Cedric's real horror

The utility chief has been pilloried over high pay, but what's that next to pounds 1.3 billion of gas which he can't sell? Cedric's pounds 1.3bn headache

AT 5pm on Wednesday, 31 May, Cedric Brown heaved a huge sigh of relief. The most humiliating afternoon of his life was finally over. For five hours, the small shareholders in British Gas had bombarded him with complaints, brickbats and plain insults. A 40-stone pig labelled "Cedric" had been paraded outside the meeting. Brown himself was accused of self- serving greed, compared with Attila the Hun and at one point told to go and gas himself.

But when the dust settled, both his job as chief executive and his pounds 475,000 pay packet were intact. Thanks to the votes of the big institutional shareholders - pension funds and insurance companies - Brown and the rest of the British Gas board left the podium bloody but unbowed, and confident that the nightmare was over.

Four months later, however, the company is facing a much greater threat than the raspberries of 4,500 angry private shareholders. The furore then was about a single salary payment that could not make a flea-bite's difference to a company the size of British Gas. The worry now is about events that threaten to wipe billions of pounds from the company's revenues.

Institutions which then backed Brown and his chairman, Sir Richard Giordano, are beginning to wonder whether their loyalty was misplaced. The doubts have already hit the share price. The shares on that infamous afternoon were trading at 305p. They are now worth just 258.5p after a 6.5p fall on Friday - their lowest this year. Shareholders have seen pounds 2bn wiped from the value of their portfolios since the AGM. The shares are now worth little more than before the stock market crash of 1987. Compared with other privatised utilities, British Gas has delivered a decidedly pedestrian return. This is more than academic for the 1.8 million "Sids" who subscribed for the shares in 1986 and remain shareholders to this day.

Some institutional investors recall how Giordano justified Brown's controversial pay rise by insisting that management performance had to be paid for. Yet in terms of short-term share price movement at least, Brown has done anything but perform. "Much of the discussion on directors remuneration before the AGM covered this very issue," commented one leading institutional investor.

The City is not yet demanding Brown's head on a platter. But there are few voices to be heard in support of him. It is significant that the recent round of presentations to big investors was handled by Roy Gardner, the finance director, sometimes with Giordano, sometimes without. Brown was nowhere to be seen.

Gardner, a former managing director of GEC-Marconi, seems to be universally admired by the fund managers. There are some who would like him to step into Brown's shoes sooner rather than later. He has one key advantage: having only arrived at the company in November 1994, he cannot be blamed for past decisions that are now coming back to haunt the company.

The most catastrophic of these was the decision over the last decade and more to enter into long-term contracts with oil companies for the supply of gas from the North Sea. While the current or "spot" price for gas has plunged to around 9-10p a therm, British Gas is locked into contracts under which it is paying more than 20p a therm.

The impact has been disastrous and will continue to be so. Rivals supplying industrial and commercial customers - the part of the industry opened up to competition - are able to buy their supplies for much less and so undercut British Gas. Under these crippling "take-or-pay" contracts, British Gas need not take the gas, but it still has to pay for it.

Paul Spedding, a gas industry analyst with Kleinwort Benson, reckons that the company will this year be forced to pay as much as pounds 700m for gas that it does not need, pounds 300m in 1996, and pounds 200m-pounds 300m in 1997. "It's a pounds 1.3bn headache. That's the value of the gas they're going to have to buy over the next three years and have no home for."

It is a horrifying prospect, even for a company making profits of pounds 1bn a year. It hopes to renegotiate the contracts with suppliers, but the counter-parties, oil giants such as BP and Shell, have absolutely no incentive to rewrite perfectly legal and binding arrangements just to suit British Gas, especially as it would lose them money. Analysts say there is little hope that the company will escape its painful obligations.

Once the Interconnector pipe from Bacton in Norfolk to Zeebrugge in Belgium opens in 1998, the company may find a Continental home for its excess gas.

But even here, the prospects are considerably dulled, because both the Russians and the Norwegians are also trying to dump surplus gas. British Gas could shut down its own production, for example from its platforms in Morecambe Bay, but that has its own associated costs.

The only realistic hope is for a cold spell that gets the entire country turning up the heating a notch. Spedding at Kleinwort Benson reckons a really vicious winter could wipe out one-third of the problem. But the alternative - another mild winter - would add to the problem.

So who is to blame for this fiasco? Not us, says British Gas. It stresses that it signed the contracts before it realised how much the Government was planning to open up the gas market to competition. When it began

signing these contracts before privatisation in 1986, it had a 100 per cent monopoly and a statutory duty to supply everyone. It was, it claims, perfectly logical to lock in to long-term supplies.

The City has largely accepted this explanation. According to one institutional investor: "I don't think any other management would have done any differently, quite honestly." Brown and his colleagues were blameless, they think.

