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Company News

Interim results for the period ended 30 June 2014

Group results and highlights


“The first half of the year has seen challenging market conditions across the Group, both as a result of the weather and reflecting the wider political environment. We have continued our efforts to engage with our stakeholders, particularly our customers, working to restore their trust. And we are taking the steps to position the business for growth in 2015 and beyond.

Trust is addressed in part through our interactions with politicians, regulators and the media, recognising the importance of Centrica to the country’s energy security. But most importantly, trust is earned through our service and relationship with the customer.

We have also reached an important stage in the succession of the Group’s leadership, with the appointment of Iain Conn as Chief Executive, to succeed Sam Laidlaw, who will retire at the end of this year. Iain will bring an impressive combination of experience to our business, with deep understanding of the energy sector from a career spanning a variety of roles in one of the world’s leading energy businesses. His breadth of knowledge and commitment to customers and safety make him ideally suited to lead Centrica in the next phase of its development.

Sam has shown exceptional leadership over the past eight years. Under his stewardship, Centrica has achieved greater strength and scale, and a platform for long term growth, delivering returns to shareholders and securing the future energy needs of our customers. Much remains to be achieved this year, and I am confident that under Sam’s leadership, and with the depth of management we have across the Group, we are well placed to position the business for the long-term.”


31 July 2014


Adjusted figures for the period ended 30 June 2014   2013   Change
Revenue £15.7bn   £13.7bn   15%
Operating profit £1,032m   £1,583m   (35%)
Taxation charge £318m   £690m   (54%)
Effective tax rate 37%   47%   (10ppt)
Earnings £530m   £767m   (31%)
Basic earnings per share (EPS) 10.5p   14.8p   (29%)
Interim dividend per share 5.10p   4.92p   4%
Net capital expenditure and acquisitions / disposals £409m   £755m   (46%)
Lost time injury frequency rate (per 100,000 hours worked) 0.12   0.16   (25%)
  • First half earnings down reflecting a challenging market environment, mild weather in the UK and the Polar Vortex in North America
  • Full year EPS expected to be in the range 21-22p, taking account of a £40 million charge associated with writing off our Round 3 wind investment and around $110 million (£65 million) of costs attributable to the Polar Vortex
  • Average actual British Gas customer bill expected to be around £90 (7%) lower in 2014 than 2013; full year BGR profit per household in 2014 expected to be around £40 (£51 before tax), 20% lower than in 2013


Figures for the period ended 30 June 2014   2013   Change
Operating profit £1,021m   £1,590m   (36%)
Profit before tax £890m   £1,487   (40%)
Profit for the period £550m   £819m   (33%)
Basic earnings per share 10.5p   £15.8p   (34%)

Unless otherwise stated, all references to operating profit or loss, taxation and earnings throughout the announcement are adjusted figures, as reconciled to their statutory equivalents in the Group Financial Review on pages 17 to 20.


  • Interim dividend 30% of 2013 full year dividend, in line with established practice
  • Expect to complete existing £420 million share repurchase programme in the second half of 2014
  • Scrip dividend alternative to be introduced in April 2015


  • Optimise our assets, investing where we see attractive opportunities and realising value where appropriate
  • Non-core asset disposals, including UK CCGTs and Ontario home services, and potential releases of capital from our gas assets in Trinidad and Tobago and our UK operational wind portfolio, expected to realise around £1 billion
  • Seek to maintain existing credit ratings; proceeds to be retained to strengthen the balance sheet further
  • Flexibility to invest along the gas value chain, in a rapidly evolving market place


  • Improving customer service in the UK, with increases in BGR and BGS net promoter scores; residential energy accounts stabilised in the second quarter following 1% decline in the first quarter; installed our one millionth residential smart meter in the UK
  • Implementation of our new BGB billing system proceeding to plan, enabling better service at lower cost
  • $100 million cost reduction programme in Direct Energy on track; sold DEB unit gas and electricity margins increased by around a third in the first half of 2014 compared to the second half of 2013
  • Bord Gáis acquisition completed; deregulation of the Irish residential gas market confirmed
  • Continued progress on cost efficiency and positioning Centrica Energy for lower capital expenditure, against a backdrop of falling European wholesale gas prices
  • Continued investment in securing sources of gas for the UK; around £60 billion of commitments to secure energy for our customers
  • Recent acquisitions performing ahead of investment cases
    • Norwegian and Canadian gas assets delivering better than expected production, reserves and resources
    • Hess Energy Marketing delivering EBITDA ahead of expectations


  • Continued focus on service, innovation and cost efficiency to drive growth in British Gas, with specific goals to:
    • complete the migration of customer accounts to the combined billing and CRM system in residential energy and services
    • increase the number of residential smart meters installed to around 1.3 million by the end of the year
    • complete the implementation of the new BGB billing system; deliver process improvement and continue progressing £100 million cost reduction programme
    • increase sales through the launch of new propositions for residential energy and services customers
  • Complete the integration of Bord Gáis
  • Deliver the cost reduction programme in Direct Energy; continue to develop innovative customer propositions; complete the Hess integration; continue US service protection plan and joint energy and services growth
  • Focus on tight cost control and targeted capital expenditure in upstream gas; progress our development pipeline; progress the FERC approval process for the 5th train at Sabine Pass
  • Develop investment plans for our smaller, more flexible gas-fired power plants under the proposed capacity mechanism; continue progressing the sales process for the three larger CCGTs
  • Position the business for earnings growth in 2015


  • Expect to return to earnings growth in 2015, reflecting:
    • improving margins and more normal weather conditions in the US
    • our target to return to customer account growth in UK residential energy and services
    • growth in energy services on both sides of the Atlantic
    • cost reduction programmes in BGB and DE to improve competitiveness
    • a full year’s contribution from Bord Gáis


“With challenging trading conditions on both sides of the Atlantic in the first half, earnings will be lower in 2014 than in 2013. However, the Group is well positioned to return to growth in 2015, and the investments we have made mean that the business is balanced and more resilient, both upstream and downstream.

