Trading Update

Summary
• Priority during the Covid-19 pandemic is to look after the health and safety of our employees and our customers.
• The Company is committed to helping all the communities it serves through the pandemic, ensuring continued access to heating, hot water and power for all its customers and providing additional support where needed for vulnerable customers.
• The Board remains committed to taking appropriate actions to maintain a strong balance sheet.
• Substantial liquidity available to accommodate anticipated increase in working capital arising from certain customer segments deferring payments.
• Financial impacts of Covid-19 and related economic weakness difficult to quantify precisely at this stage.
• Identified actions to reduce 2020 cash expenditure by around £400m compared to previous plans, including reductions in non-essential operating costs and the delay of capital and restructuring projects, to provide flexibility to navigate the impacts of the pandemic.
• Following the decision not to pay any Board level bonuses relating to 2019, bonus payments to all other management have also been paused and will be reviewed when the financial impacts become clearer.
• Taken the prudent decision to cancel the proposed 2019 final dividend payment of 3.5 pence per share.
• Spirit Energy divestment process paused until financial and commodity markets have settled.

Operational update
Our first priority during the Covid-19 pandemic is to look after the health and safety of our colleagues and customers while contributing to the efforts of our various host governments to ensure the countries in which we operate continue to have access to energy and essential services. We are following all advice from government and relevant health organisations, and as a consequence we have stopped all non-essential customer visits to minimise contact. However, our service engineers will continue to attend breakdowns, and across the business we will remain available to all our customers, whilst prioritising those who are vulnerable and may need additional support over the coming weeks.

We have several hundred UK service engineers who have volunteered to perform essential service visits to customers’ homes even where there may be higher risk of Covid-19, to ensure they have continued access to heat, hot water and electricity. And all colleagues across the organisation are showing incredible commitment and dedication, as we continue to provide an essential service to our customers in all our markets, ensuring continuity of the supply of gas and electricity and the provision of essential energy services to homes and businesses.

Impacts of Covid-19 on our customer-facing businesses
In our customer-facing businesses, although we are starting to see increased energy demand from residential customers as more people work from home, we are seeing a more significant reduction in demand from business customers as sites temporarily close. We also expect to see an increase in working capital outflows and customer bad debt, as certain customer segments defer payments due to the reduction of household incomes and business revenues. In addition, we are likely to see an impact on revenues from our services and solutions activities for both homes and businesses, as we prioritise only essential work in the near term and given the uncertain economic outlook.

The impact that reduced energy demand and weaker economic conditions will have on our 2020 AOCF and adjusted earnings is difficult to quantify precisely at this time, given it is unclear how long the current situation will last, how customer behaviour may change, the impact on the wider economy, and the extent to which government financial support for households and businesses may help mitigate some of the expected effects. Therefore, we feel it is prudent to withdraw our 2020 Group AOCF guidance at this stage.

Targeting the Upstream division to be free cash flow neutral in 2020
In our Upstream division, consistent with the rules of thumb provided by the Company, the reduction in Brent Oil prices since the Preliminary Results on 13 February is forecast to negatively impact Exploration & Production AOCF in 2020 by around £100m. In addition, we have seen further outages at the Dungeness B and Hinkley Point B nuclear power stations.

In response, we have already taken actions to reduce 2020 cash capital expenditure by around £100m to around £400m in Spirit Energy and identified further cost savings. As a result, we are still targeting our Upstream division to be no worse than free cash flow neutral in 2020.

The current environment also makes it more challenging to execute on the planned divestments of our interests in Spirit Energy and our interest in Nuclear. We were due to receive initial bids for Spirit Energy around the end of March, however we have taken the decision to pause the process until financial and commodity markets have settled. We continue to pursue the divestment of both assets and our intention remains to exit oil and gas production and nuclear power generation in line with our strategic shift towards the customer.

Mitigating actions
The Company has significant flexibility in its cash flows, and in addition to the actions taken in the Upstream division, the Company is taking steps to reduce cash expenditure in the customer-facing divisions. These include reducing non-essential operating costs, deferring the decision to pay employee cash bonuses relating to 2019 until the outlook is clearer, implementing a pay freeze for most non-customer facing colleagues, and delaying over £100m of restructuring spend. The Board also took the decision earlier this year to award no bonuses to Executive Directors relating to 2019.

The Company has also stopped or delayed all new non-critical capital expenditure projects in its customer-facing divisions, which is expected to result in a reduction in cash expenditure of around £100m in 2020. This means total Group capital expenditure including E&P is now expected to be around £600m compared to around £800m at the time of the Preliminary Results. We are also engaged in constructive discussions with relevant governments and regulatory authorities to help ensure that appropriate protections are put in place for both the industry and customers during the pandemic.

In addition, the Board has taken the prudent decision to cancel the 2019 final dividend payment of 3.5p per share, due to be paid in June 2020. The total cash outflow from the 2019 final dividend was expected to be £204m.

Balance sheet and liquidity position
The Board remains committed to maintaining a strong balance sheet. Moody’s confirmed a Baa2 (stable) credit rating on 13 March and S&P confirmed a BBB (stable) credit rating on 31 March. As at the end of March, the Company had £0.6bn of available cash and cash equivalents (net of bank overdrafts) and £2.7bn of undrawn credit facilities. There are no material covenants on any of our existing debt.

Annual General Meeting
The evolving Covid-19 situation and the related government restrictions will clearly impact the ability of shareholders to attend our AGM this year. In normal circumstances, our AGM is well attended but following the UK Government’s introduction of measures that require UK nationals to remain at home except in specific circumstances (which do not include attending an AGM), it will not be possible to hold the AGM as intended on 11 May.

The health and safety of our shareholders and colleagues is always our utmost priority and as a consequence, the AGM will be held as a closed meeting and shareholders will not be able to attend in person. The format of the AGM this year will be purely functional to comply with the relevant legal requirements. Although shareholders will not be able to attend in person this year, shareholders’ views remain important to us. Therefore, all shareholders are encouraged to exercise their votes by submitting their proxy forms either electronically or by post. We will provide further updates in relation to our AGM, including confirmation of the meeting date and arrangements, on our website.