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British Gas results turn sour

It’centrica logos difficult being British Gas, it really is, like a lightning rod to public controversy, anything associated with the business is seemingly seized upon by politicians and market commentators alike.

BT was another, but then they bought Premier League football, perhaps that’s where British Gas have gone wrong? Or maybe it’s their apparent commitment to increasing transparency and admitting and facing their challenges head on.

Indeed compare British Gas with their Big 6 colleagues and they are positively overflowing with customer, media and shareholder engagement.

But British Gas is very much in the ‘bad business’ compartment of Miliband’s mind and that simplistic thinking appears to be catching.

Quite how a major British business facing unfavourable corporate results and an uncertain future can be celebrated is as short sighted as it is predictable in the current yah boo climate of social media inspired politics.

But that is what has happened to Centrica, the parent company of British Gas Business, who last week announced a 35% drop in profits for the last financial year.

The immediate reaction was one of comeuppance – that somehow consumers had won, and British Gas had been forced to change – an attracting narrative for business bashing politicians. The only problem being it isn’t true.

On the eve of British Gas’ results announcement the initial findings of the CMA, Competition and Markets Authority, investigation into the workings of the energy markets were released. Key within these was the CMAs corroboration of the Big 6 energy suppliers’ claims that their retail margins were slim to non existent and that their generation assets were being deployed at below the cost of capital employed.

That finding directly contradicted the at times hysterical claims from Ofgem of profiteering, not least in their controversial Supply Market Indicators (SMI).

So if it wasn’t some politically inspired largesse from Britain’s biggest energy supplier that was behind a fall in profit what was it?

  1. Warmer weather through 2014 leading to reduced consumption, therefore lowering customer bills and decreasing the revenues of the business by £100m
  2. The plunging oil and gas price hitting profits in its upstream energy business
  3. IT issues in the retail arm contributing further to their losses both financially and to their customer base
  4. The ongoing outages at their joint owned nuclear facilities weighing heavily on the generation arm

Indeed British Gas lost 368,000 customers in 2014 to end on 14.8m whilst their British Gas Business arm saw profits fall by 19% and its residential business by 23%.

New Chief Exectutive Iain Conn reacted to the results saying:

“2014 was a very difficult year for Centrica and the recent fall in oil and gas prices creates a further challenge. We are cutting investment and costs in response.

“We have seen the warmest year on record in the UK which helped our customers, which is great, but it affected the volumes we were selling.

“We are stuck with $100 [a barrel] costs and $50 revenues.

“There are now 25 competitors in the market — our pricing is designed to win and retain as many as possible”

“In addition, given the changed external environment we are reviewing the longer term strategy, and will conclude this by the interim results in July.”

That long-term strategy review has already resulted in deep cuts to capital expenditure in its upstream business with Centrica disclosing that is plans to close its gas-fired power power station at Killingholme having been unable to sell the plant despite it having been in active use for the past 20 years

At a time of low energy security, a dependency on energy imports and the impending closure of a raft of power stations over the next 10 years, this is the last time that anyone would choose the UK’s largest energy supplier from reviewing its investment and development plans.

But Conn remained upbeat:

“Despite the obvious current challenges, I am confident in the quality of Centrica’s team and the platform which has been established, and I believe the group is well-placed to take advantage of the longer term trends in the global energy markets. Our priorities remain to serve our customers competitively and with integrity, to develop new offers and services, to provide secure and reliable energy supplies and to deliver long term value for shareholders.”

An ailing British Gas, great news evidently for populism, not for the energy market. If they’re not investing, who is?