British Gas sees profits up 24%

24 February 2011 Last updated at 10:48 GMT Centrica chief executive Sam Laidlaw says British Gas is making "profits for a purpose"

Operating profits at British Gas rose 24% in 2010 to £742m, its parent company Centrica has said.

The news comes two months after the UK utility announced a 7% rise in domestic energy bills, which it blamed on rising wholesale prices.

British Gas said it had increased its number of customers by 267,000 during the year to 16 million.

The results helped Centrica to achieve pre-tax profits of £2.8bn, with operating profits up 29% to £2.4bn.

'Bitter pill'

The 24% rise in British Gas's operating profit was largely because of an increase in profit per customer, with the number of customers up just 1.7%, as revealed in the group results of its parent Centrica.

Some 85% of British Gas's profit came in the first half of last year, according to a Centrica spokesperson, when customers increased energy usage in response to cold weather, and the firm attracted new business with a price cut in February.

The second half was less profitable for the group's residential energy unit as wholesale prices rose more quickly.

Centrica has claimed the decision in November to increase British Gas customers' energy bills was necessitated by a 67% rise in wholesale gas prices during the year, and a 29% rise in the cost of wholesale electricity prices.

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The issue is not about one company or one year's profit or loss but it is about whether the energy market is working properly ”

End Quote Mike O'Connor Chief executive, Consumer Focus Price comparison website Moneysupermarket.com called the rise in British Gas's profits a "real bitter pill to swallow for Britain's hard-pressed households who have suffered the double whammy of an extremely cold winter coupled with high gas and electricity prices".

British Gas launched what the comparison website considered the cheapest online tariff on the market in February.

But Moneysupermarket's Scott Byrom said that "customers shouldn't be fooled" into thinking British Gas was the cheapest provider overall because its standard, and most popular tariff, was still much more expensive.

Ofgem investigation

"British Gas is the only major UK energy supplier that breaks down its results in any great detail," notes Mike O'Connor, chief executive of Consumer Focus. "As such it acts as a lightning rod for the industry."

Amid allegations that energy suppliers were making excessive profits, government watchdog Ofgem announced a review of the retail energy market in November, that is expected to be published at the end of March.

"The issue is not about one company or one year's profit or loss but it is about whether the energy market is working properly and Ofgem's review must try to answer this question once and for all," said Mr O'Connor.

"There is a compelling case for much more transparency across the market."

Energy price windfall

As part of its business, Centrica typically sits on a large stock of unsold gas and other energy supplies, which it has already purchased on wholesale markets but has yet to deliver to its customers.

With energy prices rising, Centrica made a £1bn windfall gain - over one-third of its 2010 profits - on the value of these inventories.

In 2009 the energy group hedged these energy inventories using financial derivatives, in order to avoid making a gain or loss on changes in their value.

Centrica comprises a lot more than just British Gas

In contrast, the group's 2010 results indicate that the company did not hedge them this time round, meaning the company was in effect speculating on rising energy prices and could pocket a massive gain as prices went up.

The windfall was listed as an exceptional item in Centrica's financial results and was not part of their operating profits.

Upstream growth

Centrica comprises a lot more than just British Gas, including business energy supplies and power generation, as well as substantial operations in North America.

Indeed, its UK residential energy supply unit contributes just 37% of the energy group's revenues.

Operating profits at Centrica's upstream business - which deals with power generation and oil and gas drilling, among others - were up 46% to £771m.

The company has been expanding quickly, according to chief executive Sam Laidlaw, with two major acquisitions last year designed to secure new sources of gas, and to expand into nuclear energy.

"We invested £4bn," he said. "Clearly therefore we have a much bigger group [than just British Gas]. We've been investing £1.60 for every £1 of profit for the group."

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