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20 February 2014
07:00

Preliminary Results for the year ended 31 December 2013

Group results and highlights

RICK HAYTHORNTHWAITE, CENTRICA CHAIRMAN

"The opportunity to chair Centrica is a great privilege. It is a company with a deep heritage and relevance to the UK, supplying energy or services to over 11 million of the country's homes, employing over 30,000 people in the UK, and with a responsibility to pension funds and over 700,000 individual shareholders. Our vision remains to be the leading integrated energy company with customers at its core, and our scale is of great benefit to the UK as we secure the future energy needs of our customers. In an increasingly international gas market, our interests and those of our customers remain inextricably linked."

RICK HAYTHORNTHWAITE
Chairman

20 February 2014

SOLID YEAR ON YEAR EARNINGS IN DIFFICULT MARKET CONDITIONS

Adjusted financial figures for the year ended 31 December 2013   2012   Change
Operating profit £2,695m   £2,743m   (2%)
Taxation charge £1,022m   £1,112m   (8%)
Effective tax rate 43%   45%   (2ppt)
Earnings £1,370m   £1,378m   (1%)
Basic earnings per share 26.6p   26.6p   0%
Full year dividend per share 17.0p   16.4p   4%
Group capital and acquisition expenditure £2,565m   £2,727m   (6%)
Lost time injury frequency rate (per 100,000 hours worked) 0.11   0.20   (45%)

The Group has applied IAS19 (revised) pensions accounting. As a result, 2012 net finance costs, taxation, earnings and earnings per share have been restated

GOOD STRATEGIC PROGRESS, HELPING SECURE FUTURE GAS SUPPLIES FOR THE UK

  • Group wide £500 million cost reduction programme completed
  • Engaging with all stakeholders to improve understanding and rebuild trust
  • £14 billion of new gas supply agreements signed with Cheniere and Qatargas, taking the Group's gas and power supply commitments to over £60 billion
  • £2.6 billion invested in the year, including:
    • Over £1.5 billion of organic investments, predominantly in North Sea E&P, including in major projects such as Cygnus
    • C$1 billion Canadian upstream gas acquisition, in partnership with Qatar Petroleum International
    • The acquisition of a 25% stake in the Bowland shale exploration licence in the UK
    • $1.2 billion Hess Energy Marketing acquisition, delivering a step-change in North America B2B
    • £650 million of divestments of selected E&P assets, UK wind assets and US power stations, for value
  • Adding value through 56mmboe of organic reserve additions, principally in Norway, however £699 million pre-tax (£318 million post-tax) exceptional impairments of UK Southern North Sea projects and existing Canadian gas assets
  • £420 million share repurchase programme in 2014 following sale of Texas CCGTs; recommending a 4% increase in the full year dividend to 17.0 pence per share

Unless otherwise stated, all references to operating profit or loss, taxation and earnings numbers throughout the announcement are adjusted figures, as reconciled to their statutory equivalents in the Group Financial Review on pages 12, 13 and 14. Statutory operating profit is £1,892 million (2012: £2,625 million). Statutory profit before taxation is £1,649 million (2012: £2,416 million). Statutory earnings are £950 million (2012: £1,245 million), including post-tax exceptional items of £667 million (£1,064 million before tax) relating to an onerous contract charge on Rijnmond, E&P impairment charges and UK gas storage impairment and provision charges. Statutory basic EPS is 18.4p (2012: 24.0p).

NEW TARGETS FOR EACH AREA OF THE BUSINESS

  • Overall, 2014 trading is in line with recent market forecasts, other than a one-off impact from extreme weather conditions in Direct Energy, with Group adjusted EPS for the year expected to be lower than in 2013
  • New targets set, creating a platform for long term, sustainable growth, both downstream and upstream
  • Targeting a return to account growth in UK residential energy and services, following a 2% decline in 2013
  • Aiming to achieve industry leading, high quality service for all our customers
  • Efficiency and cost reduction programmes across the Group
  • Selective investment, concentrating on the most attractive opportunities
    • Reducing organic E&P capital expenditure by approximately 20% to around £900 million per year on average over the next three years
    • Limited UK power investment against a backdrop of losses in gas-fired generation

SAM LAIDLAW, CENTRICA CHIEF EXECUTIVE

"We have made good strategic progress across the Group in 2013, investing along the gas value chain to secure long term, affordable energy supplies for our customers. We have completed strategic reviews in both British Gas and Direct Energy, and introduced new management structures. These will help us deliver consistent, high quality customer service, reduce costs and drive growth through innovation. In Centrica Energy, we entered into a number of key strategic transactions to drive long term growth and we also added reserves from the drill-bit, mainly in Norway.

