Any finance geeks out there?

Anyone know this?

What’s the return on capital that the big six energy companies are making?

That’s the way to tell if they’re making excess profits or not: so, are they?

18 comments on “Any finance geeks out there?

  1. you’ll also need if possible to separate out the return on selling energy to B2C and B2B customers (low margin, people intensive) and the upstream component (high capital, higher return, already taxed at up to 81% in the UK). Centrica has already built up and sold off one E&P business (BG E&P in Reading) and is investing an awful lot in building up another one; all of the other members of the Big 6 are doing the same to a greater or lesser extent and I have a strong suspicion it’s the source of most of their profits. Pricing is of course set by either long term contracts (usually tied to oil and power prices and/or some basket of inflation) or by the global market. So blame to Chinese, basically

  2. Tim, using the term ‘excess profits’ is conceding ground to the enemy, even if you think the answer will come out in your favour.

  3. Looking at the two UK companies, SSE has ROCE of 6.3% for 2013, and Centrica has 15.7%. However Centrica makes more than half of its profits from oil and gas production.
    Left outside- Centrica made £2.7B Operating profit in 2012. 5 Exec Directors took £16m- eye-watering but not material in profit terms.

  4. Whilst I prefer not to put pandering to simplistic populism over proper analysis, that’s not how I’d go about making the point.

    If my scant memory is correct. the last set of British Gas accounts showed a profit per customer of about £20. That sounds like an ok number to me. The deceit in the reporting is to add up all the £20′s so you have giant numbers that cannot mean anything other than EVIL.

  5. What you need is not overall ROCE but ROCE on their energy supply business to UK consumers.
    I haven’t got that currently but I could probably work it out for some of them if no-one else has the answer to hand.
    My knee-jerk response is to quote the info on my British Gas bill which shows the costs imposed by Ed Miliband are more than British Gas’ profit margins i.e,. *he, personally* has added more cost to the poor consumer than the returns to shareholders (dividend and retained profits combined) on the capital they invested.

  6. Not looked at the numbers but would guess that ROCE will be relatively high in energy supply (cf upstream, E&P). Supply is not particularly capital-intensive except to the extent you need to implement hedging/collateralized commodity procurement – for example if the new government forced you to separate supply from upstream…

    These are margin-based businesses, which is why TTG’s suggestion of per-customer margin is the right way to look at it.

    Other than E&P/upstream, the capital-intensive bit of the industry is distribution, transmission, E&P etc, which none of these guys do any more.

  7. Last I looked British Gas (not Centrica) had about £600 million profit. Around 9 million customers, call it £5 a month off the bill if they didn’t make a profit.
    Profit margin tends to be around 4% – 6%, not too bad for a large business – many small businesses will have a higher percentage. So what is ‘excessive profit’?

  8. Just to define some terms and help Tim be more specific in what he wants. I think he really wants to know is:
    1. Net Operating Profit after Tax (NOPAT)
    2. The Net Book Value of Fixed Assets
    3. 1 divided by 2
    4. WACC
    5. point 3 minus point 4.

    If that number is positive, that’s the economist definition of Supernormal Profit/Residual Value/Intrinsic Value/Economic Profit. Colloquially known as excess profit (since competition should drive profits down to WACC, and if EP was less than WACC then firms should exit until the point that WACC is achieved).

    My guess is that WACC is c.7%. If ROA is 4% (as suggested by portemat above) then the number is negative. Firms should exit.

  9. If we want some number crunching done here what we need is expert input, being a chartered accountant and someone expert in energy. Two names that spring to mind are Richard Murphy and Caroline Lucas (if she’s not banged up by then).

    Candidly, if they fail to show that ROCE for the energy companies is not at least 30%, I’ll eat the fake coals in my living flame gas fire.

  10. hold on, this is a regulated market (at least the consumer end of it). The returns they are allowed to make are set by the regulator.

  11. @ alastair harris
    Quite. The regulator decides the *maximum* return that they are allowed to make, *but* they can make a lower return down to minus 100%.

  12. Ok. I have a Bloomberg screen in front of me so here’s we go…
    Return on Invested Capital = Trailing 12months Net operating profit after tax / Average invested capital
    So, the last five years (most recent year on the RHS):
    SSE – -ve, 11.3, 9.1, 11.7, 8.1
    Centrica – 2.0, 13.4, 14.4, 6.8, 10.7
    The other in the big six have foreign parent companies and there’s possibly no easy way to get a hold of a data for the UK subsidiaries. Maybe in the respective annual reports, but I have to get back to work…

  13. Here’s something. Labour sent a press release last month, which the media dutifully reprinted without looking at the figures:
    Since 2009 Britain’s Big Six energy companies (British Gas, E.ON, EDF, npower, Scottish Power and SSE) have been required to report to Ofgem on their annual profits for generating and selling power. Between them they supply 98% of households in Britain. These figures reveal that the total profits (earnings before interest and taxation) of the Big Six energy companies increased from £2.158 billion in 2009 to £2.219 billion in 2010, £3.867 billion in 2011, and £3.737 billion in 2012, representing a total uplift in profits of over £3.3 billion since 2010: [table of figures]
    So this rip-off or profiteering narrative is coming from EBIT figures and the mistaken interpretation that £3.3bn in a year (not over three years), and it’s not clear if this is solely domestic supply.

    If it is solely domestic supply it works out to about £45 per household per year, which is about 5% of the bill.

  14. Ok, you asked for a geek, you get one:

    The best metric for looking at overall corporate profitability is called CFROI. It is a real cash return on total capital deployed. For the last reported financial year:

    Centrica = 11%
    National Grid = 4%
    SSE = 7%
    BG= 5%

    The real market implied Cost of Capital (CoC) is currently around 5%. So, two wealth creators, one wealth destroyer and one earning its cost of capital.

    Europe Utilities such as Ibedrola, EDF, et al tend to earn pretty dismal CFROIs. Generally, less than 4%.

    In simple terms, if one was to win 100 million GBP in a lottery, the utility business is about the last place one should go looking for high ROIs.

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