Centrica CEO to quit after fi rst dividend cut in years
Bloomberg/London
Centrica said its chief executive officer will step down after a tumultuous five-year run at Britain’s largest energy supplier, which has lost two-thirds of its value and millions of customers during his term.
Iain Conn, 56, announced his departure along with Centrica’s first dividend cut since 2015. He will leave the board in 2020 after he finishes an effort to fortify the utility against increasing competition and a government cap on what it can charge for its electricity and natural gas.
Centrica shares fell as much as 13% in London to the lowest since 1997, the year the utility was spun out of the state-owned British Gas. Conn inherited a company that had under his predecessors diversified into oil and gas production and nuclear energy, businesses that Centrica now intends to sell.
In more recent years, smaller rivals have lured away tens of thousands of customers from Britain’s Big Six utilities. Centrica earnings were also hit in the first half as warm weather and operational issues cut its electricity supply by 4%.
Conn said his departure was a mutual decision with the board and the result of months of discussions. Conn is seeking to hand over a smaller entity focused on customer-facing businesses supplying power and energy services. The board will name a successor later.
While the company’s share price plunged to new lows, Conn said the company was on the right track and seeing the beginning of stabilisation. He said the earnings outlook is brighter for the rest of the year.
“This set of steps is a fundamental re-positioning of the company and is the end of a journey we began in 2015,” Conn said on a call with reporters yesterday. “We haven’t changed our strategy. We’ve made some adjustments, but the board has confirmed we need to keep going toward the customer.”
Unions were quick to criticise Conn’s plan to maintain the pace of job cuts he announced in February and step up a cost savings target.
Centrica is targeting £1bn ($1.2bn) of annual cost savings from this year through 2022, up by £250mn since February. The company maintained its estimate that it will shed 1,500 to 2,000 jobs this year from the some 30,520 it had at the end of 2018. “More of the same, more job cuts on top of the thousands already gone and going, are panic measures, not a credible plan for recovery,” said Justin Bowden, national secretary of the GMB union. “There must be a pause under a new CEO, investment and a new plan for growth.”
The board proposed an interim dividend of 1.5 pence a share, down from 3.6 pence for the same period a year ago. For the full year, the dividend will be cut to 5 pence a share, down from 12 pence in the last four years.
“The departure of Centrica’s CEO won’t resolve all of its problems, in our view, as many are outside management’s control,” Elchin Mammadov, analyst at Bloomberg Intelligence, wrote in a note. “The new team at the helm will need to focus on delivering further cost cuts and growth in energy supply and services.”
Customer numbers in Centrica’s main energy supply and services business fell 2% to 23.6mn in the first half of the year. Output from its 20% stake in Britain’s nuclear plants fell 19% in the first half to 4.9 terawatt-hours, reflecting outages at the Dungeness B and Hunterston B power stations.
“Centrica faced an exceptionally challenging environment in the first half of 2019, which impacted earnings and cash flows,” Conn said in a statement yesterday. “This major refocusing of our portfolio will unlock further efficiencies enabling us to be even more cost-competitive, as we focus on being a leading energy services and solutions provider.” Looking Ahead Conn maintained guidance for full year earnings. Nuclear plant outages that hit earnings in the first half are likely to pass, and cost savings set to kick in.
Centrica expects growth in its consumer businesses. In its connected homes business, growth accelerated 49% to 1.5mn.
In the months ahead, Centrica will work on selling its Spirit Energy unit, which produces oil and natural gas. It’s already divesting its stake in nuclear power plants, although the statement yesterday said nothing new about that process. Conn said Centrica will exit Spirit via a trade sale and use proceeds to restructure the company.
“We are completing the shift we began in 2015 from a company ill-equipped to deal with changes in the energy systems to one in tune with moving toward a lower-carbon economy,” Conn said. “Once we’ve made them, it is now time for me to hand over to a successor.”
Along with its shift toward a more customer-facing business, the company also wants to make money off the expansion of electric vehicles. It announced a new partnership with Ford Motor Co yesterday to develop charging stations at hundreds of dealerships across the UK and Ireland as well as sell home charging equipment and electric vehicle tariffs.
The company is in talks with other car companies to expand further into this area, Sarwjit Sambhi, head of Centrica’s consumer business, said on a call with reporters.
