Soaring tax bill leads Centrica to cut back on UK investment

Centrica warned yesterday that the Government's surprise extra tax on North Sea oil and gas would hit profit growth this year and cause the company to scale back investment.

The British Gas owner also warned that households could again be facing increases in energy bills after a 25 per cent rise in the wholesale price of gas and power for next winter. The company, which has about 16 million energy accounts, raised bills by 7 per cent last winter. It said it had yet to decide whether it would increase tariffs.

In a trading statement, Centrica said a mix of higher profits and the increased tax rate on UK oil and gas production would push its tax bill up by £300m this year and that its effective tax rate would be about 45 per cent.

"We continue to expect growth in our 2011 group earnings but at a more modest rate than anticipated at the time of our results announcement as upstream profits have become more highly taxed," the company said

The group had planned to spend half its £1.5bn capital expenditure budget for this year on UK upstream activities. But Centrica said yesterday: "With the resultant reduced cashflow and increased fiscal uncertainty, we no longer expect to maintain the previously projected high levels of investment in the UK."

The news sent Centrica's shares down 12p, or 3.8 per cent, to 303.5p.

In his March Budget, the Chancellor announced a shock windfall tax on North Sea oil and gas by increasing the charge on producers to 32 per cent from 20 per cent to pay for a cut of 1p a litre in petrol duty.

Centrica listed a set of tough trading conditions, including lower residential gas use during the warm April, increased competition and tight household budgets.

Gas and oil production were strong in the first quarter of the year and increased wholesale prices will boost operating profit at the company's upstream operations.

However, the Budget measure will offset the benefits of higher prices by increasing the tax rate on some Centrica fields to 81 per cent.

Weaker demand in the UK led to a 40 per cent reduction in generation from Centrica's power plants and prompted the short-term closure of four of the plants, or 20 per cent of capacity. The company has also warned the tax hike could mean that one of three fields in Morecambe Bay may not reopen following maintenance.

The Chancellor's decision to tax North Sea producers £2bn to ease the pressure on motorists produced an industry-wide outcry and claims that some of the North Sea's most mature fields would be closed.

Justine Greening, the economic secretary to the Treasury, last week admitted higher taxes would have an impact on UK investments. She said the Government would work with the industry to limit the impact on marginal North Sea fields.

Killik & Co analysts said that despite uncertainty over the near-term outlook for earnings, the company was performing solidly. "We believe Centrica is the best placed across the peer group and is likely to continue to take [residential] market share."

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