The reality is rather less black and white - 45 per cent of these damaging contracts were signed after privatisation in 1986, by which time the Government had spelt out how it wanted to see competition in supplies to industrial and commercial customers. The company continued to sign contracts for the next eight years, despite reform after reform to introduce more competition into the industry. It was still locking itself into these contracts in December 1993, when Michael Heseltine, then President of the Board of Trade, announced that the domestic market would also be opened up to competition. Even then, it carried on, signing a final long-term deal in the spring of 1994.

According to one rival gas company, British Gas ignored the evidence of its eyes and continued committing itself to future purchases. "The writing was on the wall long before they stopped signing those contracts."

If the "bubble" of excess gas is the most pressing of the company's problems, it is far from being the only one. Another big threat is looming in the shape of a review of the pricing regime for its transportation and storage business TransCo. This is the pipeline business that transports gas from the coast to the cooker or boiler. It remains a cast-iron monopoly and has been the company's cash cow. In the last six months, it contributed no less than pounds 745m to the group's pounds 994m of operating profits.

But Clare Spottiswoode, the director-general of Ofgas, is threatening to alter that. She is roughing out a new pricing regime for TransCo which, according to Daniel Martin at stockbroker BZW could significantly dent profits. His best bet for the new formula would have wiped pounds 1bn from TransCo's revenues if it had been in operation between 1993/94 and 1996/97. Martin believes a tough new formula for TransCo could force the company to cut the dividend.

TransCo has done little to win friends at Ofgas or among its new customers - independent suppliers such as Mobil, Kinetica (a joint venture between PowerGen and Conoco) and Alliance Gas (BP, Statoil and Norsk Hydro). It recently agreed to pay pounds 11m in compensation to independent suppliers because of delays in meter-reading and other problems.

Worse was to come when, two weeks ago, it announced a 10 per cent increase in transport charges from 1 December. "They made no attempt to consult us or explain the rise," said one disgruntled supplier. "They've lost any goodwill they might have had. That has to backfire on them when the regulator comes to look at the pricing formula."

Other episodes have also led investors to question the quality of the British Gas management. Their worry is that the company's lamentable handling of Brown's pay rise was not a one-off, but a reflection of poor judgement in the boardroom.

The company's continuing problem with customer complaints raises other questionmarks. Last week, the Gas Con- sumers' Council revealed that complaints so far this year have doubled to 30,000. Nine thousand families were left at some stage with no hot water, no gas to cook with and no central heating, the GCC report said.

Ian Powe, the GCC's director, said the company had sacked too many staff and subsequently had to take on temps who were not so well trained. "To change the culture of a company like British Gas, and to try to do it with the same people - but just fewer of them - is a recipe for staff and customer discontent, as events have proved."

The spectre looming over all else is the introduction of competition into domestic supplies. From 1998, all 18 million of the company's domestic customers will be able to buy their gas elsewhere. A pilot scheme begins next April in the south-west.

The immediate outlook is gloomy and analysts see no likelihood of any bounce in the shares. Some investors bailed out before the recent share price weakness. Robert Fleming, the fund managment group, sold its entire 3 per cent holding last year.

The company itself continues to blame factors outside its control for its problems - the Government, the weather, the regul- ator, the media. Shareholders are beginning to wonder whether at least some of the fault lies closer to home. The company is repeatedly forced to deny rumours that Brown is about to leave. He turned 60 earlier this year, but the normal retirement age is 65.

Even the cast-iron reputation of Giordano has taken a pounding. It was only a year ago that he hired the Queen Elizabeth II Centre opposite the Houses of Parliament to unveil his bold new vision for British Gas. That vision looks distinctly tarnished.

Some gas watchers say Brown would be the last person to go because he is "Giordano's lightning conductor". Any problems can be placed at Brown's door. That, in the end, may be what saves him - and the embarrassment of having to pay out the pounds 950,000 severance fee to which Brown would be entitled under his two-year rolling contract.

News
The Banksy image in Folkestone before it was vandalised
people
Life and Style
tech

Sales of the tablet are set to fall again, say analysts

Sport
football West Brom vs Man Utd match report: Blind grabs point, but away form a problem for Van Gaal
Arts and Entertainment
Gotham is coming to UK shores this autumn
tvGotham, episode 2, review
PROMOTED VIDEO
News
i100
Arts and Entertainment
Bloom Time: Mira Sorvino
tvMira Sorvino on leaving movie roles for 'The Intruders'
News
First woman: Valentina Tereshkova
peopleNASA guinea pig Kate Greene thinks it might fly
News
Brian Harvey turned up at Downing Street today demanding to speak to the Prime Minister
news

Met Police confirm there was a 'minor disturbance' and that no-one was arrested

Arts and Entertainment
George Lucas poses with a group of Star Wars-inspired Disney characters at Disney's Hollywood Studios in 2010
films

George Lucas criticises the major Hollywood film studios

Voices
Chris Grayling, Justice Secretary: 'There are pressures which we are facing but there is not a crisis'
voices

Does Chris Grayling realise what a vague concept he is dealing with?

