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Update: Centrica may pass on gas price increases

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By Jamil Hussein

Date: Monday 12 May 2008

LONDON (ShareCast) - Shares in Centrica rose on expectations that the British Gas owner may pass on the “stubbornly high” wholesale gas prices to customers.

The group said the current outlook for gas prices creates a challenging environment for energy suppliers, adding that Centrica will take the necessary action to deliver “reasonable margins in the retail business.”

Chief executive officer Sam Laidlaw fleshed out those comments in an analyst conference call saying “a further retail price increase across the industry looks inevitable'' unless wholesale rates drop.

Centrica said, as expected, operating profit for the first half will be “materially lower” than the same period last year.

Wholesale gas price for the second half is double of the same period last year, driven higher by record oil prices, demand in Asia for Liquefied Natural Resources and lack of imports from Europe.

“Looking to the full year, forward wholesale gas and power prices in the UK remain stubbornly high,” said the group.

“At current forward wholesale gas prices operating profit in the upstream gas production business will be very strong, although this will be partially offset by the additional losses in the industrial and commercial gas sales contracts. This shift in profit mix will increase the Group effective tax rate, which is currently forecast to be around 55%,” it added.

Following its retail price increase in January, wholesale gas prices continued to rise, causing profit margins in British Gas to be squeezed to levels below expectations in the first half.

Sales of energy accounts have slowed following the price rise, with British Gas ending April with 15.9m customer accounts on supply.

In Centrica Energy, the gas production business saw both production volumes and selling prices well ahead of the previous year.

“However the high wholesale gas costs have further impacted the legacy industrial and commercial gas sales contracts. Losses here are currently expected to be materially higher than previous guidance,” added the group.

Centrica said performance across the remainder of the group has been good.

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