By Susanna Twidale
LONDON (Reuters) - Britain's largest utility Centrica Plc (LONDON:CNA) said lower gas prices and demand would force it to slash its dividends and hit profit this year, sending its shares sharply lower on Thursday.
Iain Conn, who took over as Centrica chief executive only in January, announced a review of strategy after the company reported a 35 percent drop in profits, worse than forecast, and shelved plans to sell assets after failing to find buyers.
The company cut its full-year dividend for 2014 by 21 percent to 13.5 pence and said future payouts would be down by 30 percent.
Centrica, which owns energy supplier British Gas, has seen its profits squeezed by a slump in global oil and gas prices and dwindling demand for gas from British households after the country had the warmest year on record in 2014.
Conn, former head of marketing and refining for BP, said Centrica had to cut spending because there was "no certainty" oil prices would rebound to previous highs. He likened the recent oil price slump to 1986 when prices hit $10 after Saudi Arabia ramped up production.
"2014 was not the year we had planned. When the oil price moves so quickly you end up stuck with $100 costs and $50 revenues. So your returns are completely compressed," Conn told BBC Radio.
Centrica said it expected earnings to be lower this year than in 2014. The company is cutting its 2015-2016 exploration and production (E&P) budget by 40 percent to 650 million pounds.
Shares in the company, traded more than eight percent lower at 1200 GMT, the biggest loser in the FTSE 100 share index.
BLOW FOR SHAREHOLDERS
"For investors, and in the current ultra-low interest rate environment, the cut to the dividend payment is a major blow," said Keith Bowman, equity analyst at Hargreaves Lansdown Stockbrokers. "The search for income yield is becoming ever harder," he added.
Utilities across Europe have been hit by weak energy markets that have made their power plants unprofitable, lowered their upstream margins and reduced their retail earnings.
The low commodity prices led to a post-tax impairment charge of 1.4 billion pounds on its E&P and power assets.
The firm had already announced a tighter 2015 capital expenditure programme in November when it lowered expectations for 2014 earnings due to mild weather and reduced output at nuclear plants.
Since then, low oil prices have had a knock-on effect on Centrica's upstream business, which mainly produces gas.
Plans to sell three of its large combined-cycle gas turbine (CCGT) power plants, announced last May have also been dropped after bids fell short of expectations.
The 665 megawatt (MW) Killingholme gas plant, which was up for sale, will now be closed, along with the 260 (MW) Glanford Brigg power plant, both of which are in north-east England.
Both plants missed out in Britain's electricity capacity auction last December leaving them too uneconomic to run.
Conn said the company hopes to sell its gas assets in Trinidad and Tobago but cautioned this may not be possible due to weak oil and gas prices.