Interim results for the period ended 30 June 2014

Centrica Interim results for the period ended 30 June 2014

Group results and highlights

RICK HAYTHORNTHWAITE, CHAIRMAN

“The first half of the year has seen challenging market conditions across the Group, both as a result of the weather and reflecting the wider political environment. We have continued our efforts to engage with our stakeholders, particularly our customers, working to restore their trust. And we are taking the steps to position the business for growth in 2015 and beyond.

Trust is addressed in part through our interactions with politicians, regulators and the media, recognising the importance of Centrica to the country’s energy security. But most importantly, trust is earned through our service and relationship with the customer.

We have also reached an important stage in the succession of the Group’s leadership, with the appointment of Iain Conn as Chief Executive, to succeed Sam Laidlaw, who will retire at the end of this year. Iain will bring an impressive combination of experience to our business, with deep understanding of the energy sector from a career spanning a variety of roles in one of the world’s leading energy businesses. His breadth of knowledge and commitment to customers and safety make him ideally suited to lead Centrica in the next phase of its development.

Sam has shown exceptional leadership over the past eight years. Under his stewardship, Centrica has achieved greater strength and scale, and a platform for long term growth, delivering returns to shareholders and securing the future energy needs of our customers. Much remains to be achieved this year, and I am confident that under Sam’s leadership, and with the depth of management we have across the Group, we are well placed to position the business for the long-term.”

RICK HAYTHORNTHWAITE
Chairman
31 July 2014

FINANCIAL SUMMARY

• First half earnings down reflecting a challenging market environment, mild weather in the UK and the Polar Vortex in North America
• Full year EPS expected to be in the range 21-22p, taking account of a £40 million charge associated with writing off our Round 3 wind investment and around $110 million (£65 million) of costs attributable to the Polar Vortex
• Average actual British Gas customer bill expected to be around £90 (7%) lower in 2014 than 2013; full year BGR profit per household in 2014 expected to be around £40 (£51 before tax), 20% lower than in 2013

STATUTORY RESULTS

Unless otherwise stated, all references to operating profit or loss, taxation and earnings throughout the announcement are adjusted figures, as reconciled to their statutory equivalents in the Group Financial Review on pages 17 to 20.

COMMITMENT TO REAL DIVIDEND GROWTH REAFFIRMED

• Interim dividend 30% of 2013 full year dividend, in line with established practice
• Expect to complete existing £420 million share repurchase programme in the second half of 2014
• Scrip dividend alternative to be introduced in April 2015

CONTINUED FOCUS ON STRONG BALANCE SHEET

• Optimise our assets, investing where we see attractive opportunities and realising value where appropriate
• Non-core asset disposals, including UK CCGTs and Ontario home services, and potential releases of capital from our gas assets in Trinidad and Tobago and our UK operational wind portfolio, expected to realise around £1 billion
• Seek to maintain existing credit ratings; proceeds to be retained to strengthen the balance sheet further
• Flexibility to invest along the gas value chain, in a rapidly evolving market place

GOOD STRATEGIC PROGRESS IN FIRST HALF OF 2014

• Improving customer service in the UK, with increases in BGR and BGS net promoter scores; residential energy accounts stabilised in the second quarter following 1% decline in the first quarter; installed our one millionth residential smart meter in the UK
• Implementation of our new BGB billing system proceeding to plan, enabling better service at lower cost
• $100 million cost reduction programme in Direct Energy on track; sold DEB unit gas and electricity margins increased by around a third in the first half of 2014 compared to the second half of 2013
• Bord Gáis acquisition completed; deregulation of the Irish residential gas market confirmed
• Continued progress on cost efficiency and positioning Centrica Energy for lower capital expenditure, against a backdrop of falling European wholesale gas prices
• Continued investment in securing sources of gas for the UK; around £60 billion of commitments to secure energy for our customers
• Recent acquisitions performing ahead of investment cases
  • Norwegian and Canadian gas assets delivering better than expected production, reserves and resources
  • Hess Energy Marketing delivering EBITDA ahead of expectations

CLEAR PRIORITIES FOR SECOND HALF OF 2014

• Continued focus on service, innovation and cost efficiency to drive growth in British Gas, with specific goals to:
  • complete the migration of customer accounts to the combined billing and CRM system in residential energy and services
  • increase the number of residential smart meters installed to around 1.3 million by the end of the year
  • complete the implementation of the new BGB billing system; deliver process improvement and continue progressing £100 million cost reduction programme
  • increase sales through the launch of new propositions for residential energy and services customers
• Complete the integration of Bord Gáis
• Deliver the cost reduction programme in Direct Energy; continue to develop innovative customer propositions; complete the Hess integration; continue US service protection plan and joint energy and services growth
• Focus on tight cost control and targeted capital expenditure in upstream gas; progress our development pipeline; progress the FERC approval process for the 5^th train at Sabine Pass
• Develop investment plans for our smaller, more flexible gas-fired power plants under the proposed capacity mechanism; continue progressing the sales process for the three larger CCGTs
• Position the business for earnings growth in 2015

