As the British weather turns cold, the season of gas and electric price rises is now upon us. British Gas, which is owned by Centrica (LSE: CNA) (NASDAQOTH: CPYYY.US), gained unwelcome publicity last week when it announced an average price rise of 9.2%.
British Gas accounted for 40% of Centrica’s operating profits in 2012, and having taken a closer look at the British Gas business, and I’m not sure it’s a very appealing investment at the moment, despite last week’s price hike.
1. Complaints
Customers really don’t like British Gas. According to figures from the energy regulator, OFGEM, British Gas received 20.1 complaints per thousand customers in 2012, more than any of the other big six utilities, and a 62% increase on 2011.
Centrica’s latest accounts show that British Gas account numbers remained flat last year, suggesting that the firm is having difficulty adding new customers, despite owning one of the UK’s best-known utility brands.
2. Stagnant profits
British Gas profits rose by just 1% during the first half of the year, as the firm was unable to profit from a 13% increase in gas consumption during the long winter, due to increased commodity costs and environmental charges.
Record numbers of callouts for boiler breakdowns didn’t help either — Centrica complained of ‘additional costs’ due to the cold weather, and said that economic conditions made the sale of new products difficult.
Overall, Centrica says that British Gas residential profits are expected to be ‘broadly in line with 2012’ this year, highlighting how Centrica is increasingly relying on its upstream oil and gas business for profit growth.
3. Expensive dividend
Centrica’s dividend has risen by 40% since 2007, and now offers an appealing 4.6% trailing yield. However, the firm’s reported earnings per share (EPS) have not risen in-line with its dividend; the firm’s 2013 EPS are expected to be just 5% higher than in 2007, highlighting how Centrica has consistently reduced dividend cover to fund bigger payouts.
These factors would not concern me much if Centrica was a pure utility, but the firm’s unregulated oil and gas business now delivers around half of its profits, meaning that its earnings are closely linked to wholesale oil and gas prices. A fall in the price of oil could hit profits hard, as this wouldn’t be offset by rising profits for British Gas.