BG courts controversy with pounds 1.3bn buy-back

BG, the former British Gas, will today end weeks of speculation by unveiling plans to spend more than pounds 1bn on share buybacks. The company will also reveal a strong improvement in earnings in its half yearly results. But as Chris Godsmark, Business Correspondent, reports, the buybacks will prove controversial after the company's unsuccessful campaign to halt savage cuts in its pipeline charges.

Executives from BG first floated the idea of share buy-backs to analysts in June, following the defeat over price controls at its main gas pipeline business, Transco. Today David Varney, chief executive, is expected to announce a buyback costing around pounds 1.3bn as part of a complex restructuring of BG's share capital, mirroring recent schemes by Southern Electric and Yorkshire Water.

Though BG shareholders will welcome the buyback, which would need to be endorsed at an extraordinary general meeting, consumers are likely to be surprised by the decision. Only last year the old British Gas attacked the new price control plans by Ofgas, the industry watchdog, as the "biggest smash and grab raid ever." Executives had repeatedly warned safety could be put at risk by the loss of pounds 650m of annual revenues, translating into a reduction of about pounds 15 off average domestic bills.

Speculation about possible buybacks has already fuelled a meteoric rise in BG's share price since Feburary's landmark demerger, when the gas supply business hived off into a separate quoted company, Centrica. BG shares have doubled from a low point this year of 134p. They closed yesterday 1.5p lower at 268.5p, with dealers blaming profit taking ahead of today's interim results.

Mr Varney will justify the buybacks as part of a move to raise BG's borrowings to boost its balance sheet, a strategy adopted by many other utilities. The group's debt was already set to rise to pounds 3.9bn by the end of this year, partly reflecting the pounds 514m provision which will also be announced today to cover the windfall utility tax.

Though BG's gearing, the ratio of debt to equity, would soar to almost 200 per cent after the buyback, analysts said the company's pipeline revenues could comfortably cover the interest bill. Simon Flowers, head of utility research at NatWest Securities, predicted further buybacks could follow. "In terms of magnitude this would be very sensible. It will leave flexibility for more to come."

The buyback is likely to involve BG replacing its existing shares with two new classes of equity, some of which would then be purchased by the company. Such schemes, which reduce the amount of shares in circulation, have tax advantages over conventional buybacks.

BG will also reveal underlying after-tax profits of some pounds 480m for the first six months of the year in another sign of the group's improving fortunes. The results will be boosted by a turnaround in the exploration and production business, which looks set to move from a pounds 68m loss into a pounds 112m profit.

However, BG is expected to make exceptional charges of around pounds 100m to cover 2,500 job cuts recently announced at Transco.