Centrica Preliminary Results for the year ended 31 December 2014
Download the full Preliminary Results for the year ended 31 December 2014
Financial summary
| Year ended 31 December | 2014 | 2013 | Change |
|---|---|---|---|
Unless otherwise stated, all references to operating profit or loss, taxation, earnings and earnings per share throughout the announcement are adjusted figures, reconciled to their statutory equivalents in the Group Financial Review on pages 8 to 11. |
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| Revenue | £29.4bn | £26.6bn | 11% |
| Adjusted operating profit | £1,746m | £2,695m | (35%) |
| Adjusted effective tax rate | 30% | 43% | (13ppt) |
| Adjusted earnings | £962m | £1,370m | (30%) |
| Adjusted basic earnings per share (EPS) | 19.2p | 26.6p | (28%) |
| Full year dividend per share | 13.5p | 17.0p | (21%) |
| Group net debt (i) | £5,196m | £4,942m | 5% |
| Group net investment | £829m | £2,565m | (68%) |
| Statutory operating (loss)/profit | (£1,137m) | £1,892m | nm |
| Statutory (loss)/profit for the year attributable to shareholders | (£1,012m) | £950m | nm |
| Net exceptional items after tax included in statutory (loss)/profit | (£1,161m) | (£667m) | nm |
| Basic earnings per share | (20.2p) | 18.4p | nm |
2014 Group results
- Group adjusted EPS down 28%, reflecting challenging trading conditions, including extreme weather patterns and falling oil and gas prices. Post-tax impairments of £1,385 million on E&P and power assets
- British Gas operating profit down, primarily reflecting lower consumption in record warm year, with average dual fuel profit per household falling to £42. Average actual household energy bill around £100 lower than in 2013
- Direct Energy operating profit down due to impact of polar vortex in Q1 and narrowing of energy supply margins in a competitive environment
- Centrica Energy gas operating profit before tax down, reflecting lower market prices. Post-tax earnings largely protected by hedging, tax allowances on previous investments, and strong midstream performance. Power profit impacted by unplanned nuclear outages
2015 environment and response
- Since the November IMS, our forecast 2015 adjusted EPS has been negatively impacted by about 2.5p, primarily due to changes in the external environment. 2015 adjusted earnings are expected to be down compared to 2014
- Taking action in a low commodity price environment
- 40% reduction in E&P capex to £650 million by 2016
- Continued focus on competitiveness, service and efficiency downstream
- Group-wide performance improvement plan, with a strong cost focus
- Dividend rebased by 30%, commencing with the 2014 final dividend. 2014 full year dividend of 13.5p per share
- Decision to retain UK CCGTs, with bids received significantly below our internal valuation
- Strategic review launched, to be concluded by Interim Results in July 2015 covering; (i) outlook and sources of growth; (ii) portfolio mix and capital intensity; (iii) operating capability and efficiency; (iv) Group financial framework
Iain Conn, Centrica Chief Executive
“2014 was a very difficult year for Centrica and the recent fall in oil and gas prices creates further challenge. We are cutting investment and costs in response. However, it is with regret that, along with reducing capital expenditure and driving efficiency beyond planned levels, we have taken the difficult decision to rebase the dividend by 30%, commencing with the final distribution for 2014. In addition, given the changed external environment we are reviewing the longer term strategy, and will conclude this by the Interim Results in July. Despite the obvious current challenges, I am confident in the quality of Centrica’s team and the platform which has been established, and I believe the Group is well-placed to take advantage of the longer term trends in the global energy markets. Our priorities remain to serve our customers competitively and with integrity, to develop new offers and services, to provide secure and reliable energy supplies and to deliver long term value for shareholders.”