Our leadership in smart connected homes and innovation is helping customers reduce and control their energy consumption and offers a sustainable way to keep bills down. The combination of mild weather, and our expectation that we will not change energy prices this year, means the average actual British Gas household energy bill is expected to be around £90 lower in 2014 than in 2013.

Centrica plays a vital role in helping to secure the country’s energy requirements, a role we can only undertake if the business is profitable and financially strong. We will continue to invest where we see attractive opportunities, along the gas value chain. And we will continue to drive operating efficiencies across the Group, for the benefit of both our customers and our shareholders."

Chief Executive

31 July 2014


Investors and Analysts: Andrew Page / Martyn Espley 01753 494 900
Media: Greg Wood / Sophie Fitton 0800 107 7014


Interviews with Rick Haythornthwaite (Chairman), Sam Laidlaw (Chief Executive), Nick Luff (Chief Financial Officer), Chris Weston (Managing Director, International Downstream) and Mark Hanafin (Managing Director, International Upstream) are available on

Divisional results and highlights


British Gas: Focus on service, efficiency, innovation and growth

Adjusted operating profit for the period ended 30 June 2014   2013   Change
Residential energy supply (BGR) £265m   £356m   (26%)
Residential services (BGS) £129m   £135m   (4%)
Business energy supply and services (BGB) £61m   £78m   (22%)
Total British Gas adjusted operating profit £455m   £569m   (20%)
Total British Gas adjusted operating profit after tax £355m   £436m   (19%)
Performance indicators for the period ended 30 Jun 2014   31 Dec 2013   Change
Residential energy customer accounts (period end, ’000) 15,055   15,256   (1%)
Residential services product holding (period end, ’000) 8,046   8,227   (2%)
Business energy supply points (period end, ’000) 900   912   (1%)
  • British Gas operating profit down, with lower consumption due to warmer than normal weather in the UK
  • Average actual customer bill expected to be around £90 (7%) lower in 2014 than 2013, reflecting warmer weather and energy efficiency measures; the average bill for vulnerable customers was on average 20% lower this winter than last, due to the warm home discount and additional British Gas discounts
  • No change to residential energy prices expected during 2014, recognising competitive conditions in the UK energy supply market and the need to buy forward in the current uncertain environment
    • Gas and electricity contracted up to three years in advance; majority of requirements for next winter already purchased
    • Benefit of lower wholesale commodity prices in 2015 offset by higher carbon, ROC and network costs
  • British Gas Residential post-tax margins expected to be around 4%, lower than last year and below our long-term margin expectation of 4.5%-5%, which we believe is necessary to underpin investment in the business
  • Clear strategy in place to focus on three priorities: deliver great service, transform to grow, engage key stakeholders; new organisational structure in place to enable delivery of strategy
  • Good progress made in the first half of 2014, helping create a platform for long term sustainable growth
    • BGR customer accounts stabilised over the second quarter, following a 1% decline in the first quarter
    • Delivering improved service levels, with higher NPS in both BGR and BGS, as we target leading, high quality service for both residential and business customers
    • ECO delivery on track, with Affordable Warmth already completed ahead of March 2015 deadline
    • £100 million BGB cost reduction programme on track; implementation of new billing system to be completed in the second half of the year
  • Second half focus on service, efficiency and innovation to drive growth
    • Improve service and deliver efficiencies by simplifying key customer interactions; single billing and CRM platform for energy and services expected to be completed in the third quarter of 2014
    • Growth opportunities in BGS through tailored offerings, new propositions targeted at energy customers
    • Development of new offerings, including business services, for valuable customer segments in BGB
  • Smart, connected homes key to future growth
    • One million residential smart meters installed; over 350,000 customers receiving smart energy report
    • Targeting 2.4 million residential smart meter installations by the end of 2015
    • Launched smart meter enabled “Free Saturdays or Sundays” energy tariff trial
    • 100,000 smart thermostats sold to date, with increased sales under the Hive brand

Direct Energy: Focus on customer value, service and choice

Adjusted operating profit/(loss) for the period ended 30 June 2014   2013   Change
Residential energy supply (DER) £48m   £99m   (52%)
Business energy supply (DEB) (£21m)   £53m   nm
Residential and business services (DES) £14m   £13m   8%
Total Direct Energy adjusted operating profit £41m   £165m   (75%)
Total Direct Energy adjusted operating profit after tax £26m   £103m   (75%)
Performance indicators for the period ended 30 Jun 2014   31 Dec 2013   Change
Residential energy customer accounts (period end, ’000) 3,454   3,360   3%
Residential services product holding (period end, ’000) 2,625   2,608   1%
Performance indicators for the period ended 30 June 2014   2013   Change
Business energy supply gas volumes (mmth) 3,193   494   546%
Business energy supply electricity volumes (TWh) 48.9   28.0   75%
  • Operating profit significantly down, reflecting the impact of the Polar Vortex and a narrowing of energy supply margins due to challenging market conditions
    • Total Polar Vortex costs of $110 million (£65 million) recognised in first half operating profit, primarily relating to additional power market charges
  • Sold B2B unit gross margins in the first half of 2014 increased by 35% for gas and 33% for power compared to the second half of 2013; expected to positively impact 2015
  • Hess Energy Marketing business performing ahead of investment case
    • Further growth potential through enhanced scale, dual fuel capabilities, oil to gas switching, advantaged positions along the gas value chain and long term customer relationships
  • $100 million cost reduction programme on track; driving synergies from enhanced scale
  • Continued focus on value
    • Sale of Texas CCGTs generated a £219 million operating profit on disposal; downstream operations supported through contractual relationships
    • Agreed sale in July 2014 of Ontario home services business for C$550 million (£300 million); services focus now in the US, where we see better opportunities for growth including combined energy and services offerings
  • Building a range of innovative energy and services product offerings, improving customer retention and attracting the highest value customers
    • Sales through digital channels nearly trebled in the first half of 2014 compared to the first half of 2013
    • Targeting 250,000 US services protection plan customers and 100,000 bundled energy and services propositions by end of 2014
    • Astrum Solar acquisition provides enhanced product range for residential customers, in a rapidly growing market
    • Further growth potential through connected homes and business propositions; Nest relationship supports innovation and customer value growth


