Centrica profits fan the flames

After announcing massive price hikes yesterday, it's a good job British Gas reported falling profits today...

Last Updated: 31 Aug 2010

Yesterday British Gas provoked outrage from politicians and consumer groups by revealing that it was putting gas bills up by an eye-watering 35%, blaming it on increasing wholesale prices. The increases, which are thought to be the biggest ever, will affect about 16m customers in the UK, and could send another 1m people into fuel poverty (i.e. they’ll be spending at least 10% of their income on fuel). And with other energy firms likely to follow suit (EDF has already hiked gas prices by 22%), it will only fuel inflation worries - some estimates suggest it could push the Consumer Price Index up by 0.6%...

So all things considered, it wasn’t the best time to be announcing profits of almost £1bn, as BG owner Centrica did this morning. Centrica said that it recorded profits of £992m, about £100m more than analysts were expecting, while revenues shot up 17% to £10bn. 'A good set of results in tough market conditions,’ CEO Sam Laidlaw called it today, as he hiked the dividend by 16%. Good news for shareholders, but a bit awkward politically…

However, on closer inspection the picture looks a little different. Centrica’s group profits are down over 20% on last year, and most of the gains have come from its upstream activities like gas production. Operating profit at British Gas Residential plummeted 70%, from £533m last year to £166m this year, thanks to a 90% rise in wholesale energy costs. So despite some success in cutting costs and improving customer service, Laidlaw reckons BG had no choice but to pass on some of these costs to customers.

The problem for Centrica is that its own gas production activity covers less than a third of its needs, so it has to buy the rest on the wholesale market. For years the UK has enjoyed the boon of North Sea oil, which has meant we’ve been paying lower prices than the rest of Europe. But now that’s started to dry up, the likes of Centrica are having to import their gas from Europe – so naturally the gap is narrowing fast. Another issue is that we have much less storage space than our bigger European neighbours (an issue Centrica is trying to address with the government), which means a greater reliance on expensive futures contracts.

But with Shell also announcing bumper results today – the oil giant made a whopping $8bn profit in the second quarter, while its cashflow jumped by $5bn – the calls for a windfall tax are unlikely to go away. Centrica protested today that it’s already paying more tax than virtually any other FTSE 100 company. But as gas bills creep over the £100-a-month mark, customers are unlikely to be sympathetic...

In today's bulletin:
Centrica profits fan the flames
HBOS bounces - but housing worries remain
Baptism of fire as BT slumps
Nintendo consoles itself with Wii success
Commuter jetpack prepares for take-off

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