News

26 February 2009

Preliminary results for the year ended 31 December 2008

OPERATING OVERVIEW:

• UK and North American operating performance in line with expectations
• Loss* of £63m in Oxxio in The Netherlands
• 34% fall in British Gas Residential profits*, offset by 25% growth from British Gas Business and British Gas Services
• Centrica Energy profits* up 33%, Direct Energy profits* up 15%
• Tax charge increased by 36% to £1,027m; Group effective tax rate 53%
• Invested £737 million in power and gas assets in 2008 to supply the UK market
• Acquiring share in Baird gas field for gas storage project in North Sea
• Completed a £2.16bn Rights Issue to fund investment in nuclear power and other upstream investments
• Creating around 1,500 skilled jobs in 2009

“The financial performance in 2008 was good despite a much tougher environment, and we made strong progress against the strategic priorities we set out at the start of 2007. As the UK’s leading provider of energy and energy-related services we continue to improve the quality of service we deliver and invest in upstream assets to increase security of gas and power supplies for all of our customers. Looking forward we plan to create around 1,500 new skilled, mainly ‘green collar’, roles across British Gas to help meet our customers’ desire to make their homes more energy efficient. Whilst the overall economic climate in 2009 is clearly very challenging, the operational and structural progress we have made over the last two years has strengthened the Group and positioned us well to continue to invest for our customers and our shareholders.”

Sam Laidlaw, Chief Executive

STATUTORY RESULTS:

• Operating profit^‡: £460m (2007: £2,184m)
• Earnings: loss of £144m (2007: profit £1,507m)
• Basic earnings per ordinary share: loss of 3.5p (2007: profit^¥ 36.5p)

The 2008 statutory results include exceptional items of £67m in Oxxio and certain re-measurements which are unrealised net gains on energy procurement and sale contracts falling under the scope of IAS39 which are explained in the Group financial summary and disclosed in note 7.

• * including joint ventures and associates stated net of interest and taxation, and before exceptional items and certain re-measurements
• ^‡ from continuing operations
• ^¥ restated to reflect the bonus element of the Rights Issue

Chairman’s Statement

Performance review

Centrica performed well in 2008, during what was a very difficult year for energy supply businesses. We witnessed previously unseen levels of volatility in wholesale gas and power prices. Oil prices rose to almost $150 per barrel and then fell back to below $50 as the high levels of global oil demand, which had been causing a tight supply position, reversed quite rapidly due to the recessionary impact of the global financial crisis. Against this backdrop Centrica’s financial performance in the year was good, with the higher upstream profits providing a partial hedge to the inevitable decline in retail profits during this time. We also made further progress on our strategic agenda which places Centrica on a much stronger footing both at home and abroad.

The sharp rises in world energy prices necessitated two retail price increases for UK consumers. We concentrated on providing some protection for our customers by reducing our operating costs through efficiency improvements, transforming the level of service we offer and increasing the support we provide to our vulnerable customers. Cost rigour was also evident across the rest of the Group as we reduced like-for-like operating costs against 2007.

In September we entered into a Memorandum of Understanding (MOU) with EDF to acquire a 25% stake in the British Energy nuclear business. This investment is intended to provide a long-term hedge against volatile commodity prices and a platform for longer term involvement in new nuclear power generation as a valuable source of growth. Beyond this we made further acquisitions of gas reserves in the North Sea and in North America. We also announced our intention, subject to successful studies, to build additional gas storage facilities in the UK which will help provide important additional security of supply for the UK.

In the year we delivered excellent results in our growth businesses. British Gas Business and British Gas Services once again reported strong growth in revenue and operating profit. In North America the economic climate proved challenging but the business held up well and also delivered a good performance.

In Europe we strengthened our presence by acquiring a controlling interest in SPE in Belgium. However in the Netherlands, where the market continues to favour integrated incumbents, Oxxio did not perform well and we have written down its carrying value.

Dividend

The Board of Directors is proposing a final dividend of 8.73 pence per share to be paid in June 2009, bringing our full year dividend to 12.2 pence, an increase of 5.4%. This is in line with our policy of delivering sustained real growth in the ordinary dividend.

Board changes

In March we announced the appointment of Mark Hanafin as Managing Director Centrica Energy and Europe, replacing Jake Ulrich. I would like to thank Jake for the dedication he has shown since the formation of Centrica in 1997 and the material contribution he has made in building our portfolio of gas, power and storage assets. Mark joined us from Shell where he was president and chief executive officer of Shell Energy North America.

This morning we also announced separately some changes to the business structure within Centrica and to the Executive Committee and the Board. We have combined British Gas Energy, British Gas Business and British Gas Services into a single customer-focused British Gas retail operation in the UK to maximise the value and growth potential. Phil Bentley takes on responsibility for the combined business with immediate effect. Phil remains a director of Centrica plc.