Centrica Energy: Securing energy supplies for our customers

Adjusted operating profit/(loss) for the period ended 30 June 2014   2013   Change
International gas £465m   £683m   (32%)
UK Power £61m   £119m   (49%)
Gas-fired (£70m)   (£64m)   nm
Renewables (operating assets) £23m   £12m   92%
Renewables (one-off write-offs, profit/loss on disposal) (£40m)   £24m   nm
Nuclear £125m   £122m   2%
Midstream £23m   £25m   (8%)
Total Centrica Energy £526m   £802m   (34%)
Adjusted operating profit after tax for the period ended 30 June 2014   2013   Change
International gas £235m   £182m   29%
UK Power £42m   £100m   (58%)
Total Centrica Energy £277m   £282m   (2%)
Performance indicators for the period ended 30 June 2014   2013   Change
International gas production (mmth)1 1,945   1,696   15%
International liquids production (mmboe)1 8.7   9.8   (11%)
International total gas and liquids production (mmboe)1 40.9   37.6   9%
Total UK power generated (TWh) 10.7   10.6   1%

1. Includes a 100% share of Canadian assets held in partnership with QPI

  • International gas profit after tax up 29% despite lower UK wholesale commodity prices, reflecting the benefits of forward hedging and small field tax allowances; full year profit after tax expected to be broadly unchanged compared to 2013
  • Underlying power operating profit slightly higher, before impact of one-off write offs and profits/losses on disposal in renewables
  • Previous investments performing well
    • Sustained strong power generation volumes from the nuclear fleet
    • E&P assets acquired from Statoil and Suncor both delivering production, reserves and resources in excess of investment cases
    • Good availability and favourable yields for operational wind farms
  • Clear priorities in second half in low wholesale price environment
    • Targeting flat E&P unit lifting and cash production costs over the next three years
    • Targeting a reduction in E&P spend to around £900 million per year on average over the next three years; continue to optimise portfolio with targeted investment and selective divestments of non-core assets
    • Strategic review of gas-fired power generation portfolio completed; developing investment plans for smaller, more flexible plants and commenced sales process for three larger CCGTs

Centrica Storage

Making an important contribution to the UK’s security of supply

Adjusted operating profit for the period ended 30 June 2014   2013   Change
Centrica Storage £10m   £47m   (79%)
  • Strong operational performance; substantially lower operating profit due to low seasonal gas spreads for 2013/14 and 2014/15 storage years
  • Commenced programme to deliver £15 million of cost reductions through operational improvements over the next three years

Performance Overview


Centrica has faced a range of external challenges in the first half of this year. But we have shown the flexibility and determination to tackle those challenges, all the time underpinned by a clear sense of strategic direction. Customers are at the core of our business, in the UK, Ireland and North America. The combination of energy and services, alongside leadership positions in innovation and smart connected homes, provides us with a distinctive platform to build sustainable growth. And our vertically integrated business model enables us to direct capital where we see the most attractive returns, securing energy supplies for our customers in an increasingly international market.

Overall, the quality of our recent investments across the Group has strengthened the business, forging strong relationships with world-class partners, and helping to offset the effects of market headwinds which have affected returns from existing assets. During the year to date, we have made good progress in key areas for the long term health of the business.

Management succession

On 29 July 2014, we announced the appointment of Iain Conn as Chief Executive, with effect from 1 January 2015. Iain will join from BP plc where he has been Chief Executive, Downstream, for the past seven years and brings an impressive combination of experience to Centrica. He heads a global consumer brand familiar to millions of people and possesses a deep understanding of the energy sector, built up over many years in the industry. Iain will succeed Sam Laidlaw who will retire from the Board on 31 December 2014.

Following the announcement of his resignation on 7 January 2014, Nick Luff, Centrica’s Chief Financial Officer, will leave the company on 31 August 2014. Jeff Bell, currently Centrica’s Director of Corporate Finance, will take on the role of Chief Financial Officer on an interim basis and will join the Executive Committee on 1 September 2014. Jeff has been with Centrica since 2002, and has held a number of other senior management positions, including Group Strategy Director.

It was announced on 29 May 2014 that Chris Weston, Managing Director, International Downstream had tendered his resignation. A succession process is underway, and further details regarding his succession will be given in due course.

With the announcement of a new Chief Executive and interim Chief Financial Officer, we are making the transition to a new management team which has deep experience of the energy markets that shape our business and of the challenges we face in building customer trust and creating a sustainable energy future.

Business performance summary

We delivered good operational performance in the first half of 2014, with high reliability from our gas and oil production, power generation and gas storage assets, and improved customer service levels in our downstream businesses. We also delivered further improvements in our health and safety record during the first half of the year, with a 25% reduction in the lost time incident frequency rate compared to the first half of 2013 and no significant process safety incidents recorded during the period.

Downstream in the UK, we faced challenging market conditions, continued political and regulatory scrutiny and warmer than normal weather. Against this backdrop we delivered much improved service levels in British Gas, while our residential energy customer account numbers stabilised in the second quarter following a period of sustained account losses in the fourth quarter of 2013 and early in 2014. We are targeting a return to growth in the second half. The transfer of customer accounts onto a new combined energy and services system is nearing completion and we are also making good progress on the transformation of British Gas Business, with the cost reduction programme and billing system upgrade on track.