Recently we have seen unprecedented focus on the energy sector in the UK, with intense political and media scrutiny at a time when many customers have faced declining real disposable income. In British Gas, we have simplified our energy product range to just four residential tariffs, we have made further improvements to the transparency of our reporting, and we were the first energy company to reduce retail tariffs following proposed changes to the ECO programme.

Market conditions are set to remain challenging in 2014 with margin pressures and unusual weather patterns on both sides of the Atlantic, rising unit costs in the North Sea and weak economics for gas storage and gas-fired power generation. However in the short term, we are focused in our downstream businesses on improving service levels, reducing costs and returning to growth through innovation, technology and customer propositions. Upstream, we will continue to drive efficiencies and will be increasingly selective in our investments, focusing on the projects that offer the best returns and the lowest political risk. The acquisitions we announced in 2013 are performing well and together with the positive action we are taking across the Group, position Centrica well for the future, for the benefit of both customers and shareholders."

SAM LAIDLAW
Chief Executive

20 February 2014

ENQUIRIES

Investors and Analysts: Andrew Page 01753 494 900
  email: ir@centrica.com
   
Media: Greg Wood / Sophie Fitton 0800 107 7014
  email: media@centrica.com

 

Interviews with Rick Haythornthwaite (Chairman), Sam Laidlaw (Chief Executive), Nick Luff (Group Finance Director) and Chris Weston (International Downstream Managing Director)

Further information – a release from British Gas on the results is also available

Divisional results and highlights

INTERNATIONAL DOWNSTREAM

British Gas: Focus on service, efficiency and innovation

Adjusted operating profit for the year ended 31 December 2013   2012   Change
Residential energy supply (BGR) £571m   £606m   (6%)
Residential services (BGS) £318m   £312m   2%
Business energy supply and services (BGB) £141m   £175m   (19%)
Total British Gas £1,030m   £1,093m   (6%)
           
Performance indicators for the year ended 31 December 2013   2012   Change
Residential energy customer accounts (year end, ’000) 1 15,256   15,618   (2%)
Residential services product holding (year end, ’000) 8,227   8,402   (2%)
Business energy supply points (year end, ’000) 912   924   (1%)

1. British Gas residential energy customer accounts as at 31 December 2012 have been restated to exclude 38,000 accounts subsequently classified as dormant

  • Strategic review complete; new organisational structure in place
  • Aiming to deliver industry leading, high quality service for both residential and business customers
  • BGR operating profit down due to higher commodity and non-commodity costs, with warm weather towards the end of the year resulting in an 18% decline in operating profit in the second half of the year compared to 2012
    • Targeting a return to customer account growth, following a 2% decline in 2013, helped by our January 2014 price reduction and the introduction of new fixed price propositions
    • Simplified product range to four residential tariffs; further improvements in transparency of reporting
    • First energy supplier to reduce retail tariffs in 2014, following proposed ECO changes
  • BGS benefited from cost reduction initiatives
    • Targeting a return to customer account growth, leveraging our insurance capabilities and developing differentiated propositions such as Hive
  • BGB operating profit down as a result of difficult trading environment and the ending of auto roll-over of contracts for the benefit of customers
    • £100 million cost reduction programme underway to improve competitiveness
    • Implementation of new billing system proceeding to plan

Direct Energy: Enhanced scale in deregulated markets

Adjusted operating profit for the year ended 31 December 2013   2012   Change
Residential energy supply (DER) £163m   £156m   4%
Business energy supply (DEB) £77m   £121m   (36%)
Residential and business services (DES) £36m   £33m   9%
Total Direct Energy £276m   £310m   (11%)
           