DIVISIONAL OPERATING PROFIT
Adjusted operating profit
| Year ended 31 December | 2014 | 2013 | Change |
|---|---|---|---|
| British Gas | |||
| Residential energy supply | £439m | £571m | (23%) |
| Business energy supply and services | £114m | £141m | (19%) |
| Residential services | £270m | £318m | (15%) |
| Total British Gas | £823m | £1,030m | (20%) |
| Direct Energy | |||
| Residential energy supply | £90m | £163m | (45%) |
| Business energy supply | £32m | £77m | (58%) |
| Residential and business services | £28m | £36m | (22%) |
| Total Direct Energy | £150m | £276m | (46%) |
| Bord Gáis Energy | £7m | - | nm |
| Centrica Energy | |||
| Gas | £606m | £1,155m | (48%) |
| Power | £131m | £171m | (23%) |
| Gas-fired | (£120m) | (£133m) | nm |
| Renewables (operating assets) | £27m | £36m | (25%) |
| Renewables (one-off write-offs, profit/loss on disposal) | (£17m) | (£11m) | nm |
| Nuclear | £210m | £250m | (16%) |
| Midstream | £31m | £29m | 7% |
| Total Centrica Energy | £737m | £1,326m | (44%) |
| Gas — adjusted operating profit after tax | £302m | £325m | (7%) |
| Centrica Storage | £29m | £63m | (54%) |
| Total adjusted operating profit | £1,746m | £2,695m | (35%) |
KEY PERFORMANCE INDICATORS
Key Operational Performance Indicators
| Year ended 31 December | 2014 | 2013 | Change |
|---|---|---|---|
|
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| Group | |||
| Lost time injury frequency rate (per 100,000 hours worked) | 0.14 | 0.11 | 27% |
| British Gas | |||
| Residential energy customer accounts (year end, ’000) (i) | 14,778 | 15,146 | (2%) |
| Residential services product holding (year end, ’000) | 7,970 | 8,227 | (3%) |
| Business energy supply points (year end, ’000) (ii) | 854 | 916 | (7%) |
| Total gas volumes (mmth) | 4,085 | 5,126 | (20%) |
| Total electricity volumes (TWh) | 39.1 | 42.4 | (8%) |
| Direct Energy | |||
| Residential energy customer accounts (year end, ’000) | 3,256 | 3,360 | (3%) |
| Residential services product holding (year end, ’000) (iii) | 897 | 2,608 | (66%) |
| Business energy supply gas volumes (mmth) | 5,923 | 1,839 | 222% |
| Business energy supply electricity volumes (TWh) | 96.9 | 63.9 | 52% |
| Total gas volumes (mmth) | 8,163 | 3,883 | 110% |
| Total electricity volumes (TWh) | 116.3 | 83.4 | 39% |
| Bord Gáis Energy | |||
| Residential energy customer accounts (year end, ’000) | 608 | — | nm |
| Total gas volumes (mmth) | 106 | — | nm |
| Total electricity volumes (TWh) | 1.4 | — | nm |
| Total power generated (TWh) | 0.9 | — | nm |
| Centrica Energy | |||
| Gas production (mmth) (iv) | 3,772 | 3,557 | 6% |
| Liquids production (mmboe) (iv) | 17.3 | 18.7 | (7%) |
| Total gas and liquids production (mmth) (iv) | 4,822 | 4,690 | 3% |
| Total gas and liquids production (mmboe) (iv) | 79.5 | 77.3 | 3% |
| Upstream proven and probable reserves (mmboe) (v) | 585 | 711 | (18%) |
| Total UK power generated (TWh) | 22.1 | 21.7 | 2% |
CHIEF EXECUTIVE’S STATEMENT
Overview
Centrica occupies a vital role in the energy affairs of the UK in particular, and also in the US and the Republic of Ireland. We are a customer facing business, and our principal role is to deliver excellence in the supply and reliability of energy and services to those customers. Although we are facing some significant challenges at present, it is clear to me that Centrica has built a solid set of positions, from which we will be able to continue to play an important role in the developing energy markets on both sides of the Atlantic.