News
ebooksAn unforgettable anthology of contemporary reportage
Life and Style
A street vendor in Mexico City sells Dorilocos, which are topped with carrot, jimaca, cucumber, peanuts, pork rinds, spices and hot sauce
food + drink

Trend which requires crisps, a fork and a strong stomach is sweeping Mexico's streets

Life and Style
The charity Sands reports that 11 babies are stillborn everyday in the UK
lifeEleven babies are stillborn every day in the UK, yet no one speaks about this silent tragedy
News
Blackpool is expected to become one of the first places to introduce the Government’s controversial new Public Space Protection Orders (PSPOs)
news

Parties threaten resort's image as a family destination

Life and Style
Northern soul mecca the Wigan Casino
fashionGone are the punks, casuals, new romantics, ravers, skaters, crusties. Now all kids look the same
Life and Style
gaming

I Am Bread could actually be a challenging and nuanced title

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Customer Service Executive / Inbound Customer Service Agent

£18 - 23k + Benefits: Guru Careers: We are seeking a Customer Service Executiv...

ASP.NET Web Developer / .NET Developer

£60 - 65k + Benefits: Guru Careers: We are seeking a ASP.NET Web Developer / ....

Operational Risk Manager - Asset Management

£60,000 - £80,000: Saxton Leigh: Our client is an leading Asset Manager based...

Project Coordinator - 12 month contract

£27000 - £32000 Per Annum: Clearwater People Solutions Ltd: Our large charity ...

Day In a Page

Two super-sized ships have cruised into British waters, but how big can these behemoths get?

Super-sized ships: How big can they get?

Two of the largest vessels in the world cruised into UK waters last week
British doctors on brink of 'cure' for paralysis with spinal cord treatment

British doctors on brink of cure for paralysis

Sufferers can now be offered the possibility of cure thanks to a revolutionary implant of regenerative cells
Ranked seventh in world’s best tourist cities - not London, or Edinburgh, but Salisbury

Salisbury ranked seventh in world’s best tourist cities

The city is home to one of the four surviving copies of the Magna Carta, along with the world’s oldest mechanical clock
Let's talk about loss

We need to talk about loss

Secrecy and silence surround stillbirth
Will there be an all-female mission to Mars?

Will there be an all-female mission to Mars?

Women may be better suited to space travel than men are
Oscar Pistorius sentencing: The athlete's wealth and notoriety have provoked a long overdue debate on South African prisons

'They poured water on, then electrified me...'

If Oscar Pistorius is sent to jail, his experience will not be that of other inmates
James Wharton: The former Guard now fighting discrimination against gay soldiers

The former Guard now fighting discrimination against gay soldiers

Life after the Army has brought new battles for the LGBT activist James Wharton
Ebola in the US: Panic over the virus threatens to infect President Obama's midterms

Panic over Ebola threatens to infect the midterms

Just one person has died, yet November's elections may be affected by what Republicans call 'Obama's Katrina', says Rupert Cornwell
Premier League coaches join the RSC to swap the tricks of their trades

Darling, you were fabulous! But offside...

Premier League coaches are joining the RSC to learn acting skills, and in turn they will teach its actors to play football. Nick Clark finds out why
How to dress with authority: Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear

How to dress with authority

Kirsty Wark and Camila Batmanghelidjh discuss the changing role of fashion in women's workwear
New book on Joy Division's Ian Curtis sheds new light on the life of the late singer

New book on Ian Curtis sheds fresh light on the life of the late singer

'Joy Division were making art... Ian was for real' says author Jon Savage
Sean Harris: A rare interview with British acting's secret weapon

Sean Harris: A rare interview with British acting's secret weapon

The Bafta-winner talks Hollywood, being branded a psycho, and how Barbra Streisand is his true inspiration
Tim Minchin, interview: The musician, comedian and world's favourite ginger is on scorching form

Tim Minchin interview

For a no-holds-barred comedian who is scathing about woolly thinking and oppressive religiosity, he is surprisingly gentle in person
Boris Johnson's boozing won't win the puritan vote

Boris's boozing won't win the puritan vote

Many of us Brits still disapprove of conspicuous consumption – it's the way we were raised, says DJ Taylor
Ash frontman Tim Wheeler reveals how he came to terms with his father's dementia

Tim Wheeler: Alzheimer's, memories and my dad

Wheeler's dad suffered from Alzheimer's for three years. When he died, there was only one way the Ash frontman knew how to respond: with a heartfelt solo album