Deryk King, President and Chief Executive Officer of Direct Energy and a member of Centrica’s Executive Committee, has decided to retire and will leave his position with Direct Energy in July 2009, and subsequently depart from Centrica at the end of 2009. Deryk has built a very successful business for Centrica in North America over the last eight years. Deryk will be succeeded by Chris Weston who will take over as President and Chief Executive Officer of Direct Energy on 1 July 2009, after a period of handover. Over the last three years Chris transformed the operating and financial performance of British Gas Services and previously he headed up British Gas Business, the commercial energy supply operation in the UK. Chris will also join the Board of Directors of Centrica plc on 1 July 2009.

Paul Walsh, a Non-Executive Director of Centrica will step down from the Centrica Board at the Annual General Meeting on 11 May 2009. Paul joined the Board in March 2003. The search for a replacement has commenced.

Our employees

Our employees remain central to the success of Centrica, particularly during these times of great uncertainty and change. I want to thank them for the dedication, commitment, loyalty and professionalism which they continue to display.

The future

The economic landscape, dominated by the global financial squeeze, continues to worsen and Centrica is not immune to the effects of this. Energy markets remain volatile and erratic, placing pressure on parts of our business and on our customers.

In these challenging conditions the task of management will be to ensure we provide good service and competitive prices to all, support for the most vulnerable, a fair return and reward for our shareholders and long-term environmentally friendly sources of energy supply for the countries that we serve.

In the Chief Executive’s review, Sam Laidlaw outlines the progress made to date against the strategic priorities of the Group and the direction and actions that will be taken as we look forward in 2009. In these unpredictable times, Centrica is well positioned, with a solid set of energy and services businesses and a strong financial position, and I am confident that under Sam’s leadership the management team will remain focused on delivering stability and growth in Centrica for the benefit of our customers, employees and shareholders.

Roger Carr, Chairman
26 February 2009

* including joint ventures and associates stated net of interest and taxation, and before exceptional items and certain re-measurements

Earnings and operating profit numbers are stated, throughout the commentary, before exceptional items and certain re-measurements where applicable &nd see note 3 for definition. The Directors believe this measure assists with better understanding the underlying performance of the Group. The equivalent amounts after exceptional items and certain re-measurements are reflected in note 6 and are reconciled at Group level in the Group Income Statement. Exceptional items and certain re-measurements are described in note 7. Adjusted earnings and adjusted basic earnings per share are reconciled to their statutory equivalents in note 11.

All current financial results listed are for the year ended 31 December 2008. All references to ‘the prior-period’, ‘the prior-year’, ‘2007’ and ‘last year’ mean the year ended 31 December 2007 unless otherwise specified.

Chief Executive’s Review

2008 performance

Centrica once again delivered a good financial performance in a year which provided a severe test for the business. The progress we’ve made over the last two years provided us with much stronger defences against an extremely difficult commodity environment. In the first half of 2008 we experienced rapidly rising global oil and gas prices, only to see them fall in the second half, at the same time as the credit markets tightened greatly for all of our customers and counterparties.

This backdrop, coupled with the increasing obligations being placed upon the energy supply industry, meant that profits* at British Gas Residential were down by 34%, even after we were forced to follow other suppliers and raised retail tariffs twice during the year. Early in 2009 we were the first energy supplier to announce a reduction in retail prices, as we were in 2007, the last time retail prices fell. In Centrica Energy the financial result was stronger as a result of consistent gas production performance and high gas prices. This increase in profitability was only partially offset by the losses in the legacy industrial and commercial gas supply contracts.

British Gas Business, British Gas Services and Direct Energy all recorded strong financial results, as they increased customer numbers and grew revenue and operating profit*. Centrica Storage profits* were down against 2007, as the price of Standard Bundled Units (SBUs) fell due to the narrower summer/winter gas price spread. Oxxio, our Dutch business, recorded a very disappointing operating loss*. The impact of a volatile commodity price in a retail market which continues to favour the integrated incumbent utilities was exacerbated by poor operational execution. We have taken action to stem losses here, including replacing management.

Overall Group operating profit* was broadly flat, but earnings* were down by 20% owing to a rise in the effective tax rate to 53%, caused by the higher proportion of highly taxed upstream profits*.

Strategic progress

Our strategic priorities continued to set our agenda in 2008, and the increasing degree of vertical integration in Centrica and the emphasis on operational excellence, lowering costs and improving customer service meant that we exited 2008 with a stronger business and positive momentum for the future.