POSITIONED FOR GROWTH IN 2015, DESPITE LOWER UK COMMODITY PRICES IMPACTING THE UPSTREAM

• Expect to return to earnings growth in 2015, reflecting:
  • improving margins and more normal weather conditions in the US
  • our target to return to customer account growth in UK residential energy and services
  • growth in energy services on both sides of the Atlantic
  • cost reduction programmes in BGB and DE to improve competitiveness
  • a full year’s contribution from Bord Gáis

SAM LAIDLAW, CHIEF EXECUTIVE

“With challenging trading conditions on both sides of the Atlantic in the first half, earnings will be lower in 2014 than in 2013. However, the Group is well positioned to return to growth in 2015, and the investments we have made mean that the business is balanced and more resilient, both upstream and downstream.

Our leadership in smart connected homes and innovation is helping customers reduce and control their energy consumption and offers a sustainable way to keep bills down. The combination of mild weather, and our expectation that we will not change energy prices this year, means the average actual British Gas household energy bill is expected to be around £90 lower in 2014 than in 2013.

Centrica plays a vital role in helping to secure the country’s energy requirements, a role we can only undertake if the business is profitable and financially strong. We will continue to invest where we see attractive opportunities, along the gas value chain. And we will continue to drive operating efficiencies across the Group, for the benefit of both our customers and our shareholders."

SAM LAIDLAW
Chief Executive

31 July 2014

ENQUIRIES

Interviews with Rick Haythornthwaite (Chairman), Sam Laidlaw (Chief Executive), Nick Luff (Chief Financial Officer), Chris Weston (Managing Director, International Downstream) and Mark Hanafin (Managing Director, International Upstream) are available on www.centrica.com.

Divisional results and highlights

INTERNATIONAL DOWNSTREAM

British Gas: Focus on service, efficiency, innovation and growth

• British Gas operating profit down, with lower consumption due to warmer than normal weather in the UK
• Average actual customer bill expected to be around £90 (7%) lower in 2014 than 2013, reflecting warmer weather and energy efficiency measures; the average bill for vulnerable customers was on average 20% lower this winter than last, due to the warm home discount and additional British Gas discounts
• No change to residential energy prices expected during 2014, recognising competitive conditions in the UK energy supply market and the need to buy forward in the current uncertain environment
  • Gas and electricity contracted up to three years in advance; majority of requirements for next winter already purchased
  • Benefit of lower wholesale commodity prices in 2015 offset by higher carbon, ROC and network costs
• British Gas Residential post-tax margins expected to be around 4%, lower than last year and below our long-term margin expectation of 4.5%-5%, which we believe is necessary to underpin investment in the business
• Clear strategy in place to focus on three priorities: deliver great service, transform to grow, engage key stakeholders; new organisational structure in place to enable delivery of strategy
• Good progress made in the first half of 2014, helping create a platform for long term sustainable growth
  • BGR customer accounts stabilised over the second quarter, following a 1% decline in the first quarter
  • Delivering improved service levels, with higher NPS in both BGR and BGS, as we target leading, high quality service for both residential and business customers
  • ECO delivery on track, with Affordable Warmth already completed ahead of March 2015 deadline
  • £100 million BGB cost reduction programme on track; implementation of new billing system to be completed in the second half of the year
• Second half focus on service, efficiency and innovation to drive growth
  • Improve service and deliver efficiencies by simplifying key customer interactions; single billing and CRM platform for energy and services expected to be completed in the third quarter of 2014
  • Growth opportunities in BGS through tailored offerings, new propositions targeted at energy customers
  • Development of new offerings, including business services, for valuable customer segments in BGB
• Smart, connected homes key to future growth
  • One million residential smart meters installed; over 350,000 customers receiving smart energy report
  • Targeting 2.4 million residential smart meter installations by the end of 2015
  • Launched smart meter enabled “Free Saturdays or Sundays” energy tariff trial
  • 100,000 smart thermostats sold to date, with increased sales under the Hive brand