The 2014 environment was very difficult for Centrica, with record mild weather in the UK, extreme cold weather in North America early in the year and a highly competitive market environment on both sides of the Atlantic. Upstream, the exploration and production (E&P) business faced falling oil and gas prices, while Centrica Storage was impacted by lower seasonal gas price spreads. Political uncertainty and the launch of the Competition and Markets Authority investigation provided further challenges in the UK.
Operationally, in British Gas these conditions translated into falls in gas and electricity sales volumes of 20% and 8% respectively, and a 2% fall in residential energy customer accounts, mostly in the first half of the year. Direct Energy also saw a 3% fall in residential energy customer accounts. In Centrica Energy, oil and gas production volumes of 79.5mmboe were up 3% compared to 2013, but realisations fell as a consequence of lower oil and gas price levels. he power business experienced unplanned outages on the nuclear fleet.
As a result, adjusted earnings per share fell by 28% compared to 2013. We also recognised pre-tax exceptional items of £1,597 million, £1,161 million post-tax, which included substantial impairments on E&P and power assets totalling £1,385 million post-tax, primarily as a result of the current low commodity price environment. These were partially offset by profits on disposal relating to the sale of the Texas gas-fired power stations and the Ontario home services business totalling £224 million.
The Group continues to face a number of challenges as we enter 2015, particularly the significant further reductions in wholesale oil and gas prices since the middle of December and continuing low spark spreads. While we plan for normal weather patterns in 2015, and relative to 2014 should see an associated improvement in earnings and cash flows in the customer-facing businesses, the current forward price curves for oil and gas are likely to more than offset this. It is not clear that the forward price curves for oil and gas will improve in the near term, and we therefore need to plan on the basis that lower wholesale prices will persist for all of 2015 and potentially through 2016 and into 2017. During this time we expect the E&P supply chain costs to respond to the lower price environment. Until that time, the Group’s cash flows from Centrica Energy will be materially impacted.
Centrica balances the significant energy commitments of our downstream obligations to customers with two sources of supply: upstream assets, whose cash flows have been materially impacted by current prices; and our procurement, hedging and optimisation activities which require strong investment grade credit ratings to ensure our supply of energy is delivered efficiently.
We are taking immediate actions to improve cash flows, focusing on reducing E&P capital expenditure relative to 2014 levels by around £250 million in 2015 and a further £150 million in 2016, and reducing cash production costs. In addition, we have initiated Group-wide performance improvement efforts, including a strong cost focus, and we will also pay close attention to working capital management.
Despite these actions, with 2014 adjusted earnings per share of 19.2p, and with 2015 adjusted earnings per share having been negatively impacted by around 2.5p since the Interim Management Statement in November and therefore expected to be down compared to 2014, the Group has taken the very difficult decision to re-base the dividend, commencing with the final payment for 2014. This reduction is driven by three things:
- The need to operate with strong investment grade credit ratings
- The desire to balance sources and uses of cash in 2015
- Maintaining a healthy payout ratio
Going forward, the future level of dividend payments will be determined by the health and growth of the Group’s operating cash flow after tax.
To underpin future growth in cash flows, we have launched a strategic review to be concluded by the time of the Interim Results in July 2015. The review will focus on four key areas:
- Outlook and sources of growth
- Portfolio mix and capital intensity
- Operating capability and efficiency
- Group financial framework
Despite the challenging current environment, my initial assessment of the Group is that Centrica has an excellent and committed team, and has established a strong platform from which to play an important part in the evolution of energy supply and services in the UK, Republic of Ireland and North America.
2014 business performance summary
The top priorities for the Group are safety, compliance and market conduct. he lost time injury frequency rate (LTIFR) per 100,000 hours worked was 0.14, up compared to the 2013 level of 0.11. No significant process safety incidents were recorded during the year.
Downstream in the UK, British Gas faced continued political and regulatory scrutiny, competitive market conditions in each division and lower consumption due to the mild weather. Account numbers declined in both energy and services. In residential services we also experienced a shift in mix towards lower priced products, although we increased our sales of services products in the fourth quarter of the year and returned to account growth.