Performance indicators for the year ended 31 December 2013   2012   Change
Residential energy customer accounts (year end, ’000) 3,360   3,455   (3%)
Residential services product holding (year end, ’000) 2,608   2,401   9%
Business energy supply gas volumes (mmth) 1,839   793   132%
Business energy supply electricity volumes (TWh) 63.9   51.4   24%

To reflect a new organisational structure, the North American upstream gas business and North American power and midstream and trading businesses have been reallocated from Direct Energy upstream and wholesale to Centrica Energy International gas and Direct Energy business energy supply respectively

  • Strategic review complete, new organisational structure in place
  • Overall Direct Energy profitability down, reflecting challenging market conditions leading to a narrowing of energy supply margins
  • $100 million cost reduction programme launched to improve competitiveness, driving synergies from enhanced scale
  • Profit growth in DER, as we benefitted from previous acquisitions
    • Innovative products and enhanced digital capability key to future growth; 'Power To Go and 'Free Electricity Saturdays' both proving popular with customers
  • Decline in DEB margins and profitability, with rising wholesale costs and a highly competitive power supply market resulting in difficult trading conditions
    • Hess integration proceeding well; EBITDA in first three months ahead of our expectations
    • Growth potential through enhanced scale, dual fuel capabilities, advantaged positions along the gas value chain, long term customer relationships
  • Increase in DES profitability, with services accounts up by more than 200,000
    • Services protection plans a unique differentiating factor
    • Significant potential for bundling of energy and services over time

INTERNATIONAL UPSTREAM

Centrica Energy: Securing energy supplies for our customers

Adjusted operating profit/(loss) for the year ended 31 December 2013   2012   Change
International gas (E&P) £1,155m   £940m   23%
UK Power £171m   £311m   (45%)
Gas-fired (£133m)   (£4m)   nm
Renewables £25m   £56m   (55%)
Nuclear £250m   £237m   5%
Midstream £29m   £22m   32%
Total Centrica Energy £1,326m   £1,251m   6%
           
Adjusted operating profit after tax for the year ended 31 December 2013   2012   Change
International gas £325m   £198m   64%
UK Power £143m   £243m   (41%)
           
Performance indicators for the year ended 31 December 2013   2012   Change
International gas production (mmth)1 3,557   2,990   19%
International liquids production (mmboe)1 18.7   17.4   7%
International total gas and liquids production (mmboe)1 77.3   66.8   16%
International Upstream proven and probable reserves (mmboe)2 711   633   12%
Total UK power generated (TWh) 21.7   21.5   1%

To reflect a new organisational structure, the North American upstream gas business has been reallocated from Direct Energy upstream and wholesale to Centrica Energy International gas
1. Includes a 100% share of Canadian assets acquired from Suncor in partnership with QPI
2. Centrica's share of reserves, including a 60% share of Canadian assets acquired in partnership with QPI from Suncor, and excluding Rough cushion gas of 30mmboe

  • Increased international gas operating profit, with strong production from recently acquired assets and the impact of higher UK gas prices more than offsetting North Sea cost pressures
    • 155mmboe of 2P reserves added in total; 56mmboe added organically, predominantly in Norway; 2C resource base up by 28%
    • £318 million of post-tax exceptional impairments relating to UK Southern North Sea projects and existing Canadian gas assets
  • Reducing organic E&P capital expenditure by approximately 20% to around £900 million per year on average over the next three years, against a backdrop of rising costs and lower wholesale market prices
  • Targeting flat E&P unit lifting and cash production costs over the next three years
  • Power profit down significantly despite strong nuclear performance
    • Gas-fired fleet loss making, reflecting weak spark spreads and following the loss of free carbon allowances
  • Near term investment in the UK power sector likely to be limited

Centrica Storage: Making an important contribution to the UK's security of supply

Adjusted operating profit for the year ended 31 December 2013   2012   Change
Centrica Storage £63m   £89m   (29%)
  • Profitability impacted by continuing low seasonal gas spreads; further significant decline expected in 2014
  • Decision not to proceed with new gas storage projects at Caythorpe and Baird resulted in post-tax exceptional impairments and provisions of £224 million
  • Programme launched to deliver £15 million of cost reductions through operational efficiencies over the next three years

Chairman's Statement

I regard the opportunity to chair Centrica as a great privilege. It is a company with a strong heritage and deep relevance to the UK, serving over 11 million UK households, employing over 30,000 people in the UK and contributing around £1 billion of tax across the Group each year. With approximately 700,000 individual shareholders and numerous pension fund investors, Centrica also forms an important part of the savings and pension plans of millions of people across the country. In other words, Centrica is essential to the quality of life and competitiveness of the UK.