Direct Energy: Focus on customer value, service and choice

• Operating profit significantly down, reflecting the impact of the Polar Vortex and a narrowing of energy supply margins due to challenging market conditions
  • Total Polar Vortex costs of $110 million (£65 million) recognised in first half operating profit, primarily relating to additional power market charges
• Sold B2B unit gross margins in the first half of 2014 increased by 35% for gas and 33% for power compared to the second half of 2013; expected to positively impact 2015
• Hess Energy Marketing business performing ahead of investment case
  • Further growth potential through enhanced scale, dual fuel capabilities, oil to gas switching, advantaged positions along the gas value chain and long term customer relationships
• $100 million cost reduction programme on track; driving synergies from enhanced scale
• Continued focus on value
  • Sale of Texas CCGTs generated a £219 million operating profit on disposal; downstream operations supported through contractual relationships
  • Agreed sale in July 2014 of Ontario home services business for C$550 million (£300 million); services focus now in the US, where we see better opportunities for growth including combined energy and services offerings
• Building a range of innovative energy and services product offerings, improving customer retention and attracting the highest value customers
  • Sales through digital channels nearly trebled in the first half of 2014 compared to the first half of 2013
  • Targeting 250,000 US services protection plan customers and 100,000 bundled energy and services propositions by end of 2014
  • Astrum Solar acquisition provides enhanced product range for residential customers, in a rapidly growing market
  • Further growth potential through connected homes and business propositions; Nest relationship supports innovation and customer value growth

INTERNATIONAL UPSTREAM

Centrica Energy: Securing energy supplies for our customers

1. Includes a 100% share of Canadian assets held in partnership with QPI

• International gas profit after tax up 29% despite lower UK wholesale commodity prices, reflecting the benefits of forward hedging and small field tax allowances; full year profit after tax expected to be broadly unchanged compared to 2013
• Underlying power operating profit slightly higher, before impact of one-off write offs and profits/losses on disposal in renewables
• Previous investments performing well
  • Sustained strong power generation volumes from the nuclear fleet
  • E&P assets acquired from Statoil and Suncor both delivering production, reserves and resources in excess of investment cases
  • Good availability and favourable yields for operational wind farms
• Clear priorities in second half in low wholesale price environment
  • Targeting flat E&P unit lifting and cash production costs over the next three years
  • Targeting a reduction in E&P spend to around £900 million per year on average over the next three years; continue to optimise portfolio with targeted investment and selective divestments of non-core assets
  • Strategic review of gas-fired power generation portfolio completed; developing investment plans for smaller, more flexible plants and commenced sales process for three larger CCGTs

Centrica Storage

Making an important contribution to the UK’s security of supply

• Strong operational performance; substantially lower operating profit due to low seasonal gas spreads for 2013/14 and 2014/15 storage years
• Commenced programme to deliver £15 million of cost reductions through operational improvements over the next three years

Performance Overview

OVERVIEW

Centrica has faced a range of external challenges in the first half of this year. But we have shown the flexibility and determination to tackle those challenges, all the time underpinned by a clear sense of strategic direction. Customers are at the core of our business, in the UK, Ireland and North America. The combination of energy and services, alongside leadership positions in innovation and smart connected homes, provides us with a distinctive platform to build sustainable growth. And our vertically integrated business model enables us to direct capital where we see the most attractive returns, securing energy supplies for our customers in an increasingly international market.

Overall, the quality of our recent investments across the Group has strengthened the business, forging strong relationships with world-class partners, and helping to offset the effects of market headwinds which have affected returns from existing assets. During the year to date, we have made good progress in key areas for the long term health of the business.

Management succession

On 29 July 2014, we announced the appointment of Iain Conn as Chief Executive, with effect from 1 January 2015. Iain will join from BP plc where he has been Chief Executive, Downstream, for the past seven years and brings an impressive combination of experience to Centrica. He heads a global consumer brand familiar to millions of people and possesses a deep understanding of the energy sector, built up over many years in the industry. Iain will succeed Sam Laidlaw who will retire from the Board on 31 December 2014.

Following the announcement of his resignation on 7 January 2014, Nick Luff, Centrica’s Chief Financial Officer, will leave the company on 31 August 2014. Jeff Bell, currently Centrica’s Director of Corporate Finance, will take on the role of Chief Financial Officer on an interim basis and will join the Executive Committee on 1 September 2014. Jeff has been with Centrica since 2002, and has held a number of other senior management positions, including Group Strategy Director.

It was announced on 29 May 2014 that Chris Weston, Managing Director, International Downstream had tendered his resignation. A succession process is underway, and further details regarding his succession will be given in due course.

With the announcement of a new Chief Executive and interim Chief Financial Officer, we are making the transition to a new management team which has deep experience of the energy markets that shape our business and of the challenges we face in building customer trust and creating a sustainable energy future.

Business performance summary

We delivered good operational performance in the first half of 2014, with high reliability from our gas and oil production, power generation and gas storage assets, and improved customer service levels in our downstream businesses. We also delivered further improvements in our health and safety record during the first half of the year, with a 25% reduction in the lost time incident frequency rate compared to the first half of 2013 and no significant process safety incidents recorded during the period.

Downstream in the UK, we faced challenging market conditions, continued political and regulatory scrutiny and warmer than normal weather. Against this backdrop we delivered much improved service levels in British Gas, while our residential energy cus