On our first priority, to transform British Gas, we made further progress on all fronts. During 2008 our customer service improved significantly. Average time to answer and to handle calls reduced further and our proportion of industry complaint levels fell by nearly a third over the year. Compared to 2007 we also increased the percentage of customer enquiries which were resolved on the first call and substantially reduced the transactional exceptions associated with the new billing system. These service improvements enabled further progress to be made on our cost reduction initiatives. Our operating cost base in 2008 was over £200 million lower than in 2006.

In October Ofgem published the initial findings of its probe into the energy supply industry in Great Britain. The report concluded that effective competition exists between the major suppliers. However, it did make recommendations to reduce certain retail price differentials, particularly relating to former incumbent electricity suppliers who charge different prices for in-area and out-of-area customers. It also suggested a reduction in tariffs for those customers with a prepayment meter, to more accurately reflect the additional cost involved. British Gas complied with this recommendation in a matter of a few weeks.

We continued to pursue our second priority, to sharpen the organisation and reduce costs. In July Mark Hanafin joined Centrica as Managing Director Centrica Energy and Europe. This further strengthened the executive team. Various initiatives in the year across the Group meant that we finished 2008 as a leaner organisation without affecting our ability to grow. This helped to reduce our Group like-for-like operating costs by £40 million, despite the inflationary pressures, particularly in the offshore services environment.

On our third priority, to reduce risk through increased integration, we made good progress. During the year we acquired additional gas assets in the British and Norwegian sectors of the North Sea. In March we increased our equity stake in the assets originally acquired from Newfield in 2007 and in October we completed our acquisition of assets in the Heimdal area of the North Sea. At the end of the year we announced an agreement to acquire an additional interest in the Peik gas field in the UK and in January 2009 we agreed to take additional equity in the York gas field. These deals provided us with both producing gas assets and a pipeline of valuable exploration and development prospects.

Centrica Storage commenced two important potential gas storage projects. In March we began engineering studies to explore the potential to convert the Bains gas field in the Morecambe Bay area into a storage field with a capacity of up to 20 billion cubic feet (bcf). In September we acquired the Caythorpe onshore gas field and began the process of converting it into a storage field capable of holding up to 7.5bcf of stored gas. In February 2009 we announced our intention to create an additional 60bcf gas storage field in the UK North Sea following the acquisition of a 70% share in the Baird gas field.

In power generation we completed the Lynn and Inner Dowsing wind farm development off the Lincolnshire coast, the largest operational offshore wind farm project in the world. In Devon, the construction of the Langage gas-fired power station continued, although the contractor has experienced some delays and we now expect the station to become operational towards the end of 2009.

In September we announced the signing of a Memorandum of Understanding with EDF to acquire a 25% share in the British Energy business. This would add significantly to our upstream position and provide us with a long term hedge against volatile wholesale power prices, with access to power where the price is not impacted by the cost of oil and gas, and an opportunity to grow through new build nuclear construction in the UK.

The proceeds from the successful £2.16 billion Rights Issue towards the end of the year provide us with the capital required to complete the British Energy transaction and make further material progress in increasing the upstream asset base and reducing risk.

On our fourth priority, to build on our growth platforms, the financial results in the year show real progress. In British Gas Business and British Gas Services we grew revenue, operating profit and customer numbers, while delivering ongoing cost efficiencies. In North America we faced a difficult economic environment. However here too we increased customer numbers and delivered a strong financial result, partially due to favourable exchange rate movements. Our acquisition in June of Strategic Energy doubled the size of our Commercial and Industrial (C&I) energy supply business and made us the third largest commercial supplier of power in the US. In Europe in January 2009 we completed the acquisition of an additional 25.5% of SPE, giving us a valuable controlling stake of 51%.

In summary, following a record 2007, the financial performance in 2008 was good despite a much harsher environment. We made strong progress against the strategic priorities we set out at the start of 2007. Whilst the overall economic climate in 2009 is clearly very challenging, the strong operational and structural progress we have made over the last two years has strengthened the Group and positioned us to move on to the next phase in our development.

Business outlook

We have built a much stronger business over the last two years but the landscape is constantly changing, possibly more rapidly than ever before. Much of this change has been precipitated by volatile energy prices and the global financial crisis, but customer attitudes towards energy supply and climate change, and the changing size and shape of our competitors are also factors. This shift presents challenges and opportunities for Centrica. The strategic priorities which have been setting our agenda over the last two years continue to do so. Going forward we will adjust our emphasis on some of these priorities to ensure that we address the risks and deliver maximum returns from the opportunities presented.

