Interim results for the period ended 30 June 2013

Centrica Interim results for the period ended 30 June 2013

Operating and financial overview

Robust financial performance

  • Adjusted earnings up 2% to £767 million; 14.8 pence adjusted basic earnings per share
  • Total adjusted tax charge rises 21% to £690 million; effective tax rate of 47%, up from 43%
  • British Gas Residential operating profit marginally higher than in 2012, with significantly higher environmental and commodity costs offsetting the impact of increased consumption due to prolonged cold weather
  • Full year British Gas Residential operating profit expected to be broadly in line with 2012
  • Challenging market conditions in UK business energy; implementing new systems to help improve service and reduce costs
  • Direct Energy benefiting from enhanced scale downstream, offsetting pressure on margins from rising commodity prices
  • Higher international upstream gas and oil production and profitability; continued good nuclear performance; UK gas-fired generation loss making in weak market conditions

Investing for growth, energy security and jobs

  • Acquisition of Energy Marketing business of Hess Corporation makes Direct Energy the largest B2B gas supplier in the Eastern US
  • Agreement with Cheniere to export LNG from the US; 20 year £10 billion contract, taking our total supply commitment to around £60 billion
  • Announced £650 million Canadian gas asset acquisition, in partnership with Qatar Petroleum International
  • Acquired 25% stake in Bowland shale exploration licence, a potentially important source of gas for the UK
  • Organic investment of over £700 million in the first six months of 2013
  • First gas from York development in Southern North Sea and Rhyl project in East Irish Sea
  • 1,000 apprentices currently in training with British Gas; 200 new apprenticeships announced in June

Delivering for our customers

  • 56,000 British Gas residential energy accounts added, reflecting competitive pricing and innovative products
  • ‘Tariff Check’ launched, proactively helping British Gas customers to choose the best deal for them
  • Over 500,000 vulnerable and elderly customers received £130 Warm Home Discount last winter
  • Over 1 million smart meters installed in UK homes and businesses
  • Launching ‘Free Electricity Saturdays’ in Texas; Bounce Energy acquisition enhances online capabilities

Delivering for our shareholders

  • All cash interim dividend up 6% to 4.92 pence per share, representing 30% of the prior year’s dividend, in line with established practice
  • Over £240 million of shares bought back to date under £500 million share repurchase programme

 

Unless otherwise stated, all references to operating profit or loss, taxation and earnings numbers throughout the announcement are adjusted figures, as reconciled to their statutory equivalents in the Group Financial Review on pages 6 and 7. Statutory earnings for the period are £819 million.

Financial performance and KPIs

Financial performance
For the period ended 30 June 2013 2012
(restated)		 Δ

The Group has applied IAS19 (revised) pensions accounting. As a result, 2012 net finance costs, taxation, earnings and earnings per share have been restated.

To reflect a new organisational structure, the North American upstream gas business and North American power and midstream and trading businesses have been reallocated from Direct Energy upstream and wholesale to Centrica Energy International gas and Direct Energy business energy supply respectively.
Revenue from continuing operations £13.7bn £12.0bn 14%
       
Adjusted operating profit      
International Downstream      
British Gas      
Residential energy supply £356m £345m 3%
Residential services £135m £125m 8%
Business energy supply and services £78m £93m (16%)
Total British Gas £569m £563m 1%
Direct Energy      
Residential energy supply £99m £101m (2%)
Business energy supply £53m £43m 23%
Residential and business services £13m £11m 18%
Total Direct Energy £165m £155m 6%
International Upstream      
International gas £683m £519m 32%
UK power £119m £174m (32%)
Total Centrica Energy £802m £693m 16%
Centrica Storage £47m £36m 31%
Total adjusted operating profit £1,583m £1,447m 9%
       
Total adjusted taxation charge £690m £568m 21%
Total adjusted effective tax rate 47% 43% 4ppt
       
Adjusted earnings £767m £753m 2%
Adjusted basic earnings per share 14.8p 14.6p 1%
       