But beyond the statistics, Centrica also has an important role to play in the resolution of some of the most pressing issues for the UK – energy security, climate change and affordability. It has the know-how, balance sheet and assets to play a leading role in helping to deliver a solution to these issues. And yet, the company is sometimes regarded as part of the problem rather than the solution. Levels of trust between energy companies and wider society have come under severe pressure. I therefore believe that it will be essential to establish common ground between the participants in the debate, to enable us to meet the energy challenges which the country faces.

Centrica recognises the need to reaffirm and demonstrate its commitments to treating customers well, working constructively with policy makers and conducting its business in the most transparent manner possible. I have found such a response to be instinctive within the company and very much the focus of attention – as evidenced by the pace at which savings from recent UK Government policy changes were passed on to customers.

But this alone is unlikely to be sufficient to completely turn the tide. So, in parallel, I have been using my early independence to explore some of the issues to find a way to accelerate the restoration of trust and collaboration.

First, I have been looking into the various criticisms that have been directed towards the industry and am conducting my own independent fact finding review of some of the issues that are most important to our customers and seeing for myself whether we are truly living by the Business Principles we espouse.

Secondly, I have been meeting our customers to discuss what they need from their energy supplier, the trade-offs involved in fulfilling these needs and what it will take to re-establish a sense of mutual partnership. My early impression is that, while there are issues around customer trust and service levels, the reputation of British Gas in the eyes of our customers is vastly better than one would be led to believe from the media and political commentary, particularly when it comes to our service engineers helping customers in their homes.

At the same time, the growth and performance of the wider Centrica Group should not be forgotten. While our UK downstream businesses still contribute the largest proportion of the Group's post-tax earnings, we have substantially increased the scale of our North American operations, and now serve over six million residential and business customers. We have also delivered good strategic progress upstream, despite some setbacks in the UK North Sea, adding reserves organically and through acquisition. And we continue to play a critical role in bringing supplies of gas to the UK as North Sea resources decline. Last year we signed new deals with both Qatari and US exporters, taking our supply commitments to over £60 billion.

In summary, our interests and those of customers are inextricably linked. Our financial future and corporate capability depend on forward momentum, both in and outside the UK. In an increasingly international gas market, Centrica has a clear strategic direction and strong management, positioning itself for long-term, sustainable growth.

RICK HAYTHORNTHWAITE
Chairman

20 February 2014

Chief Executive's Review

STRATEGY AND FOCUS REAFFIRMED

In 2013, we saw unprecedented focus on the energy sector in the UK, with intense political and media scrutiny against a backdrop of declining real disposable income for many consumers. However much has been achieved during the year. We have simplified our energy offering and now have just four residential tariffs, and are leading the industry in the transparency of our reporting; the recently announced changes to the Government's ECO energy efficiency programme will help more people at lower cost; and there is improved public understanding and recognition of the real costs of securing energy supplies, the impact of climate change objectives, and the global market in which we operate.

However investor confidence and public trust in the industry have been damaged, with proposals for price controls and the potential for further political intervention, at a time when substantial investment is required to secure supplies of energy for the UK for the long term. The consensus that existed between political parties over key questions of energy policy has broken down. We are engaging with all stakeholders, working towards a sustainable and affordable energy policy which recognises the need for strong underlying economics and investment certainty.

In February 2013, we announced new strategic priorities – Innovate to drive growth and service excellence; Integrate our natural gas business, linked to our core markets; and Increase our returns through efficiency and continued capital discipline. Developments over the past year have reaffirmed these priorities and validated our strategic direction. As existing sources of gas decline, and worldwide energy markets become more interrelated, the UK will need to look further afield to secure energy supplies for the future.

Downstream, we have completed strategic reviews in both British Gas and Direct Energy, and introduced new management structures. This will enable us to focus on improving our core operations in order to deliver better customer service, reduce costs where appropriate, and drive growth through innovative propositions.

