UPDATE 2-UK's Centrica says prefers U.S. for acquisitions

Wed Jul 31, 2013 5:41am EDT

* Lower costs make U.S. more interesting for M&A than UK

* But UK still core market - Finance Director

* Adjusted earnings rise 2 pct to 767 million pounds

* Gas power generation loses 64 million pounds

* Shares up 1 pct vs 0.6 pct FTSE 100 increase

By Karolin Schaps

LONDON, July 31 (Reuters) - Centrica Plc sees the United States as a more attractive market for acquisitions than its home ground, it said on Wednesday, implying a shift in focus to North America for one of Britain's largest energy investors.

The comments from the group, owner of Britain's biggest natural gas supplier British Gas, came a day after it said it was buying Hess Corp's U.S. energy retail arm for around $1 billion, a move that followed a joint deal with Qatar in April to buy oil and gas assets in Canada from Suncor Energy Inc .

"The low gas price makes acquisitions in North America relatively attractive compared to the UK, where costs are increasing," Centrica said on Wednesday.

The shale gas boom in the United States has caused a collapse in gas prices in the world's second-largest energy consuming nation, while a turn to greener energy has increased costs in European markets.

Capacity oversupply in the power market and high gas prices have hit Centrica as much as its peers across Europe, with the company's gas-fired power generation fleet posting a 64 million pound loss.

Centrica's UK retail arm saw a 1 percent rise in adjusted operating profit to 569 million pounds, while operating costs also rose by 1 percent.

This compared with a better performance in its U.S. retail business, where operating profit rose 6 percent to 165 million pounds ($251.8 million).

"The U.S. clearly is an interesting market for us ... It does remain fragmented, so the opportunities to grow via M&A are there and we'll continue to look at that," said Centrica Finance Director Nick Luff on a conference call on Wednesday.

"I would say though, remember the UK does remain our core market. Most of our organic investment, in particular in the upstream business, is in the UK or for the UK," Luff added.

HIGHER OUTPUT

Centrica signed a 20-year deal in March to import liquefied natural gas (LNG) from the United States from 2018 and has long-term supply deals with Qatar and Norway.

The group posted a 2 percent rise in adjusted earnings to 767 million pounds ($1.2 billion) over the first half of the year, in line with expectations, spurred by higher output from North Sea gas fields.

Revenue rose 14 percent to 13.7 billion.

Its upstream business posted a 16 percent rise in operating profit to 802 million pounds, as production from its Norwegian fields more than doubled year on year.

In its power generation business as well as its gas storage activities, Centrica said it was expecting a weak performance in the second half of the year.

"Weak spark spreads (profit from burning gas for power production) will continue to make our UK gas-fired power stations loss making, and reduced seasonal gas price spreads will impact the profitability of our UK gas storage activities," Centrica said.

The gas storage business is expected to see lower profits in the second half of the year, after the average price at which Centrica sold storage space at its huge Rough site fell to 23.3 pence, compared with 33.9p in the previous year.

Luff said even though Britain needs additional gas storage capacity, the government needs to provide incentives.

"Our view is the most cost effective (mechanism) would be to ... operate in a similar way to the capacity mechanism (in the power market) in terms of bidding into an auction mechanism to get to the lowest floor price," he said.

The government is expected to publish its view on how to incentivise gas storage construction in the coming months.

Centrica shares were little changed, up 1 percent at 390.4p while the FTSE 100 blue-chip index was up 0.6 percent.