Centrica rises on British Gas - 15 May

Centrica, the owner of British Gas, predicted yesterday that its annual profits would beat expectations, barring big moves in the wholesale gas market, following a strong performance in the first few months of this year.

Centrica said at its annual meeting that it had performed well so far in 2007, with higher profits at its downstream British Gas business "more than offsetting" lower profits from its upstream gas production division.

A fall in UK wholesale gas prices since the middle of last year has led to a fall in costs and a rise in profits at British Gas, which supplies more gas to customers than it owns.

Centrica said the outlook for all of its markets was encouraging, "although significant uncertainty remains over wholesale gas and power prices for the balance of the year and over demand levels due to unusual weather patterns".

But if wholesale prices stayed line with the current forward curve and temperatures were seasonally normal, "we would expect to deliver a group operating profit above current consensus estimates, due to the significant outperformance already seen in the first half", said the company.

It also expects to benefit from a drop in interest charges, due to a lower debt burden, and a lower effective tax rate as profits shifted from upstream to downstream. Analysts forecast that Centrica will generate profits before interest and tax of £1.76bn in 2007.

Centrica said it produced 48 per cent less gas from its gas fields in the first four months of the year compared with the same period of 2006. This reflects the strategy of holding back gas production for a time when gas prices - and therefore profit margins - are higher.

The group's gas-fired power stations have benefited from lower gas prices, however, and Centrica increased their output to take advantage of the better profits available, up 133 per cent to 5.9 terawatt hours.

Lower gas costs have allowed British Gas to cut its bills for residential customers twice this year, putting it at the forefront of a price war with rival suppliers such as Powergen and Npower. There are signs that this is helping to reverse the group's decline in market share, which fell below 50 per cent for gas for the first time last year. Centrica said that British Gas had gained 900,000 customers since the announcement of its first price cut on February 8.

British Gas currently supplies energy to 15.8m residential customers, compared with 16m at the end of 2006. The group lost 1m customers last year to cheaper rivals.

Centrica shares rose 8¼p to 393¼p yesterday.