We have now completed the acquisition of Bord Gáis Energy in Ireland. The business is expected to be earnings accretive in the first full year of ownership and is expected to contribute around €40 million of EBITDA in 2015. The transaction provides Centrica with a vertically integrated energy supply business in an adjacent deregulated market, and also provides a good platform for growth. We will use our experience from the UK and US to develop innovative propositions for our customers in Ireland, in energy supply and energy services.

In North America, extreme weather conditions due to the Polar Vortex held back earnings in the first half, with the business energy supply division making an operating loss, and market conditions remained challenging in residential energy supply. However margins on new B2B sales are improving, reflecting a re-pricing of risk, and the B2B energy marketing business acquired from Hess in 2013 is performing ahead of expectations. We are making good progress on developing innovative propositions across Direct Energy, and now have residential solar capability following the Astrum Solar acquisition. We are also on track to deliver our $100 million cost reduction programme. Direct Energy Services is performing well, with the focus now on delivering growth in Alberta and the United States, following our decision in July 2014 to dispose of our Ontario home services business.

In upstream exploration and production, against a backdrop of falling wholesale commodity prices, we are targeting stable unit production costs and a reduction in capital expenditure over the next three years, while forward hedging and tax allowances are helping to maintain current year profit after tax. We also further strengthened our relationship with Qatar Petroleum International, announcing that they will acquire a 40% share of our wholly owned gas assets in Western Canada, fully aligning our interests in the region.

In UK power generation, the nuclear fleet once again delivered strong operational performance, however market conditions remained weak for our gas-fired stations. As a result, following a review of the UK CCGT fleet, we will target investment towards our more flexible, smaller power stations, which are well positioned to benefit from the Government’s capacity market proposals, while releasing capital from the larger stations.

Centrica Storage also delivered strong operational performance, with good reliability. However low seasonal gas price spreads meant that profitability was substantially lower than the first half of last year.

Earnings, dividend and outlook

Overall adjusted operating profit fell by 35%. This was partially offset by a lower effective tax rate, reflecting the mix of profit, the benefit of forward hedging, upstream small field allowances and a tax credit relating to the disposal of the Greater Kittiwake Area assets. As a result adjusted earnings per share (EPS) of 10.5p were 29% lower in the first half of 2014 compared to the first half of 2013. This predominantly reflects the impact of margin compression and the Polar Vortex in North America, mild weather in the UK, continued low seasonal gas storage spreads and a charge associated with writing off our Round 3 offshore wind investment. For the full year, we expect EPS to be in the range 21-22p, after taking into account the Round 3 wind write-off.

Looking further ahead, we expect the Group to return to earnings growth in 2015, with the prospect of underlying operating profit improvements in services and B2B in both the UK and North America, a first year of contribution from Bord Gáis and more normal weather conditions, more than offsetting the impact of lower UK gas prices on our E&P business. This remains subject to the usual variables of commodity prices, weather and asset performance, together with the downstream regulatory and competitive environment.

We reaffirm our commitment to delivering real dividend growth, a core component of ensuring appropriate returns to investors commensurate with the risks undertaken. We have now also completed just over half of the current £420 million share repurchase programme, having purchased 64.75 million shares to date for a total cost of £213 million, and expect to complete the programme later this year.

In line with our established practice, the Board proposes an Interim Dividend payment of 30% of the prior year’s full year dividend, being 5.10 pence per share, payable on 12 November 2014 to shareholders on the register on 26 September 2014.


We have clear priorities for the second half of the year, aligned to our strategic priorities.

Downstream, new organisational structures are now operational on each side of the Atlantic, and we are improving our core operations to deliver better customer service, while continuing to drive efficiency improvements and working to achieve growth through innovative propositions.

In British Gas, we have a clear strategy focused on three priorities - deliver great service, transform to grow and engage key stakeholders. We continue to target leading service levels for all our customers, and will drive further improvements in the second half to increase the net promoter score (NPS). We are simplifying a number of key residential customer interactions, in particular for direct debit payments and moving home, and we will complete the migration of residential customers onto a single billing and CRM platform for energy and services during the third quarter. Overall we are targeting a return to residential customer account growth through competitively priced products, the launch of innovative new propositions and a trial of the smart meter enabled “Free Saturdays and Sundays” energy tariff.

In BGS, we have developed proposals to change engineer terms and conditions, which are strongly supported by the GMB Trade Union and are now subject to ballot. These changes will deliver greater operational flexibility to improve service levels for our customers and enable us to develop attractive new propositions. We are on track to have sold over 150,000 smart thermostats by the end of the year, in excess of our original target. We also continue to build our leadership position in smart, connected homes, and expect to have installed around 1.3 million residential smart meters by the end of the year and 2.4 million by the end of 2015, considerably more than any other energy supplier.

In BGB, we are implementing a new billing system, which is expected to be completed in the third quarter of 2014. Alongside an ongoing programme of process simplification, this should enable us to deliver improved service and lower costs, and we are on track to achieve £100 million of annual operating cost and bad debt reductions by the end of 2015. We are also looking to develop propositions tailored to valuable customer segments, driving growth through dual fuel offerings and energy efficiency packages.

In Direct Energy, we are targeting disciplined margin expansion across the business, focusing on customer value and customer service and choice. In DEB, we will look to build on the sales margin increases we experienced in the first half of the year, which should position the business to deliver a material improvement in profit in 2015. The Hess Energy Marketing acquisition is performing well, and we expect to complete the integration in the second half while looking to drive growth – through our dual fuel capabilities, oil to gas switching, advantaged positions along the gas value chain and long-term customer relationships. We will also continue to drive operational efficiency across Direct Energy, having grounded initiatives to deliver our $100 million cost reduction target.

