Headlines

• Full year adjusted earnings and adjusted operating cash flow down vs 2018 reflecting impacts of UK default tariff cap, low wholesale gas prices and nuclear outages. Significantly improved in H2 2019 vs H1 2019.
• Adjusted operating cash flow (AOCF) and net debt both within 2019 target ranges.
• Full year dividend per share of 5.0p, in line with the rebasing announced in July at the Interim Results.
• Net exceptional charge before tax of £1,103m, including impairments of E&P and Nuclear assets predominantly due to a reduction in commodity price forecasts, and restructuring costs of £356m.
• Consumer customer account holdings up 722,000 or 3%. UK Home accounts up 78,000 with growth in services more than offsetting a reduction in energy supply. UK energy supply net losses of 286,000 significantly lower than in 2018, with H2 2019 account losses lower than H1 2019.
• £315m of cost efficiencies delivered in 2019, taking cumulative annual savings to £1.26bn compared to a 2015 baseline with 2020 nominal like-for-like costs expected to be well below 2015 levels per our five year target.
• Consumer and Business expected to benefit from adjusted earnings and AOCF momentum in 2020, but Upstream expected to be impacted by very low current wholesale commodity prices. 2020 AOCF expected to be in the range £1.6-£1.8bn based on 31 December 2019 commodity prices, assuming the existing portfolio.
• Cost efficiencies of £350m expected in 2020, with associated cash restructuring costs expected to be £300m.
• Continued focus on financial discipline. 2020 cash capital expenditure expected to be around £800m.
• Targeting broadly balanced sources and uses of cash flow in 2020 with closing net debt expected to be in the range £3.2-£3.6bn, including an expected additional £0.2bn of non-cash lease commitments and before the impact of planned divestments.

Performance Metrics

Centrica Group

1. Group, Divisional and Business Unit total recordable injury frequency rate (per 200,000 hours worked) is on a 12 month rolling basis.
2. Direct Group headcount excludes contractors, agency and outsourced staff.

Centrica Consumer

3. Active Home Solutions customers only. The equivalent figure for cumulative customers can be found in the Business Unit KPIs appendix on pg16.
4. Includes services account holdings. 2018 has been restated accordingly.
5. Redefined to exclude minor contract add-ons on home warranty contracts. 2018 has been restated accordingly and includes 182,000 accounts associated with the Clockwork divestment.
6. Excludes Clockwork customers and accounts in 2018.
7. 2018 includes a one-off bad debt credit of £8 per customer.

Centrica Business

8. Includes services account holdings. 2018 has been restated accordingly.

Upstream

9. Centrica share of generation and achieved sales price.
10. See pages 64 to 65 for an explanation of the use of adjusted performance measures.

Overview

2019 performance
Centrica delivered customer account growth, higher net promoter scores in most businesses and significant cost efficiencies in excess of its target in 2019. However, the Company’s portfolio was impacted by a challenging environment, with the implementation of the UK default tariff cap, low UK natural gas prices and extensions to outages at the non-operated Hunterston B and Dungeness B nuclear power stations.

Reflecting these factors, adjusted operating profit and adjusted earnings per share were both down 35% and adjusted operating cash flow was down 18% compared to 2018. We also recognised £1,103m of net pre-tax exceptional charges, largely relating to impairments of E&P and Nuclear assets due to the reduction in commodity price forecasts and restructuring costs associated with the Group’s cost efficiency programme. Reflecting these exceptional charges and including the impact of a loss from certain re-measurements, the statutory loss attributable to shareholders for the period was £1,023m in 2019 compared to a profit of £183m in 2018.

Adjusted operating cash flow of £1,830m was within the Group’s 2019 targeted range of £1.8-£2.0bn and closing net debt of £3,181m was within the Group’s 2019 targeted range of £3.0-£3.5bn. We also delivered significantly higher adjusted earnings and adjusted operating cash flow in the second half of the year compared to the first half, as we indicated was expected in the Interim Results in July 2019. We delivered £315m of efficiency savings during the year, in excess of original £250m target. The proposed 2019 full year dividend per share is 5.0p, in line with the rebasing announced in July 2019.

Overall Consumer customer account holdings were up 722,000 in 2019. Importantly, UK Home accounts were up 78,000, with growth in services offsetting a 286,000 decline in energy supply. This decline was significantly reduced compared to a 742,000 decline in 2018 and was lower in the second half of 2019 than in the first half.

Strategic progress
We provided a strategic update alongside our Interim Results in July 2019. Since 2015 we have been repositioning Centrica towards the customer and we announced in July that we would be completing this shift by exiting oil and gas production, in addition to our previously announced intention to exit from Nuclear power generation. Centrica will become an international Energy Services and Solutions provider which will focus on its distinctive strengths of energy supply and its optimisation, and services and solutions centred around energy, with a major emphasis on helping our customers transition to a lower carbon future.