Interim dividend per share 4.92p 4.62p 6%
       
Group capital and acquisition expenditure £755m £1,525m (50%)
Key operational performance indicators
For the period ended: 30 Jun 2013 31 Dec 2012 Δ
British Gas residential energy customer accounts (period end, ’000)1 15,674 15,618 0%
British Gas services product holdings (period end, ’000) 8,347 8,402 (1%)
British Gas business energy supply points (period end, ’000) 912 924 (1%)
Direct Energy residential energy and services accounts (period end, ’000) 5,838 5,856 (0%)
For the period ended 30 June 2013 2012 Δ
Direct Energy business energy supply electricity volumes (TWh) 28.0 23.9 17%
International Upstream gas production (mmth) 1,696 1,427 19%
International Upstream liquids production (mmboe) 9.8 7.5 31%
International Upstream total gas and liquids production (mmboe) 37.6 30.9 22%
UK power generated (TWh) 10.6 11.1 (5%)
Lost time injury frequency rate (per 100,000 hours worked) 0.16 0.24 (33%)

1. British Gas residential energy customer accounts as at 31 Dec 2012 have been restated to exclude 38,000 accounts subsequently reclassified as dormant.

Statutory results
For the period ended 30 June 2013  
Operating profit from continuing operations: £1,590m (2012: £1,767m)
Profit from continuing operations before taxation: £1,487m (2012: £1,665m)
Earnings: £819m (2012: £976m)
Basic earnings per ordinary share: 15.8p (2012: 18.9p)

Performance overview

Remaining competitive by sharpening the business and making the right investment choices

Centrica delivered a strong operational performance in the first half. Downstream, we continued to add residential customer accounts, while taking the lead in innovation, simplicity and transparency to help customers take control of their energy requirements. Upstream, our assets performed well, particularly during the prolonged cold weather experienced in the UK this winter, helping to deliver the energy the country needed. Helping our customers to keep their homes warm and well-lit is a core responsibility, alongside our wider contribution through the investments we make, the jobs we provide and the taxes we pay.

In the UK, affordability remains a key issue for customers and energy suppliers, as well as for the Government and Regulators. As a result of the cold weather, residential gas consumption in the first half was substantially higher than last year, more than offsetting the underlying efficiency savings delivered through insulation and more efficient boilers. In addition, the unit cost of gas and electricity was higher in the period compared to 2012 and the cost of delivering environmental obligations is increasing substantially.

Improving transparency is a core requirement for the industry, helping consumers understand their bill and empowering them to choose the best deal for them. We continue to make good progress in simplifying our energy offering, and have already implemented many of the recommendations set out by Ofgem in their Retail Market Review. We already publish a breakdown of costs on all our bills and have introduced a standing charge and single unit tariff structure, while our unique ‘Tariff Check’, where we contact customers every six months, enables them to check that they are on the most appropriate tariff for them. We currently have five tariffs and expect to move down to four, in line with the Ofgem recommendations, by the end of the year. And for business customers, in July we announced that we would be the first energy supplier to commit to ending auto-rollover contracts, an important step in building trust and ensuring our customers have a transparent choice of products.

We continue to make substantial investments across the Group, organically and through acquisition. Upstream, we are delivering increased gas and oil production across our international portfolio, benefiting from the full effect of acquisitions in the North Sea, and bringing new projects on stream. In offshore wind, we are on track to complete full commissioning of the £1 billion Lincs offshore wind farm later this year. Downstream, we are benefiting from enhanced scale in North America following the successful integration of our recent NYSEG Solutions and Energetix acquisition, while the recent acquisition of Bounce Energy adds further customers and a leading internet-based platform. British Gas and Direct Energy both continue to invest in innovative solutions to help our customers manage their energy requirements.