In North America residential energy and services, we are targeting improved retention and attracting the highest value customers, through increased use of digital platforms and the development of attractive propositions. We expect to grow our services franchise footprint further, while we are targeting 250,000 US protection plan customers and also expect to have sold 100,000 bundled energy and services products by the end of the year. The acquisition of Astrum Solar in July 2014 will allow us to offer solar alongside our existing range of energy and services products, while smart connected homes and businesses will become increasingly important and we have an exclusive partnership with Nest to sell 100,000 smart thermostats across North America over the next 18 months.

In Centrica Energy, in a lower wholesale price environment, we will focus on improving our returns through operational efficiency and capital discipline. In E&P, we will look to deliver production and capital expenditure targets, and successful drilling results, while a fourth well at York and a new well at Grove are both set to produce first gas during the second half. In Midstream, we will continue to contract for sources of gas to provide energy security for our customers at competitive prices, and develop our LNG business. We continue to work towards approvals at the fifth train at the Sabine Pass LNG export facility in the United States, with FERC approval expected around the end of the year. Securing contracts to deliver gas for our customers remains an important role for the Group.

In Power, we have now commenced the sales process for the three larger gas-fired stations in our fleet, which we expect to occur within the next 12 months. We will continue to develop plans for our remaining smaller stations, evaluating investment options under the proposed capacity auction.


Maintaining appropriate financial discipline, with a strong balance sheet and healthy cashflow position, is a core priority for the Group. It is also important that we maintain sufficient financial flexibility, to be able to deploy capital where we see attractive opportunities, and to realise value from non-core assets. In this context, we have initiated a programme of disposals, selling assets that are no longer core to the Group’s strategy. The programme includes the disposal of our three larger gas-fired power stations in the UK and our Ontario home services business, while we will also potentially look to release capital from our gas assets in Trinidad and Tobago and our UK operational wind portfolio. In total, we expect the programme to realise around £1 billion.

As part of their ongoing review of the sector, in April, Moody’s Investor Services Limited placed the Company on review for downgrade, noting the political and regulatory environment for energy supply in the UK, as well as the inherent risks upstream and in North America. In May, Standard & Poor’s Credit Market Services Europe Limited placed the Company on CreditWatch Negative, noting the challenging regulatory, political and market outlook.

We continue to engage with both credit rating agencies, with a view to retaining the existing A3/A- credit ratings, underlining our position as a strong counterparty for procurement contracts to bring gas to the UK, and optimising our requirements for collateral in our trading and upstream operations. We would expect proceeds from the disposal programme to be retained to further strengthen the balance sheet and improve the Group’s financial metrics. While we do not currently anticipate initiating a further share repurchase programme until the Group’s financial metrics have been strengthened, the Group’s underlying cash flows remain strong, underpinning future financial flexibility and the ability to invest for long term growth, or return capital to shareholders where appropriate.

In 2015, we expect to commence a scrip dividend programme as an alternative to the cash dividend commencing with the 2014 final dividend, subject to shareholder approval.


Energy policy remains a key issue for the UK, as we seek to balance the often competing needs of energy security, climate change and affordability. With trust in the energy sector at a low level, it is vital that all stakeholders have the clear facts to form a balanced view, enabling greater understanding of the cost drivers behind energy bills and of the implications of the policy decisions being taken. To help achieve this, we will continue to engage closely with all stakeholders – policy makers, regulators, the media and above all, our customers – in an open and transparent way, to begin the task of restoring trust in the sector.

We welcome the clarity which the Competition and Markets Authority (CMA) investigation into the UK energy sector will bring. This will be a full and rigorous review by an independent and respected body and we look forward to engaging constructively and comprehensively throughout the process - helping to clear the air, enabling investment to continue and consumer confidence in the sector to be restored.

We believe that there is effective competition in the energy market and that it brings significant benefits to consumers, delivering consumer prices which remain low compared to many European markets. There are currently some 25 suppliers active in the British domestic retail market, with new entrants now an established competitive force. Today, over 60% of our customers receive electricity as well as gas from us – each of those electricity accounts was won in the competitive market. In the six months to March 2014, over 3.5m customer accounts moved from one supplier to another – roughly 7% of the total; and within British Gas, we see around 20% of customer accounts switching to a different tariff each year, including in response to our ‘Tariff Check’ service.

We offer exactly the same products and prices to existing and new customers. And through innovation, such as smart meters and our ‘Hive’ remote heating control product, we are able to help customers control their energy use and over time, to take advantage of time of use tariffs. However, rising retail energy prices have, understandably, become a real concern for customers. This upward trend over the past few years has been driven by increases in wholesale commodity prices, higher network charges and the rising costs of Government policies. Taken together, these factors make up around 85% of the typical British Gas dual fuel energy bill. With further upward pressure predicted, an open and honest debate about these costs, with transparency from all parties, is clearly needed.

Regulation and policy interventions continue to define the way in which suppliers compete in the market. While the UK Government’s recent changes to the Energy Company Obligation and the Warm Home Discount have delivered a welcome short term reduction in costs, non-commodity costs are expected to increase because of the growing cost of decarbonisation and continued investment in energy networks. We therefore propose three principles which will help the country to meet its carbon reduction commitments in a more cost-effective way, without compromising long term ambitions: concentrate on the lowest-cost, least regret options; set simple and cost-effective decarbonisation targets; and support those most affected, whether they are energy intensive industries or vulnerable households. Together, these measures can help to ensure a sustainable, low carbon energy future for the UK, while minimising the cost for the consumer.

As North Sea resources decline, Centrica plays a critical role in bringing supplies of gas to the UK. Our vertically integrated business model enables us to protect our customers from short term volatility in market prices, at lower cost than would be the case for a stand-alone supplier. We invest over £1 billion each year across the Group, and have made commitments totalling around £60 billion to secure long term gas and power supplies to meet the future energy needs of our customers. We can only make this scale of contribution to the country’s security of supply if we are a profitable company with a strong balance sheet and cash flows.


