.5 billion pound company remains an unwieldy beast, attempting to make a politically tortuous transition to a green future without a source of steady cash to smooth out the bumps. Conn’s successor may struggle to do much better.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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