Centrica’s ‘greed’ should be put in perspective

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By George Kerevan
 
PREDICTABLY, Centrica is being given a media bashing for putting up consumer prices by 6 per cent. However, like all capital-intensive energy companies, Centrica’s profit margin is piddling.
 
Turnover is a massive £23 billion but last year it made an operating return of around 5 per cent of that figure, and a statutory profit of less than 2 per cent. That is not a comfortable margin.

The UK now imports half its gas needs – it will be three-quarters by the end of the decade. Centrica’s dilemma is what to do next? Should it seek to secure supplies elsewhere? Or diversify into other energy forms such as renewables, which means expensive capital investment?

The firm has attempted to stick with what it knows best. It has brokered £50bn of future gas supplies from abroad. Last year it signed a deal with Norway’s Statoil both to import and produce new gas. But while this sounds impressive, it’s not enough.

An attempt to secure a £30bn 20-year supply deal with Qatar came to nothing, though Centrica is rumoured to have offered the Qataris a seat on the board. In the event, Centrica signed only a £2bn deal with Qatargas, for three years.

Worse, despite the advent of American fracking technology, rising energy demand in Asia looks likely to eliminate the global over-supply of gas we have seen in the past few years. That leaves Centrica dangerously exposed.

Meanwhile, the company’s one major attempt at diversification has a big question mark hanging over it. Centrica has partnered with EDF, the French utility, to build some of Britain’s next generation nuclear power stations. But uncertain subsidies and the disaster at Fukushima have already caused other bidders – E.ON, RWE and SSE – to abandon this risky market.

It is doubtful if Centrica, with a market cap of some £17bn, is really in any position to find its 20 per cent share of the £25bn project with EDF. The French are already making contingency plans to go it alone. Rather than worry about Centrica’s alleged greed, we should be worrying about the lights going out.

BAE has more good points than bad ones

WHERE next for BAE Systems after Berlin’s veto to its proposed merger with EADS?

In retrospect we should have seen the German move coming. Tom Enders, the boss of EADS, is not appreciated in Berlin after he switched much of the production of the Airbus A350 to France, citing a lack of skills in Germany. While there’s no obvious replacement for Enders, that may not stop Berlin taking revenge.

There are also rumours that BAE’s chief executive Ian King, and the chairman Dick Olver, are under pressure to resign, but that seems a good way of turning an embarassment into a total disaster.

With sales of £19bn, profits of £1.5bn and a good relationship with the Pentagon, BAE is hardly a basket case.

To reassure shareholders, BAE needs to find a way of diversifying back into commercial aviation – the ostensible reason for EADS tie-up. The way to do this would be through acquisitions or partnerships.

Why not a joint venture with Mitsubishi, which wants to capture the regional jet market from Brazil’s Embraer and Canada’s Bombardier with its new MRJ90? Mitsubishi needs a second production line outside of Japan. It worked with Japanese cars in the UK.

Courtesy of George Kerevan and the Scotsman newspaper