Upstream, we entered into a number of key transactions which will not only benefit our customers but provide the business with sustainable growth over the longer term. We also added reserves organically, mainly in Norway. Moving forward, against a backdrop of challenging economics upstream, particularly in the UK North Sea, we will be increasingly selective in our investments, directing capital towards the projects offering the most attractive returns with the lowest political risk.

SOLID EARNINGS AND GOOD STRATEGIC PROGRESS IN CHALLENGING MARKET CONDITIONS

Centrica performed well in 2013, with good operational performance in gas and oil production, power generation and gas storage, and we are benefiting from improved scale from previous E&P and North American acquisitions. We delivered further improvements in our safety record, with the frequency of lost time incidents falling by 45% in 2013 compared to 2012 and no significant process safety incidents recorded during the year. I was also pleased to see another increase in employee engagement levels in 2013, and remain grateful to all my colleagues for their commitment and hard work during the year, particularly during times when the company was the subject of much political and media scrutiny.

We have made good strategic progress in 2013 in challenging market conditions - investing along the gas value chain to secure long term, affordable energy supplies, with customers at the core of our activities:

  • we signed £14 billion worth of new gas supply agreements with Cheniere and Qatargas, helping secure supplies for the UK;
  • we completed the C$1 billion acquisition of a portfolio of Canadian gas assets in partnership with Qatar Petroleum International (QPI), adding over 100mmboe of reserves to our international upstream portfolio at lower cost than for equivalent North Sea assets;
  • we acquired a 25% stake in the Bowland shale exploration licence, bringing our expertise and resources to a potentially important long-term source of gas for our customers;
  • we made over £1.5 billion of organic investments across the Group, predominantly in our North Sea E&P portfolio, including in major projects such as Cygnus;
  • we added 56mmboe organically to our reserves base, mostly from upgrades to our Norwegian assets;
  • we announced £650 million of disposals, of selected North Sea assets, our Texas CCGTs and non-core UK wind assets, underlining our commitment to capital discipline and value; and
  • we acquired the Hess Energy Marketing business for $1.2 billion, transforming the capabilities of our North American B2B activities.

However, with economic and market headwinds impacting many areas of the business, adjusted earnings per share were flat year-on-year at 26.6p. We also recognised pre-tax impairments and provisions totalling £1,064 million, £667 million after tax.

Downstream in the UK, the post-tax margin for residential energy supply fell to 4.5%, in part reflecting the impact of mild weather on consumption towards the end of the year. This followed unusually cold weather in the first half, with the benefit from higher consumption used to absorb the increased external costs being faced by the business for as long as possible. However, in October we announced the decision to increase our residential energy tariffs, as a result of higher commodity and non-commodity costs. Following the announcement, the level of customer switching increased significantly and the number of residential customer accounts reduced by 2% over the year. However, although account losses have continued in early 2014, with around 100,000 in the year to date, the position is now stabilising, with British Gas the first to pass on savings in full to all our customers following the announcement of changes to the ECO programme and the introduction of new fixed price propositions.

British Gas Services once again recorded operating profit growth despite the challenging economic environment, benefiting from cost reduction initiatives implemented over the course of 2012 and 2013. Early signs of economic recovery are also benefiting our central heating installations business. Installations were 7% higher in 2013 compared to 2012, while weekly sales of our remote heating control product have more than doubled since its launch under the Hive brand in September. In British Gas Business, the trading environment remained difficult in a highly competitive market. We led the industry with our programme to end auto-rollover of contracts at renewal, although this has placed further pressure on margins.

Downstream in North America, we delivered profit growth in both residential energy and residential services, as we benefitted from previous acquisitions and services account growth. However total Direct Energy profitability fell as a result of lower margins in Direct Energy Business, with rising wholesale costs and a highly competitive power market resulting in difficult trading conditions.

Upstream, gas and liquids production performance was good, as recent acquisitions in the North Sea and Canada delivered production better than our investment cases. We also added 56mmboe of 2P reserves organically, predominantly on our Norwegian assets. However, following reserve and resource downgrades and increases in expected costs on certain projects in the Southern North Sea, and a reduction in North American natural gas prices since previous asset acquisition and development, we recognised exceptional post-tax impairments of £318 million.

