Centrica to put soaring profits into UK power

Centrica today reported a 40% surge in profits in 2007, landing £1.95 billion from supplying household energy, lifting and storing gas in the seas off Britain, servicing and insuring people's boilers and running energy businesses in North America.

While consumer groups howled in fury at the record profits - just a month after British Gas raised up its bills by 15% to more than £1000 a year again - shareholders will be cheering the British Gas board, led by chief executive Sam Laidlaw, which ordered another annual rise in the dividend payout, this year up 17% to 13p a share.

Laidlaw attempted to head off the storm over the group's rocketing profits and City dividends by pledging to spend at least £1 billion a year for the foreseeable future on a whole host of investments - a spending spree equivalent to the group's after-tax profits in 2007 and 50% higher than the expenditure in 2006.

"What we are looking for is the opportunity to invest in good-quality power generation and gas assets that will create value," said Laidlaw.

"Opportunities in LNG [imported liquefied natural gas], in gas storage, in exploration prospects in the UK, Norway and Nigeria and in generation we are looking at nuclear, in new gas-fired plants, in clean coal technology and in offshore wind to ensure we hit the new renewable generation targets."

It is the green energy targets set by the European Commission of having the UK source 15% of its energy from renewables by 2020 which is likely to keep household fuel bills high in the long-term.

Centrica is forecasting that these targets will mean the construction of 33,000 megawatts of wind farms over the next dozen years, but warned that the construction and linking of wind farms to the national grid makes them about three times as expensive as building a traditional power station.

Centrica makes big profits from British Gas when the wholesale energy price is low, producing wide margins on its residential prices. When the wholesale price is high, its upstream production business is quids in.

When the wholesale price was low for much of the earlier part of last year, British Gas's residential supply business saw a 500% surge in profits to £571 million while its upstream energy business was flat at £663 million.

Profits from supplying business customers was up by more than a third to £151 million. British Gas Services, which services and insures household boilers, also saw a surge in profits, up 50% to £151 million.

Its storage business was 5% up at £240 million, while its North American energy supply company was nearly 10% better at £187 million.