Centrica feels the heat as record profits prompt fresh fury over bills

Centrica, the owner of British Gas, fanned the flames of consumer anger yesterday by unveiling record annual profits of £1.5bn and a 22 per cent rise in the dividend payment just days after announcing the biggest increase in energy prices in history.

The company, which supplies about 40 per cent of the UK's domestic gas and electricity market, was unrepentant about the rise in earnings and shareholder returns, arguing that last week's price increases - which, by coincidence, also came in at 22 per cent - were necessary to reverse heavy losses in its residential energy business.

But the consumer body Energywatch called on domestic customers to give British Gas a "bloody nose" by switching to rival suppliers and uSwitch, the price comparison service, accused Centrica of "placing shareholder value, not customer value, at the top of its agenda".

Sir Roy Gardner, Centrica's chief executive, said had British Gas passed on the increase in wholesale gas prices in full, then domestic bills would have gone up by 31 per cent, not 22 per cent. He also pointed out that while Centrica's operating profits had risen by 11 per cent to £1.51bn, this was in part due to the improved contribution from its North American operations and British Gas Services, which ranges from three-star boiler cover to plumbing and domestic appliance repairs, as well as higher profits from gas production and storage.

Although profitable for the year as a whole, Centrica's residential energy business lost £75m in the second six months.

At the post-tax level, Centrica's profits fell 4 per cent to £661m after a one-third increase in the company's tax bill to £706m, mainly as a result of higher corporation taxes and the increase in taxes that Gordon Brown has imposed on UK oil and gas producers.

The sharp increase in the dividend was not enough to prevent Centrica shares slipping 4 per cent as the company warned of a further tough year ahead.

Sir Roy said there would be "further turbulence" in the commodity markets and an increase in "customer churn" as consumers deserted British Gas.

Last year, the company suffered a net loss of 600,000 customers, reducing its share of the residential gas market from 57 per cent to 53 per cent. However, its share of the electricity market remained steady at 23 per cent. Sir Roy declined to put a figure on the likely level of customer loss, arguing that consumers were now more wary of switching supplier only to find that their energy bills were going up anyway as every supplier grappled with the surge in wholesale prices - up 63 per cent this year compared with last.

Centrica blamed the sharp rise in wholesale prices on lack of competition in the European market and sought to deflect criticism that it had acted too slowly to secure its own supplies of cheap, long-term gas by pointing to £12bn worth of deals signed in the past 18 months (see panel).

Sir Roy renewed his attack on the way in which Continental markets continued to be skewed in favour of big, vertically integrated players such as Germany's E.ON, which owns Ruhrgas, the operator of the country's gas pipeline network, and is a dominant retailer of gas. "It's hugely ironic, isn't it, that E.ON, which has consolidated the German market, is now riding over the hill as the white knight for Endesa to prevent Gas Natural buying the company and doing the same thing in Spain," he added.

Centrica said its lobbying for Europe to be opened up was starting to show signs of success, with the Dutch market now fully open, Belgium beginning to liberalise and even Germany under pressure to abolish long-term contracts and provide greater transparency.

Sir Roy said it was clear that the European energy market was set for consolidation - as the bids for Endesa demonstrate. But he would not be drawn on the speculation over a bid for Centrica from Gazprom which has driven the company's share price sharply higher in recent weeks. "This is a great company with a clear future and the ability to do what it needs to do independently but if someone came over the hill waving a big cheque book we know where our fiduciary duties lie," he added.

If a bid does materialise, then he will probably not be the one to receive it. Centrica confirmed yesterday that it expected to announce Sir Roy's replacement as chief executive before the end of next month, clearing the way for him to leave and take on the chairmanship of the troubled catering giant Compass. His successor will face a daunting in-tray of challenges with market conditions remaining volatile, customer numbers in decline and the ever-present threat of takeover.

Two years from now the picture could look brighter. Centrica's £180m cost-cutting programme will be complete with the loss of 4,000 jobs, making it one of the most efficient suppliers in the market. Meanwhile, wholesale prices should have stabilised or begun to fall as extra capacity comes on stream with new pipelines from Norway and the Netherlands and import terminals at Isle of Grain and Milford Haven for liquefied natural gas. The question is whether Sir Roy's successor will still be in charge of an independent company and in a position to reap the rewards.

£17bn plan to secure long-term gas supplies

Centrica is largely dependent on other shippers for its gas and is therefore hostage to the volatile European wholesale gas market. By the end of this decade all that could have changed.

Whereas today it is only 20 per cent self-sufficient, by 2010 some 75 per cent of its needs could be met either from long-term supply contracts or its own gas production facilities.

At the same time, the bottleneck through which gas imports into the UK have to squeeze will have eased with the commissioning of new pipelines and terminal facilities, increasing capacity by some 70 per cent. Of the 40 billion cubic metres (bcms) of gas that Centrica requires to meet annual customer demand, some 10 bcms come from its own gas fields in Morecambe Bay and the North Sea, leaving it to find 30bcms from third-party suppliers. By 2015, Morecambe Bay will have run dry.

But in the past 18 months, Centrica has signed three long-term contracts worth £12bn to buy 16bcms a year from Statoil of Norway, Gasunie of the Netherlands and Petronas of Malaysia. The contracts range from 10 to 15 years. Centrica is also in talks with Gazprom of Russia, the world's biggest gas company, which could lead to another long-term contract to supply a further 5 bcms, according to the chief executive, Sir Roy Gardner. That would cover more than half Centrica's annual requirements. A further 25 per cent of its needs will be met by buying into gas production fields in the North Sea, Nigeria, North Africa and elsewhere. Centrica has a budget of £5bn to spend acquiring acreage, of which £1bn has been invested. That would leave it needing to cover just a quarter of its needs either through other contracts or the short-term spot market.

New pipelines come on stream at the end of this year from Norway and the Netherlands which will add 43bcms to the UK's import capacity.