On our first priority, to transform British Gas, we have created a strong foundation here over the last two years and now is the time to take British Gas to the next stage of its evolution. Building on our already strong brand in the UK we are seeking to deepen the customer relationship by combining the energy and services propositions. This will offset the gradual decline over time in the use of gas by consumers in the UK as we move to a lower carbon economy, and take full advantage of the increasing demand for energy-efficient products and services. To best achieve this we will combine British Gas Residential, British Gas Business and British Gas Services into a single customer-focused organisation. This will enable us to launch new bundled products under the British Gas brand, products that customers want, to increase customer loyalty and benefit from the efficiencies which this structure offers, and to target even more efficiently the substantial support we already provide for our vulnerable customers. Phil Bentley, the current Managing Director of British Gas Energy, will run this new organisation. Chris Weston, current Managing Director of British Gas Services, will takeover leadership of the Direct Energy business from Deryk King in July 2009.

On our second priority, to sharpen the organisation and reduce costs, we have a strong leadership team in place and improved capital allocation, risk management and cost control processes, which will enable us to drive superior financial and operational performance. Going forward, we consider operating cost advantage to be a key competitive differentiator for Centrica and we will be relentless in the pursuit of further cost reductions, while enabling growth across the business.

On our third priority, to reduce risk through increased integration, we will place greater focus on power generation as part of the overall upstream hedge to reduce the exposure to the increasing volatility in power prices and spreads. Here we will seek to cover an increasing amount of our UK demand load and to grow and better align our generation mix with that of our competitors and the wider market. As part of this, our discussions with EDF, regarding us potentially acquiring 25% of British Energy are continuing. We will also pursue external financing to allow us to develop and build on our wind farm pipeline and additional options to grow the size of our conventional gas fleet.

We are continuing to push ahead on reducing our exposure to the short-term volatility in wholesale gas prices by acquiring additional gas assets and striking gas contracts. In pursuing this we will focus most of our asset acquisition activity on the UK and Norwegian sectors of the North Sea while also continuing to evaluate Liquefied Natural Gas (LNG) opportunities. Building closer relationships with National Oil Companies, to secure competitive long-term sources of gas for our customers, remains firmly on the agenda.

On our fourth priority, to build on our growth platforms, the reorganisation in British Gas provides us with an opportunity to increase the overall value of our customer base by expanding the overlap between our energy and services businesses through bundled offerings under a single brand. In North America we will also integrate further by building on the platform we have already established and tightening the focus on key geographies. In doing this we will establish a centralised service platform which enables us to compete more efficiently. With better focus will come a greater degree of integration, primarily through the selective acquisition and construction of gas and power assets, to provide growth opportunities and support for the retail businesses.

This agenda maintains a consistent direction and builds on the progress we have made so far. We expect to invest over £15 billion by 2020 in offshore wind, nuclear generation, gas production and gas storage. These investments, coupled with an increasing demand for energy efficiency products and services among our residential and business customers, will lead to the creation of around 1,500 new skilled, mainly “green-collar” jobs in the next year.

2009 outlook

2009 has started well for the energy supply businesses, with the favourable combination of higher demand due to cold weather and a lower prompt gas price. Upstream the falling gas price is having a negative impact on gas production and storage, and lower spark spreads are impacting the power generation business. This is partially offset by lower underlying losses in the legacy industrial and commercial gas contracts; and we have terminated one of the more heavily loss making contracts which will also help the reported result here.

Even with the weakening economic outlook, we continue to expect good profit growth in British Gas Business, British Gas Services and Direct Energy, and reported results from the latter will also be helped by sterling’s weakness. In Europe the actions we have taken will stem the losses at Oxxio. SPE, which we are now consolidating, will benefit from the agreement of the first tranche of Pax Electrica 2 (PE2). Although our strong cash position provides us with substantial headroom for investment, in the short term low interest rates mean that it is a drag on earnings, and the precise timing of our investments could have a material influence on Group earnings in the year.

The outlook for the global economy remains very challenging and in the UK 2009 could be particularly difficult for many of our customers, both residential and commercial. We will continue to place our customers’ needs at the forefront of our agenda, alongside our determination to deliver increasing long-term value for our shareholders.

Sam Laidlaw, Chief Executive 26 February 2009

* including joint ventures and associates stated net of interest and taxation, and before exceptional items and certain re-measurements

Download our full Preliminary results for the year ended 31 December 2008 PDF (0.64Mb)

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 2008 Preliminary Results presentation for analysts and institutional investors at 9.30am (UKT) on Thursday 26 February 2009. There will be a live audio webcast of the presentation and slides from 9.30am.

A live audio broadcast of the presentation will be available by dialling in using the following numbers:

The call title is "Centrica plc – Preliminary Results 2008" and the conference ID is 83540913.

An archived webcast and full transcript of the presentation and the question and answer session will be available on the website from Friday 27 February.

Enquiries

Investors and Analysts:

Kieran McKinney, Director of Investor Relations
Telephone: 01753 494 900
email: ir@centrica.com

Media Relations

Telephone: 0845 072 8001
email: media@centrica.com

Financial Calendar

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