Centrica: long-suffering shareholders share in windfall profits

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Centrica is a brave utility indeed. The UK energy group’s customers are facing rising energy costs — partly paid for out of the public purse. It asks the government for support to refurbish the Rough gas storage field while earning pots of money from the commodity boom. Now it has decided to divert £250mn of its bumper 2022 profits into buying back stock.

Surely this waves a red rag to UK chancellor Jeremy Hunt’s windfall tax bull? Well, perhaps. But Centrica — whose retail business has been mopping up failed rivals and provides long-term support for the energy transition — has good reason to keep shareholders onside.

A trading update from Centrica boosted its profit outlook for this year. It should make £1.5bn of net profits this year, up six times since 2021. Trouble is, the extra money comes from its residual upstream and power generation arms, as well as its trading business. This is not expected to last. The commodity markets will retreat, eventually, and the production profiles of ageing nuclear reactors and oil and gas will decline over time.

At its core, Centrica is a retail energy supplier that needs investors with an eye on the long term. A disastrous push by the UK energy watchdog Ofgem to increase competition in this arena led to market failures, including Bulb which required a government bailout worth about £4bn. Britain clearly needs energy suppliers that the government need not backstop.

That helps explain why Centrica is throwing its long-suffering investors a sop. It has fixed its balance sheet and has net cash. The shares are still only on 3.4 times 2022 earnings. Total returns to shareholders — which this year may amount to £430mn in dividends and buybacks if the latter is completed before year end — should be a quarter of its net earnings. That is historically low for Centrica.

Profitable energy companies make attractive targets for windfall taxes. But the government would be unwise to bash Centrica given its central role in the energy system.

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