In UK power generation, the performance of the nuclear fleet was once again strong. However, our gas-fired fleet was loss-making, reflecting weak spark spreads and the end of free carbon allocations. In this environment we continued to minimise our cost base and run our plants as efficiently as possible. We also recognised a £125 million exceptional onerous contract charge on the Rijnmond tolling contract in the Netherlands as a result of decreases in expected future revenues.

Our Rough gas storage asset performed well, particularly during the prolonged cold weather at the start of the year, making an invaluable contribution to UK security of supply. However, forward seasonal gas spreads remain very low, leading to a significant reduction in profit in 2013. The low seasonal spreads, together with the UK Government's decision to rule out incentivisation for new gas storage projects to be built, caused us not to proceed with the Baird storage project and to put our project at Caythorpe on hold. As a result, we have recognised exceptional impairments and provisions relating to storage projects of £224 million after tax.

We successfully completed our £500 million Group-wide cost reduction programme, announced at the start of 2012. We also completed our £500 million share repurchase programme launched in February, and in December announced a further £420 million share repurchase programme, following the sale of our Texas CCGTs, to be undertaken over the course of 2014.

WORKING TOWARDS A TRANSPARENT AND AFFORDABLE ENERGY POLICY

Over the past year, UK energy policy has seen unprecedented levels of debate and discussion amongst stakeholders. As a result, there is improved awareness of the costs of securing and supplying energy, the majority of which are external to the business. However, it is important that the facts are made public and that all stakeholders – energy companies, regulators, politicians, consumers and commentators - engage in full and open conversation.

We have simplified our UK residential energy product range to four tariffs, and led the way earlier in 2013 with our unique 'Tariff Check', making it easier for our customers to ensure they are on the most appropriate British Gas tariff for them. We continue to improve the transparency of our reporting, including publication of audited Ofgem segmental statements as part of our year end reporting and separating out our midstream power profits, and call on others to follow. We also protected over half a million of our most vulnerable customers from the November price rise, through a special discount to be applied to their bills. As a result, we currently expect this group of customers to have lower bills in 2014 than in 2013. And we welcome the proposed changes announced by Government to the ECO programme, enabling more customers to benefit, at lower cost.

However, the prospect of political intervention and a wide range of potential policy initiatives has damaged investor confidence. In particular, we believe that a price freeze is not a credible solution, when the large majority of costs are external to the business. Such proposals create both short term uncertainty for all energy suppliers and longer term additional costs for customers. With substantial investment required to secure energy supplies for the UK, these uncertainties increase the cost of capital and, in the eyes of major global producers, reduce the credit worthiness of prospective buyers of their gas, impairing rather than improving the UK's energy security position.

Against this uncertain background, financial stewardship and discipline remain important to our business, for the benefit of customers and shareholders. Customers rely on us for our financial strength to enter into long term supply contracts and shareholders require an appropriate return, reflecting the risks inherent in managing commodity price and weather risk in the underlying business and in the investments we make. Whilst delivering good service and value for customers is paramount, with a significant proportion of our share capital held by UK pension funds and around 700,000 individual shareholders, making appropriate investments and delivering a fair level of return to investors also remains a core responsibility.

We firmly believe that any form of price control in a competitive market is not the answer and is not in the best interests of customers, and this has been clearly demonstrated by experience in other markets. The industry requires a stable policy environment, which recognises the need for strong underlying economics and investment certainty, to deliver secure supplies for our customers. We will continue to engage with all policymakers to present proposals for more affordable ways to decarbonise and reduce energy consumption, helping more people at lower cost.

INVESTING TO SECURE ENERGY SUPPLIES FOR OUR CUSTOMERS

We have made substantial progress in delivering our gas value chain strategy, positioning the business for future growth. In an increasingly global gas market, it is important that the UK is able to source gas at the most cost effective price. Centrica plays an important role, with existing relationships to secure pipeline gas from Norway and Continental Europe, and LNG from Qatar. During the year we extended our LNG supply contract with Qatargas until 2018. We also signed a contract with Cheniere to take gas export capacity at the Sabine Pass facility in Louisiana, which gives us destination rights over cargoes for the first time, and will allow us to benefit from any differential between North American gas prices and other worldwide markets.