We are making progress towards delivering the business unit objectives we laid out in July, specifically the fundamental rebasing of UK Home, the refocusing of our Home Solutions activity towards the UK and Ireland, improving returns in North America Business and growing Centrica Business Solutions.

In addition, the simplified portfolio will enable further rebasing and focusing of Centrica, unlocking material additional efficiencies as be target becoming the lowest cost provider in all our markets by 2022, consistent with our chosen brand positioning and propositions. This will enable us to stabilise and grow customer numbers and gross margin. Including the £315m savings achieved in 2019, we have now delivered over £1.25bn of annualised cost efficiencies since 2016 and we are targeting to have delivered £2bn by 2022, including around £350m in 2020.

Outlook
In addition to pursuing the planned divestments of Spirit Energy and Nuclear, our focus in 2020 is on continuing to grow customer relationships, delivering further efficiencies, continuing to build on our customer-facing capabilities and maintaining financial discipline.

Our customer facing activities in Centrica Consumer and Centrica Business are expected to benefit from adjusted earnings and cash flow momentum in 2020, reflecting the improved performance in the second half of 2019. However, we expect the remaining legacy gas contract in Centrica Business to be loss-making in 2020. In addition, recent significant commodity price falls are expected to negatively impact achieved prices in both E&P and Nuclear in 2020, despite some benefit from forward hedging.

Taking these factors into account, at 31 December 2019 commodity prices and assuming the current portfolio, we expect 2020 adjusted operating cash flow to be in the range £1.6bn-£1.8bn. This is lower than adjusted operating cash flow in 2019. However, the adjusted earnings impact from the lower commodity price environment is likely to be much less material, which includes the impact of lower depreciation resulting from the year-end impairments. As a result, we would expect the positive earnings momentum from our core customer-facing businesses to be broadly offset by the negative earnings impact from the legacy gas contract and the Upstream portfolio.

With 2020 capital expenditure expected to be around £800m in 2020, in line with 2019 and reflecting our continued focus on capital discipline, we expect Group sources and uses of cash flow to be broadly balanced in 2020. Reflecting this, we are expecting 2020 Group net debt to be in the range £3.2bn-£3.6bn, including an additional £0.2bn of lease commitments, before any impact from the planned disposals of Spirit Energy and Nuclear.

2019 Financial Performance

Adjusted operating profit and earnings

• Group adjusted gross margin fell by £401m or 9% to £3,852m and adjusted operating profit fell by £491m or 35% to £901m compared to 2018.
• Centrica Consumer adjusted gross margin was down £291m or 11% to £2,315m and adjusted operating profit was down £245m or 33% to £505m.
  • This includes a £300m negative revenue impact resulting from the implementation of the UK residential energy supply default tariff cap.
  • We delivered cost efficiencies of £229m in Consumer in 2019 and we also recognised a £34m credit relating to the renegotiation of one of our smart metering contracts. These positive impacts more than offset a negative effect from competitive pressures on underlying margins in energy supply and the non-recurrence of a bad debt provision release of £59m in UK Home in 2018.
• Centrica Business adjusted gross margin was up £148m or 17% to £1,030m and adjusted operating profit was up £142m or 189% to £217m.
  • These increases reflect a significant improvement in achieved power retail margins in North America, good European trading and optimisation performance and a benefit from the decision to defer delivery of gas from 2019 into 2020 from the one remaining large legacy gas contract. Centrica Business also delivered £40m of cost efficiencies in 2019.
• Upstream adjusted operating profit was down £388m or 68% to £179m.
  • Nuclear adjusted operating profit was down £27m or 59% to £19m largely reflecting lower output. This predominantly relates to extensions to outages at the Dungeness B and Hunterston B nuclear power stations, the impact of which was not fully offset by a higher achieved power price.
  • Exploration & Production adjusted operating profit was down £361m or 69% to £160m, including reduced achieved gas sales prices due to the lower wholesale commodity price environment and lower volumes from the Rough field reflecting the field’s natural decline. We also saw higher depreciation and amortisation rates following asset write-backs at the end of 2018 and a production mix shift to higher DDA rate fields, and higher field specific write-offs.
• The net finance charge decreased by 7% to £255m, reflecting lower gross debt levels resulting from a bond repurchase programme completed in March 2018 and the maturity of a bond in September 2018.
• The Group adjusted effective tax rate reduced from 41% to 34%, predominantly due to the more highly taxed E&P business contributing a significantly lower proportion of adjusted operating profit.
• Adjusted earnings attributable to shareholders reduced by 34% to £419m and adjusted EPS fell by 35% to 7.3p.