Problems in pipeline for BG blows hot and cold

BLUECHIIP
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The Independent Online
Last week was BG's annual general meeting, during which chairman, Richard Giordano, told the low turnout in the cavernous hall at Birmingham's National Exhibition Centre, that "regulatory clarity and stability" were essential if performance could be safely predicted. Safely predictable performance, of course, has been the traditional appeal of a utility company since time immemorial.

For Centrica in this column last week, the conclusion was that the shares represented poor value. Does the other half of the former British Gas represent a better bet?

BG, sadly, after muggings by regulator Clare Spottiswoode, is about as unpredictable as you can get. After the Spottiswoode row, the latest difficulty to befall it is the threat of a windfall tax under the new Chancellor.

While Centrica has been landed a business which may be unable to pay out a dividend for a few years yet, BG is hardly a stock for investors to dive headlong into. TransCo, its collection of pipelines, is the root of its problems. BG is under the scrutiny of a Monopolies and Mergers Commission review to decide the rate of depreciation the company can charge for its pipeline assets; what is the appropriate capital replacement rate; and what makes a fair rate of return on capital.

Determining such a rate, however, will set the rate at which BG can charge its customers - notably Centrica, but also independent gas shippers - for the privilege of transporting gas to their consumers around Britain.

It is too hard to call the MMC decision. Ms Spottiswoode's own proposal, which provoked the MMC investigation, called for a pounds 400m cut in TransCo's revenues, with a pounds 30 a year saving off gas bills. While the MMC may not be as harsh, it is unlikely to restore BG's fortunes.

The shares trade on the appealing historic yield of 10.5 per cent; appealing, until it sinks in that this discounts the probable halving of the dividend, to 7p or less after the MMC reports, at the end of this month.

One might hope the matter would end there, but Ms Spottiswoode has the right to reject the MMC's findings, and insist her own, more far-reaching, draconian recommendations be implemented. Should this happen, it will plunge not only BG's share price into turmoil, but leave a problem for the Government to consider: who regulates the regulator?

The shares have climbed up from the low of 121p they struck in May of last year, and have since inched back to 181.5p

Capitalised at just over pounds 8bn, BG is still a sizeable affair. But whether it can return much more to shareholders over the next few years remains a series of ifs and buts. The shares are for well-informed gamblers only.

RICHARD PHILLIPS

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