Organic investments and acquisitions over recent years have left the business better balanced and more resilient.

  • We have invested in systems and service and developed a leadership position in innovation and smart connected homes in British Gas
  • We have established a larger scale downstream business in North America, providing a platform for further growth in energy supply and services
  • We have a more balanced upstream gas and oil business spanning the Atlantic basin, with scale positions in Norway and Western Canada in addition to the UK
  • We have a power generation business that benefits from low carbon baseload nuclear production alongside renewables and gas-fired generation
  • We have a growing midstream business, in an increasingly international energy market
  • We have forged strong relationships with world-class global energy partners, providing security of supply for our customers

Our investments are generally performing well. The British Energy nuclear fleet is delivering sustained strong generation volumes, while in E&P, although some of our organic investments in the Southern North Sea have proved challenging, the gas and oil assets acquired from Statoil and Suncor have materially increased our upstream scale in Norway and Western Canada respectively, and have delivered reserves and production in excess of the original investment cases.

In North America, the Hess Energy Marketing acquisition is delivering returns ahead of the investment case, and gives us an industry leading position in B2B energy supply in North America, as well as enhanced presence along the gas value chain. We have also successfully integrated a number of residential bolt-on acquisitions, including the Bounce Energy acquisition which provides us with the foundation to grow our digital offering and offer innovative products across DE Residential. In energy services, through the Clockwork and Home Warranty of America transactions we now have a scalable platform in a growing but highly fragmented market, with the potential for energy and services bundling, while the recent acquisition of Astrum Solar provides us with capabilities in residential solar.

We have also added value through the development of a substantial wind portfolio, realising value through capital efficient financing and selective divestments, with further opportunities to realise value from the remaining five operational wind farms. By contrast, returns from our gas-fired power stations and the Rough gas storage facility have declined materially, while we suffered from the UK Government’s decision to increase the effective tax rate on upstream gas and oil assets in the 2011 Budget. Overall, these impacts broadly offset the contribution from acquisitions.

Although a large proportion of investment has been in the upstream business and in North America, the UK downstream business remains core, contributing a material part of the Group’s profit after tax. Our relentless focus on improving service and reducing costs, alongside investment in new systems, has helped us to maintain our competitive position over the past few years. And our leadership position in smart, connected homes and innovation provides a platform for long term, sustainable growth.



British Gas Residential

British Gas Residential operating profit fell by 26% compared to the first half of 2013. This reflects warmer than normal weather and an underlying consumption decline, in part due to energy efficiency measures, resulting in 24% and 9% reductions in average residential gas and electricity consumption respectively.

The number of customer accounts reduced by around 1% during the first quarter of 2014, which reflected high levels of customer switching following the increase in residential prices in November 2013. However they were broadly stable over the second quarter, despite fierce competition from smaller suppliers who are currently benefiting from an exemption from some environmental obligations. This reflects British Gas being the first energy company to pass on savings in full to all our residential customers in January following the announcement of changes to the ECO programme, and the introduction of attractive fixed price propositions.

Service levels in British Gas Residential significantly improved over the first half of the year. Average answering and call handling times both reduced compared to the second half of 2013, and drove a +11 point movement in our contact NPS, reflecting our focus on delivering leading, high quality service. We are targeting a significant reduction in customer complaints over the next three years. We remain on track to complete the migration of all residential customers onto our new billing and CRM platform in the second half of 2014, and the new system will deliver a more integrated customer experience.

Innovation and smart connected homes

We continue to lead the industry in technology, innovation and smart connected homes. Around two-thirds of our customer interactions are now made through digital channels, with around half of those initiated from a mobile or tablet device, and customer downloads of our top rated mobile App have now reached 1.3 million.

We have now installed over one million residential smart meters in the UK and expect to have installed around 1.3 million by the end of the year. We strongly support the 2020 mandate for full smart roll-out and are on track to support the ‘go live’ of the Data Communications Company in December next year and to lead industry testing of the new systems in mid-2015. We encourage the industry, Government and regulatory bodies to maintain momentum on all fronts to ensure the smart roll-out is delivered on schedule. Smart meters will bring significant customer benefits including an end to estimated bills, greater ability to monitor and reduce consumption, flexible time of use tariffs, and simpler and faster switching between suppliers, helping to improve trust in the UK energy industry.

Over 350,000 smart meter customers now regularly receive our unique Smart Energy Report (SER). The SER provides customers with a comprehensive analysis of their energy consumption including a breakdown by type of use, benchmarking against similar homes, personalised energy saving tips and access to an online tool. The report is helping improve levels of customer satisfaction and the overall perception of British Gas.

We have also taken the lead in the roll-out of smart meters to prepayment customers and are currently trialling a SMETs capable prepayment meter, the first of its kind. We plan to launch it in 2015, a year ahead of the Government’s target. Leveraging our experience in Direct Energy, we are now also trialling a new time of use energy tariff, “Free Saturdays or Sundays September 2015”, for full launch next year.

We have now sold 100,000 smart thermostat products in the UK, mostly under our innovative Hive brand that was launched in September 2013. The Hive product is now available in Apple stores nationwide and has been received extremely positively, featuring in T3’s ‘The Great British Tech List’ in July this year. The brand NPS of customers using Hive is over +40, with 80% saying they would actively recommend the product. We have a strong development pipeline of further innovative products and have now commenced trials of a ‘smart connected boiler’ product and a ‘virtual in home display’, both of which we plan to launch next year. Our nationwide network of over 8,000 highly trained service engineers with trusted access to customers’ homes remains a key competitive advantage for British Gas in the connected homes market.

