Energy

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

Investors have been wary of feeling any optimism around Britain's biggest gas supplier. On Thursday, Centrica Plc justified their caution, inflicting a severe profit warning that took the shares down 16 percent. That adds to a 60 percent drop since 2013. Centrica and its CEO Iain Conn have some difficult questions to answer.

The shares have been hammered in recent years as government intervention in its home market has become increasingly likely. The latest warning relates mainly to North America. Centrica's operation serving business customers there experienced a sudden and dramatic increase in competition in recent months. To cap it all, the company has discovered billing errors dating back four years.

In the U.K., Centrica has suffered a sharp drop in retail customers, losing more than 800,000 accounts. True, many of these were on Centrica's least profitable tariffs -- but not all were.

Out of Gas
Centrica shares were in steady decline ahead of Thursday's profit warning
Source: Bloomberg

Taking all the bad news together, and adding the risk of tougher regulation at home, Centrica says it's possible that earnings don't fully cover its dividend at some point.

Things shouldn't have been allowed to deteriorate so quickly. Centrica was aware of the squeeze from rivals in the middle of the year but clearly failed to grasp its severity and didn't respond fast enough. Its financial reporting seems poor too. A week after British industrial group GKN Plc revealed accounting charges in the U.S., here's another U.K. company with a loose grip on activities on the other side of the Atlantic.

Conn says some domestic rivals are offering loss-making packages that make sense only if the customers get flipped onto higher tariffs later -- a game he's rightly staying out of. Still, Centrica's scale should give it home advantage. It needs to do better at making this work for customers and, in turn, investors.

There was a strategic review after he joined in 2015. He wants to build a Centrica whose stability comes from global diversification. He insists the North American business is "core", and Centrica has useful expertise to bring to that market. Yet these capabilities just aren't delivering.

The recent missteps mean he should consider seriously whether this business might be worth more to someone else, who could pay Centrica a price that exceeds the value he can achieve from running it.

The prospect of a strain on the dividend is already raising Centrica's borrowing costs. Conn indicates that any departure from the current dividend cover would be temporary. The snag is that this is a company that lacks visibility over the next three months. Investors won't feel confident about reassurances extending further out.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net