NEW YORK – This month marks the 75th anniversary of the signing of the Bretton Woods agreement, which established the International Monetary Fund and the World Bank. For the IMF, it also marks the start of the process of selecting a new managing director to succeed Christine Lagarde, who has resigned following her nomination to be European Central Bank president. There is no better moment to reconsider the IMF’s global role.
The most positive role that the IMF has played throughout its history has been to provide crucial financial support to countries during balance-of-payments crises. But the conditionality attached to that support has often been controversial. In particular, the policies that the IMF demanded of Latin American countries in the 1980s and in Eastern Europe and East Asia in the 1990s saddled the Fund’s programs with a stigma that triggers adverse reactions to this day.
It can be argued that the recessionary effects of IMF programs are less harmful than adjustments under the pre-Bretton Woods gold standard. Nonetheless, the IMF’s next managing director should oversee the continued review and streamlining of conditionality, as occurred in 2002 and 2009.
The IMF has made another valuable contribution by helping to strengthen global macroeconomic cooperation. This has proved particularly important during periods of turmoil, including in the 1970s, following the abandonment of the Bretton Woods fixed-exchange-rate system, and in 2007-2009, during the global financial crisis. (The IMF also led the gold-demonetization process in the 1970s and 1980s.)
But, increasingly, the IMF has been relegated to a secondary role in macroeconomic cooperation, which has tended to be led by ad hoc groupings of major economies – the G10, the G7, and, more recently, the G20 – even as the Fund has provided indispensable support, including analyses of global macro conditions. The IMF, not just the “Gs,” should serve as a leading forum for international coordination of macroeconomic policies.
At the same time, the IMF should promote the creation of new mechanisms for monetary cooperation, including regional and inter-regional reserve funds. In fact, the IMF of the future should be the hub of a network of such funds. Such a network would underpin the “global financial safety net” that has increasingly featured in discussions of international monetary issues.
The IMF should also be credited for its prudent handling of international capital flows. The Bretton Woods agreement committed countries gradually to reduce controls on trade and other current-account payments, but not on capital flows. An attempt to force countries to liberalize their capital accounts was defeated in 1997. And, since the global financial crisis, the IMF has recommended the use of some capital-account regulations as a “macroprudential” tool to manage external-financing booms and busts.
Yet some IMF initiatives, though important, have not had the impact they should have had. Consider Special Drawing Rights, the only truly global currency, which was created in 1969. Although SDR allocations have played an important role in creating liquidity and supplementing member countries’ official reserves during major crises, including in 2009, the instrument has remained underused.
The IMF should rely on SDRs more actively, especially in terms of its own lending programs, treating unused SDRs as “deposits” that can be used to finance loans to countries. This would be particularly important when there is a significant increase in demand for its resources during crises, because it would effectively enable the IMF to “print money,” much like central banks do during crises, but at the international level.
This should be matched by the creation of new lending instruments – a process that ought to build on the reforms that were adopted in the wake of the global financial crisis. As IMF staff have proposed – and as the G20 Eminent Persons Group on Global Financial Governance recommended last year – the Fund should establish a currency-swap arrangement for short-term lending during crises. Central banks from developed countries often enter into bilateral swap arrangements, but these arrangements generally marginalize emerging and developing economies.
Then there are the IMF initiatives that have failed altogether. Notably, in 2001-2003, attempts to agree on a sovereign debt-workout mechanism collapsed, due to opposition from the United States and some major emerging economies.
To be sure, the IMF has made important contributions with regard to sovereign debt crises, offering regular analysis of the capacity of countries in crisis to repay, and advising them to restructure debt that is unsustainable. But a debt-workout mechanism is still needed, and should be put back on the agenda.
Finally, the IMF needs ambitious governance reforms. Most important, building on reforms that were approved in 2010, but went into effect only in 2016, the Fund should ensure that quotas and voting power better reflect the growing influence of emerging and developing economies. To this end, the IMF must end its practice of appointing only European managing directors, just as the World Bank must start considering non-US citizens to be its president.
Lagarde’s departure represents a golden opportunity to put the IMF on the path toward a more effective and inclusive future. Seizing it means more than welcoming a new face at the top.