With rising costs in the North Sea, we are targeting our investment towards opportunities that offer the best value, particularly in Norway and in North America. We have taken a stake in UK shale exploration, potentially a significant source of gas for the UK. And in power, our Lincs offshore wind farm, which is capable of providing electricity for up to 200,000 UK homes, is now fully operational.

POSITIONING THE BUSINESS FOR THE FUTURE

Market conditions are expected to remain challenging in 2014, with margin pressures in our energy supply businesses on both sides of the Atlantic, rising North Sea unit costs, and weak economics for both gas storage and gas-fired power generation. In British Gas Residential, the level of margin achieved in a competitive market is dependent on a number of factors, including retail and wholesale prices, service and the weather, which has been warmer than usual in the year to date. The wider external environment also currently provides a challenging operating backdrop. In North America, although the Hess Energy Marketing business is performing well, Direct Energy has had a difficult start to 2014. With a weaker US dollar, continued margin pressures, and exceptionally cold weather which resulted in additional short term system charges, we currently expect Direct Energy operating profit to be broadly flat year on year. Overall for the Group, 2014 trading is in line with recent market forecasts, other than the one-off impact from extreme weather conditions in Direct Energy, with adjusted earnings per share in 2014 expected to be lower than in 2013.

Recognising the challenges, we are maintaining our focus on operational and capital efficiency, with specific new targets appropriate for each area of the business.

We have now completed strategic reviews in both British Gas and Direct Energy, and our downstream strategic priority – Innovate to drive growth and service excellence – remains robust. New organisational structures are in place on both sides of the Atlantic to ensure delivery, as we target improvement in our core operations to enhance service and reduce costs, while driving growth through innovative propositions.

In our UK residential energy and services businesses, we are targeting industry leading service levels for our customers. We will aim to improve service and deliver further efficiencies by simplifying key customer interactions, in part enabled by our investment in a single residential Customer Relationship Management (CRM) system for energy and services, which is expected to be completed in 2014.

Our leadership in digital, smart and connected homes enables us to offer compelling, differentiated propositions. By the end of 2014 we are targeting over 100,000 sales of our 'Hive Active Heating' smart thermostat and currently expect to have installed 1.3 million residential smart meters. We see the smart connected home as core to our customer proposition, materially improving the customer experience and providing an opportunity for growth. We also see further opportunities in residential services, leveraging our insurance capabilities to offer new pricing structures and an expanded product choice, and from growing share in adjacent markets such as the landlord sector. Through enhanced price competitiveness, improved service quality and innovation we are targeting a return to account growth in both UK residential energy and services.

In British Gas Business, we are also targeting industry leading service levels, with a sustained programme of process simplification and the implementation of a new billing system expected to deliver improved service at lower cost. A cost reduction programme is underway, which is expected to generate £100 million of annual savings by the end of 2015, helping to offset the impact of continuing difficult market conditions and the impact of our decision to lead the market in ending auto-rollover at contract renewal. Longer term, we expect to deliver growth from the development of new offerings tailored to the most valuable customer segments, and from business services, where the market opportunity is comparable in size to business energy.

In North America, with margin pressures persisting in 2014, improving cost competitiveness is a core priority. Against this backdrop we have launched a $100 million cost reduction programme, driving synergies from the enhanced scale of our business. We are already benefiting from call centre consolidation and back office integration, while we have started investment in a new residential energy billing system.

We are also positioning the business for growth, and building a range of innovative product offerings is core to our North American business model, enabling improved customer retention and delivering growth. Our 'Power To Go' prepayment offering and our innovative 'Free Electricity Saturdays' product have both proved popular with residential energy customers, while we are targeting further growth in our services protection plan offering in 2014, which we see as a unique differentiating factor in our business model. Over time, we see significant potential for bundling of energy and services propositions to our residential customer base.

In Commercial and Industrial energy supply, the integration of Hess Energy Marketing is proceeding well. Our priority for 2014 is to fully integrate the teams, retaining key personnel and systems, and in turn to deliver good service levels and high levels of customer retention. In the first three full months of our ownership, the business has delivered EBITDA in excess of our investment case. Over time, the enhanced scale, dual fuel capabilities, advantaged positions along the gas value chain and long-term customer relationships delivered by the Hess acquisition provide additional growth opportunities.

