Centrica hit by warning of margin pressure at British Gas

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Centrica, the owner of British Gas, has lost nearly 1 million customers this year after rising fuel costs forced it to increase energy bills.

Centrica, the owner of British Gas, has lost nearly 1 million customers this year after rising fuel costs forced it to increase energy bills.

The company also warned yesterday that its British Gas division was likely to miss its own target on profit margins, having decided to shelter customers in the short term from further gas price increases in an effort to keep customers on board.

Shares in Centrica fell more than 8 per cent, despite reassurance from the group that it still expected to meet current profit expectations, as investors focused on news that margins at British Gas in 2005 are unlikely to improve on its 2004 performance. Nearly £800m was wiped off the value of the company, with shares closing at 229.25p.

"The key issue facing Centrica in 2005 is the current level of UK wholesale energy prices," a statement from the company, run by Sir Roy Gardner, said. The price of natural gas this quarter has risen 32 per cent from the same time last year, and electricity prices are 18 per cent higher, causing Centrica's costs to soar. "Operating margins are now expected to be lower than previously anticipated."

Some of the rises in energy costs have already been passed on to customers. After a 12.4 per cent rise in gas bills and a 9 per cent rise in electricity bills in September, a further 630,000 customers have abandoned British Gas in the second half of the year, adding to the 300,000 that switched their utilities supplier in the first half. ScottishPower said last month that it had lured 460,000 customers in its first half, mostly from Centrica. Scottish & Southern said that it has been gaining 50,000 new customers a month.

Centrica said the number of customers deserting the business had stabilised as rival operators also increase their charges to customers, and sales are at 80 per cent of levels prior to the price increases. But in order to stem the tide of customer churn and protect its customer base, Centrica has vowed not to pass on the impact of further energy cost increases to customers for at least the next few months.

It will instead try to absorb high wholesale gas prices by cutting costs in other areas of the business. But the company has also said that upgrades to its British Gas billing system were now expected to cost £430m, up from its previous estimated cost of £400m, and this will not take the pressure off British Gas's margins.

Analysts are expecting margins at British Gas to be at about 4.5 per cent, rather than the 8 per cent Centrica had hoped to achieve. It has not abandoned the 8 per cent target entirely, however, saying it was a long-term goal. Phil Bentley, the finance director, said: "We're still convinced that an 8 percent target is appropriate and achievable."

It is trying to increase output at its gas production division, which currently provides about only 20 per cent of its supplies, to about 40 per cent, so the group is less reliant on buying gas from the open market.

Centrica said it believes it will still deliver double-digit profit growth because of strong results in its other businesses. Gas production has been increased to take advantage of high energy prices. Gas storage and profits from North America are also expected to be solid. It has sold 84 per cent of its storage capacity, and said full-year profits in the division would be "significantly" ahead of last year's.