In February, recognising the increasingly international nature of worldwide gas markets, we set out our strategic priorities - Innovate to drive growth and service excellence;Integrate our natural gas business, linked to our core markets, and; Increase our returns through efficiency and continued capital discipline. We have already made good progress towards these objectives:

  • Our new management structure is in place, under the leadership of Chris Weston for International Downstream and Mark Hanafin for International Upstream, both supported by strong teams on each side of the Atlantic.
  • Our 20 year North American LNG gas export contract with Cheniere, the announcement of the acquisition of further upstream assets in North America in partnership with Qatar Petroleum International (QPI), and the acquisition of a stake in the licence for UK gas from shale in the Bowland Basin all help to secure potentially important sources of gas for the long term.
  • Downstream in North America, the acquisition of the Energy Marketing business of Hess Corporation makes Direct Energy the largest business gas supplier in the Eastern US, and strengthens our position along the gas value chain.
  • We have made good progress in delivering organic projects, such as the York and Rhyl gas fields and the Lincs offshore wind farm, and we retain investment options across the Group, in upstream gas and oil, in power generation and in gas storage.
  • We have now bought back over £240 million of shares to date under our £500 million share repurchase programme, a core indicator of financial discipline when set alongside our investment programme – returning surplus capital where appropriate.

Our vision is to be the leading integrated energy company, with customers at its core. We will seek to maintain our competitive edge, continually sharpening the business and making the right investment choices – for the benefit of customers and investors. Health and safety remains a key priority and our lost time injury frequency rate reduced by 33% in the first half of the year.

Operational performance

Innovate to drive growth and service excellence in International Downstream

In the UK, British Gas Residential performed well in the first half. We increased our residential energy customer base, adding 56,000 accounts, reflecting the combination of a competitive pricing position and our leading digital platform.

Against a backdrop of sustained cold weather, average residential gas consumption was up 13% compared to last year and significantly above seasonal normal levels, while commodity costs experienced short term volatility as a result of the increased demand. The business is also facing substantially higher costs for environmental obligations and network charges. We are working with local authorities to meet our responsibilities under the new ECO programme, although it is clear that the costs associated with the programme will be significantly higher than those under previous environmental initiatives, reflecting the challenging targets set.

We announced in May that, recognising the economic pressures facing many of our customers and the impact of the cold weather in the first half, any benefit arising from increased consumption would be used to maintain our price competitiveness. In this context, we have absorbed the significant increase in environmental costs during the period. Full year profitability of the residential energy supply business is expected to be in line with 2012.

In British Gas Services, we were able to respond well to record numbers of callouts for boiler breakdowns during the cold weather, although this has resulted in some additional costs. With economic conditions making the sale of new products difficult, retention rates remain high, underlining the value our customers place on the service. We continue to focus on delivering cost savings, and expect to deliver revenue growth through the targeting of under-served segments, such as the private rental sector, and through affinity partnerships.

In British Gas Business, the economic backdrop remains challenging. We have now commenced the implementation of a new billing system, which is proceeding to plan and is due to be completed in the first half of 2014. As a result, we expect to deliver improved service at reduced cost, delivering growth over time, with B2B services playing an increasingly important role.

In North America, Direct Energy is benefiting from enhanced scale due to organic growth and acquisitions in the US, and from the move to our new centralised headquarters in Houston. In Direct Energy Residential, we experienced the continued decline of our Ontario customer base, as expected, due to the challenging regulatory environment. However, we continue to deliver profit growth in the US North East, as we benefit from organic growth and the full year effect of the NYSEG Solutions and Energetix acquisition. In Direct Energy Business we are achieving higher volumes, reflecting strong sales activity in the prior year. Rising gas and power prices in North America have led to some narrowing of margins in both residential and business energy supply, but over time this should benefit our upstream activities.

Innovation is central to our activities both in the UK and North America, enabling customers to take better control of their energy requirements and offering attractive propositions. We will seek to build on our leading positions in smart and digital and the recent acquisition of Bounce Energy will allow us to further develop our online capabilities in North America. We will look to share our experience across the business to drive growth and improve retention, maximising the benefit of our combined energy and services offerings in each market over time.

Good operational performance and disciplined investment in International Upstream

Operational performance from our international gas and oil portfolio has been strong in the year to date, and we are on track to deliver a production increase of nearly 20% for the full year. This includes the impact of production from the York and Rhyl fields, which both delivered first gas in the first quarter, and 100% of the production from the acquisition of a package of Canadian gas assets from Suncor, which is due to be completed around the beginning of September.