Overall we delivered improved service levels in British Gas, and we have now completed the implementation of a new combined residential energy and services customer relationship management (CRM) platform. We also completed the implementation of a new billing system in British Gas Business, although we have encountered some transitional issues following the migration of accounts, which we are now resolving. We continue to lead the industry in smart metering, innovation and connected homes, having installed around 1.3 million residential smart meters and we have now sold over 170,000 smart thermostats in the UK.
In North America, the business was impacted by extreme cold weather caused by the polar vortex in early 2014, resulting in additional network system charges. In addition, lower margin sales made in prior years impacted Direct Energy Business. However margins on new B2B sales materially increased in 2014 compared to 2013, reflecting a re-pricing of risk following the polar vortex, and this will benefit the business in 2015.
Market conditions remained highly competitive for Direct Energy Residential, particularly in the US North. Against this backdrop, we are differentiating our offering through innovative propositions that are attractive to the most valuable customer segments. During the year we delivered increased sales of protection plans, combined energy and services products and smart thermostats, while also adding residential solar capability through the acquisition of Astrum Solar. In Direct Energy Services, our focus is now on delivering growth in the US and Alberta following the disposal of our Ontario home services business in October 2014.
At the end of June 2014, Centrica completed the acquisition of Bord Gáis Energy, the incumbent gas supplier and largest dual fuel supplier in the Republic of Ireland. The transaction added some 600,000 residential energy accounts, giving us a leading position in an adjacent deregulated market and providing a platform for growth. We will look to use our experience from the UK and US to develop innovative propositions for our customers in the Republic of Ireland, in both energy and services.
In Centrica Energy, upstream gas post-tax earnings in the year were largely protected from falling wholesale prices by the impact of hedging, tax allowances, and strong midstream performance. e delivered increased E&P production, reflecting a full year of production from assets acquired in Canada in 2013 in partnership with Qatar Petroleum International (QPI). During the year we further strengthened our important relationship with the State of Qatar, selling a 40% share of our wholly owned gas assets in Western Canada to fully align our interests in the region.
In power generation, nuclear output was lower reflecting the temporary shut-down of four reactors following the discovery of a boiler spine issue at Heysham 1 nuclear power station. All four reactors are now back on-line, although at reduced power until modifications are made to the boilers during planned maintenance periods.
In Centrica Storage, our Rough gas storage asset reached its highest ever net reservoir volume in November 2014, reflecting mild UK weather and good asset reliability. However the low seasonal gas price spreads resulted in much reduced year-on-year profitability.
Disposal programme
We completed the disposal of our Texas gas-fired power stations for £411 million in January 2014, releasing capital from non-core assets. In addition, during the year we announced a £1 billion programme of further non-core asset disposals and we completed the sale of our Ontario home services business for £270 million in October. We also ran a process to dispose of our three larger UK CCGTs - Langage, Humber and Killingholme. However, the bids we received were significantly lower than our internal valuation and we have concluded that it is not in the best interest of shareholders to proceed with the disposal of these stations. In addition, the fall in oil and gas prices has made the proposed disposal of our Trinidad and Tobago gas assets more challenging, although we will continue to review our options to release capital from the assets.
Competition and Markets Authority Investigation
The Competition and Markets Authority investigation into the UK energy market commenced in June, and we continue to engage constructively and comprehensively with this full review by an independent body. The CMA published their updated statement of issues on 18 February 2015 and is expected to set out provisional findings in May or June 2015.
2015 environment and outlook
Against the low commodity price backdrop we are taking positive action to improve earnings and cash flows in 2015 and 2016. We are focused on reducing capital expenditure through driving efficiencies on in-flight projects and putting a hold on certain new projects. Absent a material change in commodity prices, we expect E&P capital expenditure to fall to approximately £800 million in 2015 and to approximately £650 million in 2016, around 40% lower than 2014 levels. We will also maintain a tight control on production costs, examining all internal and external supply costs for our operated fields and working with our partners to reduce costs where we are not the operator. Reflecting these actions, we are targeting a 10% or £100 million reduction in our 2016 lifting and other cash production costs compared to 2014 levels, including absorbing the incremental costs of the Valemon and Cygnus fields which will be on-stream.
