UNDER sustained pressure from the regulator in recent times has been
British Gas. Unfairly, perhaps, given the cavalier manner which many
other privatised utilities adopt, though it must be admitted that this
#10,500m FTSE constituent's rating is higher in Scotland than elsewhere.
Even so I see no reason why this giant's army of 2,178,855 investors,
the majority with fewer than 1000 shares, should be other than happy
with progress. Offered at 135p (50p down) in 1986, the shares stand
close to 244p on a 7.3% yield. That is a good deal better than almost
anything else, and the track record since flotation is a 17% pa compound
dividend growth rate.
Admittedly the shares did run up a bit on speculation about a
demerger, which led to analysts projecting break-up values ranging from
327p to 415p a share. Net asset value is 464p.
British Gas is certainly rich in assets, with scope to maximise their
value. Possible actions include hiving off the pipeline business, said
to be worth around #6000m; the extensive exploration interests; or more
likely consumer distribution could be split into a regional pattern,
much as the electricity discos are organised at present.
Cause for more immediate shareholder concern is the pressure of
regulation, aimed at completely busting the gas monopoly. If the company
is forced to surrender a major part of activity, it is reasonable to
question the future impact on earnings.
Fortunately the prospects are brighter than may appear. British Gas is
prepared to lose sales to a new generation of rivals, but still benefits
from the supply service. It has, for example, been estimated that loss
of 10% of volume would cut #70m from profits.
That can be countered, however, by switching into other energy
interests. BZW analysts reckon it could spend up to #2000m on upstream
oil and gas, involving a substantial shift in capital to higher return
activities within five years.
There has to be concern about the dogfight between the company and
Ofgas director-general Sir James McKinnon. This Rottweiler of regulators
is said to consistently outplay British Gas chairman and chief executive
Robert Evans. Sir James almost contradicts that, complaining about
British Gas having a record of strong resistance to change on every
matter his organisation addresses.
After studying Ofgas's annual report I must say the regulator writes
in racy and lucid style. The nub of his argument being that the company
has not actually had entitlement to monopoly since privatisation.
''It may be that few believed it would ever happen, but no-one can say
it was not clearly sign-posted,'' he says. Admitting that everyone is
going flat out to capture the profitable gas accounts he raises doubts
on who would want the low users.
''Who would compete with British Gas -- a supermarket?'' he asks. And
supplies the answer: ''If all customers were to buy gas and electricity
from a single source, the costs associated with the function would be
substantially reduced and maybe almost halved,'' says Sir James, adding
that there would then be considerable scope for lower prices and higher
profits.
''The powerlines have taken on the mantle of toll roads, available to
all prepared to pay the fees required.''
What is worth remembering is that British Gas was given rough
treatment in the run-up to privatisation. I seem to recall former
chairman Sir Denis Rooke being pretty unhappy at being deprived of the
Wytch Farm discoveries and what became Enterprise oil.
Under pressure the company has agreed to reduce its share of the
contract gas market from 90% to 40%, having already cut prices by 3% to
its 18 million domestic customers. And naturally it is actively looking
to extend operations in other compatible areas, even though Ofgas has
warned that if these prove unsuccessful there can be no question of
raising tariff prices to balance losses.
It surprised rivals by paying #132m in March to acquire the largest
electricity generating station in Northern Ireland, also setting up two
companies to operate a pipeline for gas from Scotland which will also be
marketed there.
Through its Global Gas subsidiary it has worldwide ambitions in power
generation, based on the acquisition of Consumers' Gas, Canada's largest
distributor, in 1990 for #565m. Stakes were taken last year in three
former East German companies, plus other interests in Spain and
Portugal. It is also active in technology transfer and engineering
projects internationally.
British Gas is set for major expansion of oil and gas exploration,
having already established in 20 countries across Europe, Africa, Asia,
and the Americas.
So any idea that this is a mature business, bowing before attempts to
confine its activities, would be wide of the mark. Mind it has not
helped its image by confusing its accounts with a quite unnecessary
change from a December to March year-end. This has entailed paying a
nine months' final.
Even so the five-year record is impressive, with turnover on a current
cost basis up from #7364m to #10,485m, the bulk from UK gas sales of
which 69% were domestic. Despite milder winters this shows this remains
a growth market. Earnings have risen from 14p to 21.6p a share, pre-tax
profit from #1018m to #1469m.
With its considerable cash flow British Gas can fund its increasing
exploration programme quite easily, with gearing at a steady 10.9%
level. Currently reserves of gas and oil amount to the equivalent of
2382 million barrels, almost double the level of 1987. Morecambe Bay
fields form the company's largest asset, with the central North Sea a
key area.
What is surprising is that institutions accept Mr Evans holding both
top positions in such a large concern, which is at odds with known
preferences. It does mean, of course, that his #435,222 earnings last
year were modest. Overall board emoluments rose just #6000 to #1.6m
total.
There is a remarkable anonymity about this vast company, highlighted
by the issuing of a directors' annual report and accounts containing
neither chairman's statement nor chief executive's review.
But there is an accompanying statistical review. It not only details
financial performance in every detail, down to therms sold per employee
up from 159.4 to 250.5 in ten years, but also shows that in Scotland the
1.29 million customers equate to 42 per square mile. That contrasts
sharply with 1.9 million in the same radius in North Thames area.
Overall this concentration on data suggests management has a tight
grip on performance. The 79,400 employees equals 226 customers each,
against 151 a decade ago. Efficiency is charted down to the value of gas
savings stamps sold annually (#63m).
Less satisfactory is the extent to which the 679 gas showrooms are
being rationalised, the target being to close one in ten and concentrate
on larger showrooms. Inevitably this will deprive many smaller towns of
a useful facility.
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