In UK power generation, nuclear output was once again good, following on from a strong performance in 2012. However the environment for gas-fired generation remains extremely challenging, with the combination of a well-supplied market and relatively cheap coal and carbon resulting in our gas-fired power fleet being loss making. The business also faced the impact of the loss of free carbon allocations, accounting for much of the decrease in profitability compared to the prior year.

In UK storage, Rough performed very well during periods of sustained withdrawal resulting from the unusually cold weather, although market conditions are challenging, with lower seasonal spreads expected to affect the profitability of the business in the second half of 2013.

In the first half of the year, Centrica invested over £750 million – around £500 million of which was in North Sea gas and oil projects – and we have now fully commissioned 55 out of 75 turbines at our 270MW Lincs offshore wind farm. For the full year, we expect to invest £1.5 billion organically across the Group, including around £1 billion in upstream projects such as Cygnus, Valemon, York and Kew. These investments are important for the UK, helping to secure long term supplies of gas for our customers and providing jobs. We also continue to look for opportunities to invest outside the UK where we see value, as evidenced by the Suncor transaction.

In June, the Government announced proposals for market capacity payments and for investment in renewables as part of its review of Electricity Market Reform. We welcomed the announcement that a capacity mechanism would be introduced, with the first auction expected in 2014. The proposals also included the draft Contract for Difference strike prices, applicable to renewable power generation including offshore wind projects and we are awaiting the final outcome of the consultation to determine the implications for our Race Bank offshore wind farm project. We also retain the option to build further offshore wind projects, in partnership with DONG, in the Round 3 Irish Sea zone, and have options for new build gas-fired generation, including consent to build a 1GW CCGT plant on our existing site at Kings Lynn, subject to appropriate returns on these projects. In gas storage, we have two potentially attractive projects, Baird and Caythorpe, although under current market conditions a support mechanism is likely to be required to underpin investment in new storage facilities.

Maintaining capital discipline is a core priority. All our investments are benchmarked against returns to shareholders, and we will return surplus cash flow to shareholders where appropriate, as evidenced by our current share repurchase programme. We have also continued to grow the dividend, increasing it in real terms each year and paying it all in cash. The Board is proposing an interim dividend of 4.92 pence per share, to be paid on 13 November 2013 to shareholders on the register on 27 September 2013, in line with our established practice of paying an interim dividend of 30% of the prior year full year dividend.

Outlook

Overall the business performed well in the first half of 2013, with earnings up slightly on the same period in 2012, and subject to weather conditions, commodity prices and asset performance, we remain on track to deliver earnings growth in line with expectations for the full year.

Further out, we expect continued organic profit growth in North America and in UK home services, while we will continue to benefit from the integration of previous acquisitions. Weak spark spreads 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. However across the Group we continue to focus on delivering further improvement in service levels, developing our industry leading propositions and digital platform, and maintaining tight cost control.

We have a strong balance sheet and a range of investment options. However we will maintain capital discipline, only investing where we see appropriate returns – further strengthening the business for the benefit of customers and shareholders alike.

Disclosures

Disclaimers

This announcement does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Centrica shares or other securities.

This announcement contains certain forward-looking statements with respect to the financial condition, results, operations and businesses of Centrica plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts.

Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser.

For further information

Centrica will hold its 2013 Interim Results presentation for analysts and institutional investors at 9.30am (UK) on Wednesday 31 July 2013. There will be a live audio webcast of the presentation and slides from 9.30am at www.centrica.com/investors.

A live audio broadcast of the presentation will be available by dialling in using the following number:

+ 44 20 3059 8125

The call title is “Centrica plc Interim Results 2013 Announcement”.

An archived webcast and full transcript of the presentation and the question and answer session will be available on the website on Friday 2 August 2013.

Financial calendar
Ex-dividend date for 2013 interim dividend 25 September 2013
Record date for 2013 interim dividend 27 September 2013
Payment date for 2013 interim dividend 13 November 2013
Interim Management Statement 14 November 2013
2013 Preliminary Results announcement 20 February 2014

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