British Gas Owner Centrica Feeling the Heat
By Anne Lewis-Schneider
The political uproar over gas prices is heating up and British Gas could be on the receiving end of lower growth and profit margins. Sam Laidlaw is the chief executive for Centrica and has been in the position since 2006. He made a startling announcement last year in November when he said that he would give up his bonus in a move that left his colleagues aghast. He has always maintained that the company has a right to make profits and has had many run-ins about this but has also said that the business is one that carries high risks with the investments that it has had to make. His nightmare would appear to be far from over.
Last week Ed Davey who is the Energy Secretary wrote a letter to Ofgem asking them to investigate allegations that British Gas has been overcharging for gas. Ed Davey has said that the profit margin of 11% is excessive and that the time could be near when it would become necessary to break up the business to avoid a monopoly and profiteering. Managing director of British gas, Mr Chris Weston has replied with a statement that the profit margin for dual fuel is in fact only 5%.
Ed Miliband has come in for his share of a drubbing after he announced that if Labour won the upcoming election in 2015 then he would impose a 20 month price freeze on all energy companies. Following this, the share price for Centrica has seen a drop of 20% and this has led to accusations from Centrica’s biggest shareholder that Ed Miliband is guilty of what has been called economic vandalism. Analysts fear that Centrica may not be able to recover to its former profits and a profit warning was issued in November. Sam Laidlaw suffered yet another blow when his finance director quit. He is getting ready to make known his 8th annual results report and nervous investors are wanting reassurance that Centrica will be able to weather this storm, and also for how long Sam Laidlaw will be in the position he currently holds.
The main problem being faced by Centrica’s British Gas is how to ensure that the company remains profitable, and to do this prices will inevitably have to rise but if Ed Miliband manages to win the next election there is the price freeze pledge to contend with. So will British Gas be able to increase its prices? Industry experts are bandying words like “difficult” and “impossible” and “suicidal” in reply to that question.
The profits that were once fairly predictable as far as British Gas is concerned are now facing a very real threat, and British Gas is also feeling the squeeze in its Business Division too. Profits are down as companies change to cheaper suppliers and analysts say that they expect profits in this sector have dropped by around 21% this year. Centrica’s power plant profits have also dropped by about 40%, with power stations running at a loss.
Despite the predictions of energy shortages and blackouts, there is still an oversupply to the national grid and gas plants are all struggling to run long enough to cover costs and make a profit whilst cheaper coal burning plants are running full speed ahead. Centrica does have its share of nuclear power but if the carbon tax is frozen then earnings in that sector could also plummet. In recent months Centrica has pulled out of several investments which were explained away by Sam Laidlaw as putting more emphasis on gas and less on power. Centrica pulled out their 20% stake in the Hinkley Point C Nuclear Power Plant project with EDF recently too. The exiting of these various projects does not appear to stand up to their claims that more profit is required so that they can invest in future developments. When the nuclear plant investment was pulled that sent a very negative indicator to the energy sector and further damage was done when they decided to pull out of wind and gas fired plants, and then hiked their prices.
Centrica’s rough gas storage would also appear to be in difficulty with international prices narrowing the profit margins there. Profits are thought to have dropped by 25% there from 2012. Centrica’s campaign for subsidies has been ended as government says it is no longer prepared to see fuel bills rise to give additional subsidies to British Gas. This caused the death of two other projects that were planned. Centrica has however invested in shale exploration. Politics would appear to be playing a big part in all of this.
It is expected that shareholders will see more cash but the question still remains to be answered as to whether the investments that Centrica has made will deliver as expected. Centrica’s oil and gas division is hoped to be the one area where the company may be able to redeem itself. Gas and oil are no longer seen as growth businesses according to Credit Suisse. There have been suggestions that Centrica should make a bold move that will inspire investors but it is thought that Centrica may lack direction and is indecisive as to what move to make next.
There are questions over Sam Laidlaw’s role as he is now 58 years of age and may have one last tenure as chief executive left in him. He cannot leave in a blaze of glory and all of his ex-colleagues have beaten him out the doorway in a stream of resignations: Phil Bentley, Sir Roger Carr and now his right hand man Mr Luff. Sam Laidlaw would like to bow out but to do so at this point would be seen as running scared from Ed Miliband and investors need at least one consistent head but some have suggested that he will need the help of someone who understands the business to guide Centrica over the next few rough years. John Musk would like to see him stay in Centrica until after the election in 2015 for the sake of investors but only time will tell if that is to be the case.
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