Group financial review
Providing value to shareholders
2009 was a year of sound earnings in the face of volatile markets driven by profitability across most of our businesses, with continued progress in our growth businesses.
Group revenue from continuing operations was up 5% to £22.0 billion (2008: £20.9 billion). Revenue in all three downstream UK businesses increased due to a higher number of customer accounts and revenue in our upstream UK segment was also slightly up due to higher external sales volumes. The North American businesses were impacted by a fall in commodity prices, although the reduction was more than offset by the effect of a favourable exchange rate movement on reported revenue.
Group operating profit† from continuing operations was down 9% at £1,814 million (2008: £1,992 million). Adjusted operating profit* was down 7% to £1,857 million (2008: £2,003 million). An increase in downstream profitability, reduced losses in the industrial and commercial segment and strong performance in the power generation business partially offset decreases in upstream gas and oil profitability caused by lower volumes and selling prices.
Group profit† on a continuing basis was up 15% to £1,104 million (2008: £964 million). The increase resulted primarily from a lower tax charge† of £531 million (2008: £1,026 million). This decrease reflected the change in mix of profits, with a decrease in highly-taxed gas production profits. The resultant effective tax rate† for the Group was 32% (2008: 52%). Net interest expense was £179 million (2008: £2 million), reflecting the higher level of debt during the year. Despite the increase in Group profit†, adjusted earnings per shareˆ (EPS) was unchanged at 21.7 pence (2008: 21.7 pence) reflecting the higher number of shares in issue following the Rights Issue in 2008.
The statutory profit for the year was £856 million (2008: loss of £136 million). The reconciling items between Group profit† and the statutory profit are related to exceptional items, certain re-measurements and discontinued operations. The Group reported a statutory basic EPS of 16.5 pence, up from basic loss per share of 3.3 pence in 2008, mainly reflecting the reduction in the post-tax impact of certain re-measurements.
In addition to the interim dividend of 3.66 pence per share, we propose a final dividend of 9.14 pence, giving a total ordinary dividend of 12.8 pence for the year (2008: 12.2 pence), an increase of 4.9%.
Group operating cash flow from continuing operations before movements in working capital was down 12% to £2,183 million (2008: £2,478 million). After working capital adjustments, operational interest, tax, cash flows associated with exceptional charges in prior years and cash flows from discontinued operations, this stood at £2,647 million (2008: £297 million). This significant increase in operating cash flow is due primarily to an improvement in working capital, lower outflow of cash collateral associated with margining agreements and a decrease in cash taxes paid.
The net cash outflow from investing activities increased to £4,520 million (2008: £1,122 million), due primarily to the acquisition of Venture and the investment in 20% of British Energy.
There was a net cash inflow from financing activities of £304 million (2008: £2,603 million). 2008 included £2,164 million from a Rights Issue.
The Groupís net debt level at 31 December 2009 was £3,136 million (2008: £511 million). This reflected the cash movements described above.
During the year net assets decreased slightly to £4,255 million from £4,372 million as at 31 December 2008. Net segment assets increased following the acquisitions of Venture and British Energy and the sale of Segebel S.A. (Segebel), but this was offset by an increase in the level of net debt.
Net exceptional charges from continuing operations before tax of £568 million were incurred during the year (2008: nil). A charge of £199 million related to an onerous gas procurement contract, and a charge of £139 million related to the termination of an out-of-the-money energy sales contract in the industrial and commercial segment of upstream UK. A provision of £55 million was recognised for North American wind power purchase agreements, to reflect the fair value of the obligation to purchase power above its net realisable value. Impairments of £149 million relating primarily to upstream gas and power assets in the UK and North America were incurred, arising from declining commodity prices and changing market conditions and an exceptional charge of £75 million relating to restructuring in downstream UK and in upstream UK was incurred. Also within continuing operations, profit on disposal of £49 million was made on the sale of the equity interest in GLID Wind Farms TopCo Limited. In discontinued operations a £297 million profit on disposal was made on the sale of Segebel and charges of £24 million were incurred in respect of previously capitalised customer acquisition costs in The Netherlands.
In our business we enter into a portfolio of forward energy contracts which include buying substantial quantities of commodity to meet the future needs of our customers. A number of these arrangements are considered to be derivative financial instruments and are required to be fair-valued under IAS 39. Fair valuing means that we apply the prevailing forward market prices to these contracts. The Group has shown the fair value adjustments separately as certain re-measurements as they are unrealised and non-cash in nature. The profits† arising from the physical purchase and sale of commodities during the year, which reflect the prices in the underlying contracts, are not impacted by these re-measurements.
