Profits fall 34% at Centrica's British Gas unit
Rising wholesale prices bring soaring profits, and taxes, at production business
Friday 27 February 2009
Centrica rejected accusations that it milked high energy prices as the company's British Gas retail business yesterday revealed profits down 34 per cent last year alongside plans to create 1,500 new "green collar" jobs.
The gas production division's profits more than doubled from £429m to £1.2bn in 2008, as wholesale prices soared. But British Gas profits of £379m, compared with £571m last year, dragged Centrica's group profits down 0.4 per cent to £1.9bn. The biggest tax bill in the FTSE 100 then slashed earnings to £904m, 20 per cent lower than in 2007. Centrica paid out 53 per cent of its profits to the Revenue – gas production taxes that sometimes run as high as 75 per cent.
The figures are further evidence against calls for a windfall tax on money made from last year's unprecedented rise in energy prices, according to Centrica. As are capital investments of £737m – in a new gas-fired power station at Langage in Devon, due to come on stream by the end of this year, and on the world's biggest offshore windfarm at Lynn and Inner Dowsing. Nick Luff, the finance director, said: "In round numbers, we made £2bn in pre-tax profits, of which £1bn went in tax and £1bn was invested. With windfall taxes, what gets squeezed is that investment, and if companies like Centrica are not able to invest in the infrastructure of the country, eventually the lights will go out."
The group's strategy is to offset the decline of the UK's North Sea resources with expansion into renewable energy and nuclear. To fund the plan, it will invest more than £15bn by 2020. The company is creating 1,500 new jobs over the coming year, the majority of which will be customer-facing roles offering energy efficiency services including both advice and installation of new equipment such as solar panels and next-generation, green boilers.
Centrica is also trying to buy a 25 per stake in British Energy, the nuclear company that was sold to EDF last month. Negotiations between Centrica and EDF are expected to conclude by the end of March. Centrica raised £2.1bn in a rights issue to fund the deal, but the discussions are less about the price tag than about what Centrica will get for its stake in the business.
"EDF paid 774p per share for British Energy, so the potential was always for us to buy at the same price," Mr Luff said. "But there are many aspects to discuss as well as the best price." The other element of the strategy is storage. Currently the UK can store only about 5 per cent of its total annual demand, compared with 20-plus per cent in Germany and France. But as North Sea gas supplies dwindle, storage capacity must grow to shield the UK market from international pressure and spikes in prices, says Centrica. The company already runs Rough, the field off the coast of Yorkshire that holds three-quarters of all the UK's stored gas. Yesterday it announced plans to spend £1.2bn on a 70 per cent interest in the depleted Baird gas field, not far from Rough, which would add another 60 billion cubic feet – or about 50 per cent – to UK capacity.
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