Our International E&P business has been re-organised with a substantially new leadership team, to help realise the full potential of the international resource base. We have added 155mmboe in total to our 2P reserves, organically and through acquisition. We also retain a number of attractive investment options, particularly in Norway and Canada, having increased our 2C resource base by 28% to 771mmboe over the year. However, with rising costs, in the UK in particular, we are targeting savings to keep unit lifting and other cash production costs flat over the next three years.

Against this backdrop, we are being increasingly selective in our investment, concentrating on the most attractive opportunities. An increasing proportion is expected to be directed towards North America, where we are well placed to benefit from any increase in gas prices. Taking account of forward UK gas prices and higher costs, we are targeting a reduction in our organic investment in gas and oil projects to approximately £900 million on average over the next three years. This is around 20% lower than previously expected levels, but will have limited impact on near-term production, which we expect to be in the range 80-85mmboe per annum. Our current level of committed capital expenditure in the short to medium term gives us flexibility to consider acquisition opportunities, if the economics are attractive and the assets provide a good fit with our existing portfolio, while potentially divesting non-core assets for value.

In UK power generation, reflecting the challenging market conditions that resulted in losses for our gas-fired power stations, we will continue to optimise the running of our existing fleet to capture the benefit from any improvement in market spark spreads. However, following our decision not to invest in new nuclear in the UK and to sell the Race Bank offshore wind project to Dong, we expect our near-term investment in the UK power sector to be limited. Any future investment in new build gas-fired generation capacity will depend on the economics of the projects and the successful introduction of a capacity market, including an assessment of the political risk.

Centrica is an important company, providing energy or services for over 11 million homes in the UK as well as serving some six million customer accounts in North America. We directly employ over 35,000 people worldwide, make a tax contribution of around £1 billion a year and make a valuable contribution to retirement savings through our dividend payments, as well as securing cost-effective sources of energy for the UK.

Centrica has a strong balance sheet, providing flexibility for targeted investments for value. However, maintaining tight capital discipline is a core priority, as evidenced by our share repurchase programmes. We are recommending 2013 full year dividend growth of 4%, in excess of the UK retail price index, and are maintaining our commitment to real dividend growth.

In a challenging external environment, we remain committed to our guiding principles of offering good service and value for customers and playing a vital role in the transition to a lower carbon economy. Whilst the outlook for the UK business has been impacted by short term political uncertainty, we are taking positive action across the Group to position the business for the long term, for the benefit of both customers and shareholders.

SAM LAIDLAW
Chief Executive

20 February 2014

Disclosures

Disclaimers

This announcement does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Centrica shares or other securities.

This announcement contains certain forward-looking statements with respect to the financial condition, results, operations and businesses of Centrica plc. These statements and forecasts involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future. There are a number of factors that could cause actual results or developments to differ materially from those expressed or implied by these forward-looking statements and forecasts.

Past performance is no guide to future performance and persons needing advice should consult an independent financial adviser.

For further information

Centrica will hold its 2013 Preliminary Results presentation for analysts and institutional investors at 9.30am (UK) on Thursday 20 February 2014. There will be a live audio webcast of the presentation and slides at www.centrica.com/investors.

A live audio broadcast of the presentation will be available by dialling in using the following number:
+ 44 20 3059 8125

The call title is "Centrica plc 2013 Preliminary Results Announcement".

An archived webcast and full transcript of the presentation and the question and answer session will be available on the website on Monday 24 February 2014.

Enquiries

Investors and Analysts:
 
Andrew Page
 
Director of
Investor Relations
  Telephone: 01753 494 900
  email: ir@centrica.com
     
Media: Greg Wood / Sophie Fitton  
  Telephone: 0800 107 7014
  email: media@centrica.com

Financial calendar

Ex-dividend date for 2013 final dividend   23 April 2014
Record date for 2013 final dividend   25 April 2014
2013 final dividend payment date   11 June 2014
Interim Management Statement   12 May 2014
Annual General Meeting   12 May 2014
2014 Interim results announcement   31 July 2014

Registered office

Millstream,
Maidenhead Road,
Windsor,
Berkshire SL4 5GD

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