Preliminary Results for the year ended 31 December 2013

Centrica Plc 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

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

​"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

Divisional results and highlights

INTERNATIONAL DOWNSTREAM

British Gas: Focus on service, efficiency and innovation

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

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

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

• 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