Helping people today

Helping customers to reduce and control their energy consumption is the sustainable way to keep bills down. We have made good progress in delivering our commitments under ECO, which is providing energy efficiency measures such as insulation to transform homes and communities across the UK. We are on track to meet our obligations and have already delivered the Affordable Warmth component of the scheme, well in advance of the March 2015 deadline.

We do more than any other supplier to assist the most vulnerable customers. This past winter, in addition to the £135 Warm Home Discount, we made a payment of up to £60 to over 500,000 eligible customers, and these customers’ bills were on average 20% lower this winter than last. This year we have committed £9 million to the British Gas Energy Trust, an independent charity giving grants to households struggling with bills, and our total donations since 2004 have now reached £65 million. We also continue to work closely with our key charity partners, Shelter and National Energy Action, to improve the safety and warmth of homes in the private rental sector and to tackle fuel poverty.

We continue to support job creation in the UK with over 1,100 apprentices currently in training and a further 250 expected to be recruited this year as part of our smart meter roll-out programme. We are also working with Accenture, Princes Trust, Job Centre Plus and Global Action Plan to provide training opportunities to young people not in employment, education or training (NEETs). In addition, all of our direct UK-based employees are paid at least the ‘living wage’ rate.

British Gas Services

British Gas Services delivered high levels of customer service in the period, both in our contact centres and in customers’ homes. Customer complaints fell by 40% compared to last year and the NPS for our engineers increased to +64, with our investment in a more resilient operating model, in addition to the warmer weather, resulting in improved response times for breakdowns. We have developed proposals to change engineer terms and conditions, which are strongly supported by the GMB Trade Union and are now subject to ballot. These changes will deliver greater operational flexibility to improve service levels for our customers and enable us to develop attractive propositions to drive growth.

The market for central heating installations is showing signs of recovery, with the number of boilers installed increasing by 11% compared to the same period in 2013. For contract customers, retention levels remained high, underlining the value that our products continue to provide. However, improvements in the UK economy have yet to feed through into higher contract sales, which have also been impacted by a focus on compliance training for front line staff and protecting service levels during the migration of customer accounts onto the new billing and CRM platform. As a result, the number of services product holdings fell by 181,000 during the first half of the year, although we did see an increase in the number of landlord contracts, an important growth opportunity, and we are developing new channels and propositions to increase sales in the second half of the year. British Gas Services operating profit fell slightly compared to the first half of 2013, predominantly reflecting the decline in the number of contract holdings.

British Gas Business

The number of British Gas Business supply points was broadly flat over the first half. However operating profit reduced compared to the same period in 2013, largely reflecting the warmer than normal weather, with total gas and electricity volumes down by 22% and 3% respectively compared to the first half of 2013. We remain on track to deliver £100 million of targeted reductions in operating costs and bad debt, in part enabled by the implementation of a new billing system, which is expected to be fully operational by the third quarter of 2014, and so far this year we have removed over 300 roles from the business. We remain on track to deliver the programme by the end of 2015 and these cost efficiencies will help offset the margin pressures resulting from a competitive market and our decision in 2013 to end the auto-rollover of contracts at renewal.

To drive growth in BGB, we are developing a new customer segmentation model based on external research, to drive growth through dual fuel offerings, energy efficiency packages and joint energy and services propositions. We continue to develop our business services capabilities. We have secured a contract with Sainsbury’s for ground source heat pump installations and three further energy performance contracts have entered the construction phase. Our solar business also continues to expand, with a landmark contract at Toyota’s Deeside plant nearing completion, while we recently announced our participation in the Generation Community scheme to deliver up to £60 million in solar PV solutions for Local Authority and Housing Association properties.


Direct Energy profit was 75% lower in the first half of 2014 compared to the same period in 2013, and 73% lower after adjusting for foreign exchange movements. This was predominantly due to margin pressures on sales made during the second half of 2013, particularly in our legacy business supply division, and the one-off impact of additional ancillary and other charges resulting from the extreme weather conditions, the Polar Vortex, seen across much of North America early in the year. The total impact of these charges was approximately $110 million (£65 million) in the first half of 2014, across both residential and business energy supply. However following the Polar Vortex we have seen evidence that the C&I market is pricing in additional risk into retail power products, and have seen a material increase in our sold unit margins for both gas and power over the first half of the year.

Our $100 million cost reduction programme is progressing to plan and we have now grounded initiatives to achieve the target by the end of 2014. A number of initiatives are underway, including investment in our billing systems, consolidation of our services operating systems and integration of our energy and services call centres.

Direct Energy Residential

The number of residential energy accounts increased by 94,000 in the first half of the year, despite the expected further decline in Ontario due to the Energy Consumer Protection Act (ECPA), as we gained accounts in the US North East following the acquisition of aggregation customers in Ohio. However Direct Energy Residential operating profit fell, as we incurred additional costs related to the extreme weather conditions and we faced a challenging competitive sales environment in both Texas and the US North East, leading to a reduction in unit margins. Against this challenging backdrop we are focused on delivering high quality customer service, and our NPS remained high and retention levels improved.

We also made good progress on developing innovative products and the number of residential sales coming through digital channels nearly trebled, following the acquisition of Bounce Energy in 2013. We have now started selling bundled energy and protection plan products, and have sold over 20,000 in the year to date. We have also now sold over 10,000 smart thermostats so far this year in Alberta, and have signed an exclusive partnership with Nest to sell 100,000 additional units across North America over the next 18 months. In July 2014, we entered the rapidly growing US residential solar market through the acquisition of Astrum Solar for $54 million (£32 million). The transaction allows Direct Energy to sell solar alongside its existing range of energy and services products, as we look to develop further attractive propositions and attract the highest value customers.

