British Gas calls for help as profits slump

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The Independent Online

Industrial Correspondent

British Gas warned of a profits fall yesterday and called on the Government to help bail it out of heavy losses on its North Sea supply contracts. The company is seeking relief from the levy it pays on gas from North Sea fields, which at present costs pounds 170m annually.

The warning was accompanied by a statement from Richard Giordano, the chairman, which was seen as a hint that the company might be broken up. He said: ''The board ... is addressing the longer-term options open to us, to ensure we maximise value for shareholders."

The statement fuelled speculation that the company plans to sell off the gas trading operations, which are already set to be put into a separate subsidiary.

British Gas also cast doubt on the Government's plans to introduce domestic competition by April 1996, after delays in finalising legislation. The Government has put great store on plans for a pilot scheme in the South-west, which it is hoped will slash gas prices and help restore the damaged public reputation of privatised utilities.

The company said exceptionally warm weather could result in underlying profits dropping below last year's pounds 927m. British Gas announced an historic loss of pounds 181m in the third quarter, compared with a loss of pounds 149m in the same period last year.

The loss is after provisions of pounds 83m related to long-term contracts for gas the company must buy but for which there is yet no market. The company also said that under the contracts it would be forced to make a pounds 520m pre-payment in the current quarter for gas not used.

Mr Giordano called on the Government to help the company renegotiate these "take or pay" contracts, the effect of which he said is impossible to quantify. He said that the situation would be exacerbated by the introduction of domestic competition next year, adding: "The Government has taken decisions to change the structure of the market. We expect them to do everything in their power to ensure that the contracts are renegotiated."

British Gas, whose share of the commercial and industrial gas market has already fallen to about 35 per cent, argues that the contracts with North Sea producers were entered into when it had a monopoly and an obligation to supply. But the producers say that they have to have regard to the interests of their own shareholders, and not those of British Gas.

As part of its plea for government help, British Gas has raised the issue of reducing or abolishing the state levy on North Sea gas supplies imposed before privatisation.

Mr Giordano said: "The significant surplus of gas currently available in the UK market, the consequent rapid decline in gas prices and the significant enforced loss of market share in the industrial and commercial market are the main factors affecting the outlook of British Gas. If the exceptionally warm weather experienced to date continues into the fourth quarter, our full-year earnings for 1995 on a pre-exceptional basis will be below the level achieved in 1994."

The unusually warm weather has cost British Gas pounds 120m in the nine months to 30 September, and an estimated pounds 50m in October alone. Mr Giordano said that in spite of the problems, the board intends to maintain the dividend for 1995. Shares fell by 4p to 241.5p.

British Gas also faces continued regulatory threat from the watchdog Ofgas, which is reviewing the price controls for domestic customers and the amount it will be able to charge rival suppliers to use its pipes.

Investment, page 26