Martin Flanagan: Not a national champion but still a vital cog in the economy

Published on Tuesday 27 July 2010 21:53

CENTRICA will probably have its work cut out to ever even aspire to a "national champion" tag. The company's ownership of British Gas, whose status as a target of consumer protest is almost enshrined in British society, ensures that.

But Centrica's strong six-monthly results are a timely reminder in the context of BP's technicolour tailspin in America that the British energy sector is not uniformly out of sorts at the minute. And, also, that American ambitions remain undiminished in the British energy bosom.

British Gas/Scottish Gas's near doubling of profits in our last glacial winter will inevitably be the lightning rod for home turf consumer cynicism again, but the parent company's two-thirds jump in wider operating profits to 1.56 billion is also clearly influenced by its more diversified strategy under chief executive Sam Laidlaw.

Centrica is more than 40 per cent bigger in stock market terms since its acquisition of Aberdeen-based oil explorer Venture Production and a 20 per cent stake in nuclear group British Energy last year.

It is still not near BP's stock market magnitude, but with a value of circa 15.8bn it is now the 25th biggest company in the FTSE 100 blue-chip index. The group will probably pay some 700 million to the British tax coffers this year and a similar amount to UK pension funds.

In short, Centrica's wider corporate health, as distinct from the evergreen hue and cry about retail energy prices in Britain, is clearly of value to the country.

And BP's dramatic Gulf of Mexico fall from grace shows we cannot take good performance for granted.

Having said that, it is good that Laidlaw has not been put off by BP's experience in terms of further acquisitive expansion.

He will not be drawn on whether Centrica is interested in any of the $30bn (19bn) of assets the oil giant has put up for sale to help pay the Gulf bill.

But Laidlaw makes no bones about his desire to expand Centrica's Direct Energy business in the States, which also doubled profits to 139m in the first six months of 2010.

He wants to replicate the company's recent British progress across the Atlantic of transforming a meat-and-veg supply business into a fully integrated production and supply company.

The wider aim of this strategy is for Centrica to stabilise earnings by having enough of its own production to help insulate it from swings in wholesale energy prices.

This will also give the stock market greater visibility on future earnings at the group and therefore hopefully sustain Centrica's developing strength in the Footsie.

That, in turn, should keep the tracker funds interested in the stock and provide a further support for the market price alongside a decently progressive dividend policy (interim payment a shade under 5 per cent).

In perspective, any world-beater accolades for Centrica are not so much on the backburner as down the back of the oven where the cat left the unwanted Whiskas.

But the group's creditable results do show a business well into its corporate transition into a broader energy player.

King right to see inflation as lesser of two evils

Bank of England governor Mervyn King yesterday told the Treasury select committee that a sustained British economic recovery was still uncertain given global headwinds, adding that inflation would probably remain high for most of 2011.

That apart, the interchange between the BoE's heavy guns and Whitehall's finest was quite downbeat. It will not send a glow of relief among the general populace facing rising taxes and an austerity axe swung with vigour at public services.

On the one hand you could wonder whether the Old Lady of Threadneedle Street has lost control of inflation. On the other you could argue that does it matter if she has temporarily?

In the current climate of uncertainty, it looks like King thinks it is far more dangerous to hike interest rates and plunge us into a double-dip recession.

That is probably about right. Inflation above the government's 2 per cent target, and likely to stay there for much of 2011 according to the governor, is a cause for concern at present.

But even the hint of a double-dip recession is downright frightening. The country is in hock up to the eyeballs, and its only hope is to pay off the creditors with private-sector cash while the public sector is given a going-over it hasn't seen since the early 1980s.

A double-dip recession would squeeze the very sector that is supposed to be our path out of the mire.

It is a case of the lesser of two evils.

We are not at Weimar Republic levels of money devaluation. We should keep our nerve on current levels of inflation and press ahead with trying to get the economy moving again. ..