The statutory results include net charges to operating profit relating to these re-measurements of £71 million (2008: £1,331 million) from continuing operations, primarily from marking-to-market some contracts relating to our energy procurement activities. As gas and power were delivered under these contracts, net out-of-the-money mark-to-market positions from year end 2008 were unwound generating a net credit to the Income Statement in the period of £928 million (2008: £10 million). As forward prices decreased in the second half of the year the portfolio of contracts fair valued under IAS 39 reported a net charge on revaluation of £1,097 million (2008: £1,337 million). The termination of an out-of-the-money energy sales contract, described above, resulted in a credit within certain re-measurements of £135 million. The remaining charge of £28 million (2008: £4 million) reflects positions relating to cross-border capacity and storage contracts. There were also net losses arising on re-measurement of associatesí energy contracts (net of taxation) of £9 million (2008: nil).
The net loss of £71 million on the re-measurement of energy contracts largely represents unrealised mark-to-market loss created by gas and power purchase contracts which are priced above the current wholesale market value of energy. This loss is calculated with reference to forward energy prices and therefore the extent of the overall economic profit or loss arising over the life of these contracts is uncertain and is entirely dependent upon the level of future wholesale energy prices.
Business combinations and capital expenditure
In January 2009, the Group acquired the remaining 50% of the issued share capital of Segebel for cash consideration of £544 million (including deferred consideration of £62 million), bringing the Groupís total ownership interest in Segebel to 100%. Segebel holds a controlling stake of 51% in SPE S.A., a Belgian energy company. This business was subsequently sold to EDF Belgium S.A. for Ä1,325 million (£1,205 million) on 26 November 2009, as part of an inter-conditional transaction in which Centrica acquired a 20% interest in Lake Acquisitions Limited, owner of British Energy, for £2,255 million.
The Group also acquired 100% of the issued share capital of Venture for a total consideration of £1,253 million in a series of transactions occurring between 18 March 2009 and 9 November 2009. The Group acquired a controlling interest in Venture on 27 August 2009, and Venture was therefore consolidated as a subsidiary of the Group from this date.
The Group also initiated a process to sell its businesses in The Netherlands and Spain, being Oxxio B.V. and Centrica EnergŪa S.L. respectively. Together with Segebel, these businesses have been accounted for as discontinued operations.
During the year, a number of other smaller acquisitions were completed for total cash consideration of £32 million, as explained in note 37.
Details of capital expenditure are provided in note 6(e).
Principal risks and uncertainties
The Groupís risk management process remains unchanged from 31 December 2008. A description of the impact of the volatility in wholesale commodity prices and the weakness of credit markets on financial risk management is provided in note 4.
Details on the Groupís capital management are provided in note 5.
Related party transactions
Related party transactions are described in note 40.
Events after the balance sheet date
On 5 February 2010, 50% of the issued share capital of Centrica (Lincs) Limited (Lincs) was sold to Dong Wind (UK) Limited and Siemens Project Ventures GmbH for £50 million. Centrica has retained 50% of the issued share capital of Lincs and Centricaís investment in Lincs is accounted for as a joint venture from this date due to the joint control that arises from this transaction.
On 12 February 2010 the Group redeemed £250 million of debt with a maturity date of 12 December 2011.
On 25 February 2010 the Group announced that it had agreed to acquire a portfolio of Trinidad and Tobago gas assets from Suncor Energy Inc. for approximately US$380 million (£246 million) in cash, subject to certain conditions being satisfied.
The Directors propose a final dividend of 9.14 pence per ordinary share (totalling £470 million) for the year ended 31 December 2009. The dividend will be submitted for formal approval at the Annual General Meeting on 10 May 2010 and, subject to approval, will be paid on 16 June 2010 to those shareholders registered on 30 April 2010.
UK listed companies are required to comply with the European regulation to report consolidated financial statements in conformity with International Financial Reporting Standards (IFRS). The Groupís significant accounting policies, including changes of accounting presentation, are explained in note 2. Note 3 to the Financial Statements explains the critical accounting judgements and key sources of estimation uncertainty arising in the preparation of the Financial Statements.
Group Finance Director
25 February 2010
- * including joint ventures and associates stated gross of interest and taxation, and before other costs and depreciation of fair value uplifts to property, plant and equipment from Strategic Investments and exceptional items and certain re-measurements
- ˆ as above, except after other costs and joint ventures and associates stated net of interest and taxation
- † including joint ventures and associates stated net of interest and taxation, and before exceptional items and certain re-measurements