Eastern set to lose millions in dash for gas

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Eastern Group, the regional electricity company bought by Hanson last year for pounds 2.5bn, is facing mounting losses running into tens of millions of pounds from its aggressive assault on the commercial gas market.

Managers in charge of Eastern Natural Gas have not revealed the scale of the problems, but industry sources close to the company suggested its policy of grabbing market share by selling gas too cheaply has cost it at least pounds 40m. In addition there are other huge losses incurred on so-called "take or pay" contracts to buy gas from North Sea fields at fixed prices well above the current market price.

For weeks the gas market has been rife with rumours that Eastern is about to cease taking on new customers in an attempt to sort out its existing difficulties - a charge the company vehemently denied. City analysts said the losses would have an impact on the valuation of Hanson Energy when the division, which also includes US coal mining operations, is demerged next year.

One source suggested those at the top of Eastern, and at its parent, Hanson, may not be fully aware of the scale of the problems. "The shareholders, in this case Hanson, are getting a raw deal over Eastern's venture into the gas market. They ought to know more about it than they apparently do at the moment," he explained.

The pace of Eastern's "dash for gas" has been astonishing, outstripping that of any rival electricity company. The idea was to lessen Eastern's exposure to the electricity business prior to the distribution price review being undertaken by the industry watchdog, Offer.

Just a year ago the company ranked sixth in the league table of suppliers to the competitive gas market, which covers everything from heavy household users to large industrial customers.

The latest unpublished industry sales figures suggest that since then Eastern has risen to second place in the business market, beaten only by British Gas. One consultancy said Eastern had actually surpassed British Gas in the large industrial market, taking as much as a 17 per cent share.

Since last year Eastern's sales force - believed to earn commission based on the volume of gas sold rather than the profitability of the contracts - has sold gas to customers for as little as 7p a therm and at an average price of around 10p. Yet in recent weeks the market price of gas, which collapsed in 1995, has recovered from 10p a therm to prices of 15p and above for delivery this autumn.

Eastern is thought to have contracts of this type to supply about 1 billion therms of gas this year at an estimated loss of 4p a therm, making total losses of pounds 40m. Other independent gas suppliers also face losses on recent cheap contracts, but experts said Eastern's aggressive sales policy had worsened its exposure considerably.

In addition, losses on the company's take or pay contracts are potentially even greater. Eastern is believed to be committed to buying a further 1 billion therms of gas each year at around 19p-20p a therm, substantially higher than the market price. The company has signed a number of big contracts with gas producers, including a pounds 400m deal arranged last year to buy the entire production of one North Sea field.

Some of these take or pay losses were reportedly written-down in Hanson's balance sheet following the takeover. The last annual report includes a "fair value" adjustment to the balance sheet of minus pounds 129m, to reflect what it described as "liabilities in respect of purchase contracts" incurred by the energy division.

However, the company's web of deals to supply gas to its own power stations and the wholesale market have disguised the true picture. Last week Trevor Turner, the head of Eastern Natural Gas, could not be contacted. But an Eastern spokesman insisted the business was profitable. "These are just mischievous rumours spread around by our competitors."

News of the problems may also affect Eastern's attack on the domestic market, with full competition for residential customers due in 1998. Eastern is selling gas at a 20 per cent discount to British Gas in the trial run of competition under way in Devon and Cornwall.