In power, the Humber and Langage gas-fired stations are cash generative at the operating level in the current environment. We will retain these assets, however following a review we plan to close the Killingholme and Brigg power stations. We will also be taking action to make the management of our power portfolio more efficient.
Downstream, it is vital that we focus on competitive pricing, customer service and operational efficiency. arly in 2015, we were able to announce price reductions for both our British Gas and Bord Gáis Energy residential customers, improving our competitive positions. n North America, margins on new B2B sales improved during 2014, resulting in much improved second half profitability and leaving the business well placed for further profit growth in 2015. We also made good progress in improving our service levels. However, there are further improvements we can make, in part enabled by investment in our IT platforms on both sides of the Atlantic.
We will continue to develop our leading position in smart metering, innovation and connected homes in the UK, which will enable us to offer enhanced customer offerings and drive greater customer engagement, while also creating new skilled jobs. Smart meters are already providing significant benefits to over 600,000 British Gas customers, providing an end to estimated bills and a greater ability to monitor and reduce consumption, while also delivering higher levels of customer satisfaction.
We will also continue to drive sales of our Hive Active Heating smart thermostat, which has extremely positive customer reviews, and we have a strong development pipeline of further innovative products, including time of use tariffs and a ‘connected boiler’. In February 2015 we agreed to acquire AlertMe, the company that provides the technical platform that underpins British Gas’ existing connected homes activity, including Hive. The acquisition will enable further development of connected homes products and services across the Group. In North America, we have also focused on differentiating our offering to the more valuable customer segments, through joint energy and services products, solar and innovative partnership agreements.
Across the Group, we are reviewing our resource efficiency, with a focus on cost to serve, overhead levels and working capital consumption, and have initiated a Group-wide performance improvement plan, including a strong cost focus.
Despite these actions, since our Interim Management Statement in November 2014 the reductions in commodity prices and power margins, the associated impact on our ability to make asset disposals in the current environment and the impact of systems implementation delays in BGB are estimated to have had a negative impact of about 2.5p on 2015 adjusted EPS. As a result, we expect adjusted earnings to be down in 2015 compared to 2014. arnings remain subject to the usual variables of commodity prices, weather and asset performance.
We have also taken the very difficult decision to rebase the dividend from the 2014 final payment. We are proposing a 2014 final dividend of 8.4 pence per share, 30% lower than the 2013 final dividend, which when added to the interim dividend of 5.1 pence, gives a 2014 full year dividend of 13.5 pence. We will also commence a scrip dividend programme as an alternative to the cash dividend, commencing with the final dividend, subject to shareholder approval.
Our primary role as a Group is to supply energy and services to our customers, and we provide security for that energy both by owning gas and electricity production and also in midstream by hedging, procurement and optimisation activities. To do this, the Group requires a strong investment grade credit rating.
The Group currently has an A3 credit rating with Moody’s and an A- credit rating with S&P, with both agencies having placed their rating on negative outlook in the summer. Since then, the fall in commodity prices has impacted the Group’s cashflows, with a corresponding reduction in its credit metrics. The actions we are taking to improve cashflow through the reduction of capital expenditure and operating costs, and the rebasing of the dividend, are therefore necessary both to balance sources and uses of cash in 2015 and to underpin the financial metrics necessary for strong investment grade credit ratings.
Summary
I joined Centrica at the start of the year and have spent my first weeks visiting our operations, meeting people and deepening my understanding of the Group. Despite the challenges we face, under Sam Laidlaw Centrica has built attractive positions and good capabilities in the UK, Republic of Ireland, Norway, Netherlands and North America. Given the current commodity price env
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Martyn Espley, Investors and Analysts
T: 01753 494900
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Sophie Fitton, Media