City shocked by pounds 500m cost of Gas demerger

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The Independent Online
British Gas yesterday surprised investors and analysts by announcing a further pounds 500m of restructuring provisions, inflated by huge redundancy costs, in preparation for next month's demerger of its supply business, which will be called Centrica.

The write-offs, disclosed in more than 200 pages of documents to shareholders outlining details of the demerger, will more than wipe out the company's annual profits for 1996. They come on top of expected provisions announced yesterday of pounds 341m to cover the recent deals with oil giants BP and Mobil to renegotiate some of British Gas's pounds 30bn-worth of long-term North Sea "take-or-pay" contracts to buy gas at inflated prices.

British Gas had already announced exceptional charges of pounds 457m in the first nine months of last year to cover losses on its take-or-pay contracts. Based on analysts' forecasts, the total write-offs would plunge the company into losses of about pounds 400m when the results for 1996 are announced on 27 February, compared with profits in 1995 of pounds 607m.

The group said the pounds 500m charges would cover further redundancy payments, write-downs on the value of British Gas's huge property portfolio and the costs of the demerger process itself, estimated at pounds 55m. Roy Gardner, chief executive designate of Centrica, defended the scale of the write- offs, which he maintained were in line with the company's existing "conservative" accounting policy.

A company source said the provisions also reflected the fact that 10,000 more staff had taken voluntary redundancy than anticipated. The original pounds 1.65bn restructuring programme announced three years ago planned for staff cuts of some 25,000, but in recent months more employees have left British Gas as morale in the company slumped.

Last night analysts were still coming to terms with the write-offs and attempting to put a value on Centrica and the remaining half of the business, which will be renamed BG plc. One said: "These provisions are much bigger than we'd expected. We had assumed there would be further write-offs of around pounds 200m or pounds 300m but not on this scale."

British Gas also dampened speculation yesterday of further imminent deals to renegotiate take-or-pay contracts. Following the agreements with BP and Mobil, representing around 20 per cent of the total liabilities, analysts had been expecting similar arrangements with Shell and other leading North Sea oil producers.

However, Mr Gardner said one of his first tasks after the demerger of Centrica, to be completed on 17 February, would be to review the question of further take-or-pay deals.

Centrica, which will own British Gas's vast Morecambe Bay gas fields, takes over the liabilities to buy gas at around 19p a therm, much higher than current market price of 15p a therm.

However in recent months gas prices on the spot markets have been rising, alleviating some of the pain.

Mr Gardner explained: "We've progressed with a number of other deals but now I want to pause for a while. One parameter is the rise in the gas price, though clearly we still have a problem."

The demerger documents confirmed that Richard Giordano, British Gas chairman, would step down earlier than expected as chairman of Centrica at the end of June and would be replaced by Sir Michael Perry, former head of Unilever, the Anglo Dutch foods and detergents group.

Following his departure, Mr Giordano's salary of pounds 450,000, unchanged since his arrival at British Gas in 1994, will be halved, reflecting his diminished role as non-executive chairman of BG.

Under the demerger, existing British Gas shareholders will receive one Centrica share for every share they already own.