British Gas reports dip in profits as energy costs rise

Sam Laidlaw, chief executive of Centrica, says British Gas has "very competitive propositions in the marketplace"

British Gas's residential business has reported a small drop in profits for 2013 due to warmer weather and higher wholesale energy costs.

Adjusted operating profit for the full year came in at £571m, down 6% on the £606m recorded a year earlier.

Owner Centrica also posted a dip in profits, at £2.7bn, down from £2.74bn.

Earlier this month, British Gas's prices and profits were questioned by Energy Minister Ed Davey, who suggested the firm might have to be broken up.

British Gas also said customer numbers had dropped by 362,000, or 2%, in 2013 compared with the previous year. It has lost a further 100,000 this year, although customer numbers are now stabilising following a recent price reduction, the company said.

"We have made good strategic progress across the group in 2013, investing along the gas value chain to secure long term, affordable energy supplies for our customers," said Sam Laidlaw, chief executive of Centrica.

However, he warned that this year would "remain challenging, with margin pressures and unusual weather patterns on both sides of the Atlantic, rising unit costs in the North Sea and weak economics for gas storage and gas-fired power generation".

Analysis

Centrica's profits are down. There are boardroom changes afoot. And its British Gas retail business faces accusations of having monopoly power.

But speaking to me, boss Sam Laidlaw was in a defiant mood. He blamed Labour's price freeze announcement for triggering the ongoing sell-off in its shares - they're down 23% since Sept.

He said Energy Minister Ed Davey's intervention in the current competition review was "regrettable" and added that "if there is political interference, that is clearly something that is going to concern investors and slow down building new power stations that we desperately need".

If a full competition probe comes - and industry watchers think it's increasingly likely - Centrica could be the big loser. The BBC understands the company may be looking at ways to placate the authorities by improving transparency around how it sells power to itself.

Speaking on BBC Radio 4's Today programme this morning, Mr Laidlaw said: "If that helps restore trust in the industry, it's certainly something we would look at."

Centrica revenue for 2013 rose 11% to £26.6bn, while revenue at British Gas also rose. The company said that profits fell despite this increase in revenue because of higher "wholesale gas and electricity prices".

'Dismay'

In October last year, British Gas announced an average increase of 9.2% in household energy bills. Following the government's changes to renewable energy funding, it subsequently said it was reducing prices by 3.2%.

The government took action to reduce green levies after the price rises, announced by the big six energy suppliers, sparked heated political debate and caused dismay among consumers.

Labour leader Ed Miliband pledged to freeze energy prices for 20 months if his party were to win the next election. But on Thursday Centrica chairman Rick Haythornthwaite said this and other political interference was "immensely damaging".

"I think the reputation of Britain as a place in which to invest is under threat and the time to correct that is now, not after the 2015 election, by which time the possibility of the lights going out in Britain will be looming much larger."

Mr Haythornthwaite and other critics of the Labour policy pledge argue that a freeze in prices means energy companies would not be able to make the investments in power generation needed to meet demand. The Labour Party rejects this criticism, and say the freeze is needed to help those struggling to keep up with rising fuel bills.

Speaking later to Channel 4 News, Centrica chief executive Sam Laidlaw said he had spoken personally to Mr Miliband to tell him his planned freeze was "flawed economics".

Investigations

The average dual-fuel bill in the UK is about £1,400. All the major energy companies have been criticised for continuing to raise bills, and have been called in front of MPs to explain both price rises and profit margins.

Former British Gas customer Neil Dennison: "There is no benefit to loyalty"

In response, the companies argue that they can do little about rising wholesale costs and government levies. They also stress the need for investment to modernise the UK's energy infrastructure.

Mr Davey has called on the competition authorities to investigate the profit margins of the major suppliers, although a review into the market is already being carried out by the Office of Fair Trading, regulator Ofgem and the Competition and Markets Authority.

Mr Laidlaw told the BBC soon after Centrica's results were published that he was "very concerned about household bills and vulnerable customers in particular.

"We are very conscious of pressures on average bills and we'll do whatever we can to keep bills down."

He said that average profit margins on British Gas dual-fuel bills were currently 4.5%, while £100bn of investment was needed in new energy production in the UK. The profit margin on gas alone, however, was 8.9% last year.

Domestic Gas Supply Margin

2012 2011 2010 2009

Source: Segmental Statements

Centrica

11.2%

8.1%

10.6%

7.4%

EON

-1.8%

-5.4%

-2.0%

-7.3%

EDF

-4.1%

-9.0%

-1.4%

-13.5%

RWE

1.7%

-1.6%

-0.4%

-8.8%

Scottish Power

7.1%

11.4%

6.3%

-0.9%

SSE

11.4%

8.6%

6.3%

-3.2%

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