Energy companies are meant to be throwing off cash like nobody’s business so reports that British Gas owner Centrica PLC (LSE:CNA) needs extra bank funding might have raised a few eyebrows.
In its latest half-year results, the FTSE 100 group reported underlying profits of £1.66bn, generated £643mln of free cash flow and reinstated its dividend.
At the end of June it had net cash of £316mln, a swing from net debt of £93mln a year before, plus it still has a £4.2bn multi-bank facility arranged to last until 2024.
Surely it does not need any extra money?
However, the story this week is that companies in the European electricity sector have warned that collateral requirements in wholesale power markets must be eased.
Collateral requirements are sums that energy firms are required to post as a guarantee in order to trade energy on wholesale energy markets, and to use distribution networks in the UK under government obligations.
As transactions are carried out, companies must transfer additional collateral if needed on a daily basis to meet the exchange’s requirements for initial margin and potentially variations, with the requirements swinging around along with market prices even if a company has not made any new trades.
As prices have rocketed, so has the required collateral.
Eurelectric, the body that represents European utilities, yesterday told the Financial Times that the ballooning collateral required was of “grave concern” and could become the “energy sector’s version of Lehman Brothers”.
RBC Capital Markets analysts warned that “even the strongest utilities are facing huge pressure in terms of collateral payments”.
Reports quickly followed that Centrica was potentially looking for “pre-emptive” extra funding, which was born out of “an abundance of prudence”.
With several European governments in recent days offering emergency support to energy companies, the UK’s new prime minister Liz Truss may be forced to do the same, on top of her reported plans to help households and businesses with their energy bills.
Collateral damage benefits the big player
The collapse of over 20 smaller UK suppliers as gas prices started to rise in the past couple of years (the foothills of the current crisis) has in part been blamed on the costly collateral requirements and trading-related fees, which made it harder for them to compete with the big boys.
Centrica's British Gas, the former national monopoly, has benefited from its size in more ways than just by being able to cope with the larger collateral requirements - though it has said it will donate 10% of its profits to customers who are facing skyrocketing bills.
It mopped up more than 150,000 customers in 2022 and around 550,000 in 2021 after collapses by smaller rivals.
At the end of last year, it claimed back £361mln from regulator Ofgem under the industry levy for taking on customers as part of the UK's supplier of last resort (SOLR) scheme.
At the half-year stage, the company recorded £413mln of costs incurred and customer credit balances, saying it will make a further SOLR claim will be made later in 2022.