Direct Energy Business

In business energy supply, the Hess Energy Marketing acquisition is performing ahead of our investment case. This 2013 acquisition made Direct Energy the largest C&I gas supplier on the East Coast of the US and the second largest C&I power supplier in the competitive US retail markets, and we now have a more balanced gas and power portfolio. We have retained key personnel and systems and delivered good levels of customer service, with customer retention strong as a result. Reflecting the impact of the acquisition, business gas volumes increased by over 500% while power volumes increased by 75%.

Overall Direct Energy Business made an operating loss in the period, reflecting the one off impact of the Polar Vortex and also margin pressures on power sales made during 2013. However, sold margins in the first half of 2014 increased by 35% for gas and 33% for electricity compared to the second half of 2013, reflecting a re-pricing of risk following the Polar Vortex. This will improve margins over time and we expect the business to deliver a much improved result in the second half of 2014 and in 2015. We also continue to look to attract new customers who wish to switch from oil to natural gas heating and to develop innovative propositions for our C&I customers. We have a partnership agreement with BuildingIQ to offer cloud-based energy efficiency solutions for customers, while we have also partnered with Panoramic Power to offer wireless energy sensors, helping customers understand the details of their power consumption.

In January, we completed the sale of our three Texas CCGTs, releasing capital and recognising a £219 million profit on disposal as a result. The three year heat rate call option agreed at the time of signing the transaction has now commenced and we believe that this arrangement, together with a liquid physical and financial power market in Texas, can support our downstream operations through contractual relationships rather than asset ownership.

Direct Energy Services

The number of Direct Energy Services customer accounts was up slightly over the period, with growth in our US protection plan base offsetting a decline in accounts in Canada. Our HVAC leasing proposition is also progressing well, with customers willing to undertake a higher value of work when purchased through rental payments as opposed to upfront payment. First half operating profit was up slightly compared to 2013, although after accounting for exchange rate movements it increased by 27%.

In July 2014 we agreed to sell our branded Ontario home services business to EnerCare for C$550 million (£300 million) including normal adjustments for working capital. This is an attractive opportunity to realise value from our Ontario business and focus our attention on opportunities in the US and Alberta, where we see good prospects for growth. We also entered the rapidly growing US residential solar market through the acquisition of Astrum Solar for $54 million (£32 million). The transaction allows Direct Energy to sell solar alongside its existing range of energy and services products, as we look to develop further attractive propositions and attract the highest value customers.



Our E&P business is benefiting from previous investments in both Norway and Canada, with production from the assets acquired from Statoil in 2012 and from Suncor in 2013 both ahead of our investment cases. Following these recent acquisitions we now have a more diverse portfolio, and the new management structure put in place last year is enabling us to maximise the full potential of our core E&P regions of UK and Netherlands, Norway and Canada.

Our assets delivered high levels of availability during the first half of the year. Total gas and liquids production was up 9% compared to the same period in 2013, predominantly due to production from North America more than doubling following the acquisition of a package of assets from Suncor in the second half of 2013. In May 2014 we announced that QPI will acquire 40% of our wholly owned gas and liquids assets in Canada for C$200 million (£107 million), fully aligning our interests and further strengthening the relationship with our Qatari partners. We also announced in May that the partnership had agreed to acquire a package of natural gas assets in Alberta from Shell Canada Energy for C$42 million (£23 million). An increasing proportion of our capital is now being directed towards North America, where we are well placed to benefit from increases in gas prices through the accelerated development of our resources.

In Europe, production from our core assets, such as Morecambe and Kvitebjorn, remained good. However, total production from the region decreased, partly as a result of the disposals of three packages of North Sea assets, all announced in late 2013. We continue to invest in new sources of gas for the UK, including the large-scale Cygnus and Valemon projects in the North Sea, which remain on schedule. We have completed fracking activities on our Grove project, and expect first production later in 2014, while we delivered first production from Kew in January 2014, with good initial performance. A fourth well at York has tested positively and is expected to produce first gas in the second half, following disappointing results on both the second and third wells. Two wells drilled adjacent to the Butch discovery, Butch East and Butch South West, did not find further commercial hydrocarbons, however the results contributed valuable information that should allow us to optimise the development of the main Butch field. On exploration, we drilled five wells, four of which were successful in finding hydrocarbons. Commercial development prospects are being reviewed for the Valemon North, Solberg and Cepheus wells, but the Novus exploration well in the Norwegian Sea is unlikely to be of commercial size and the Kookaburra well was dry.

In the current environment, with lower forward gas prices and higher costs, new North Sea development will be directed to the best projects. We expect to spend an average of £900 million over the next three years, down from 2013 levels, with capital expenditure expected to be around £1 billion in 2014 reflecting expenditure on Cygnus and Valemon. As a result, over the next few years a larger proportion of our capital employed will be productive. In 2014 we expect full year international gas and liquids production to be around 83mmboe and to remain in the 80-85mmboe per annum range in 2015 and 2016, subject to any acquisition or divestment activity. In July 2014, we agreed the disposal of the undeveloped 1a and 1b blocks in Trinidad. We are currently considering options for our remaining Trinidad and Tobago non-operated producing assets and operated undeveloped resources, to potentially release capital from the assets for value.

International gas operating profit fell by 32% in the first six months of 2014 compared to 2013 despite an increased contribution from our Canadian assets, reflecting lower wholesale gas and oil prices. However profit after tax increased by 29%, reflecting the benefits from forward hedging, a production mix weighted to lower taxed assets some small field tax allowances and a tax credit associated with the disposal of the Greater Kittiwake Area assets. Unit lifting and other cash production costs in the first half were slightly up compared to the same period in 2013, and with the leadership team focused on countering inflationary impacts, we are targeting stable unit costs over the next three years.


Our midstream business continued to perform well in 2014, as we managed periods of wholesale market volatility related to the Russia and Ukraine dispute and falling UK gas and power prices. We see further growth opportunities in our asset backed trading and optimisation model, including the development of our LNG activities. In 2013, we signed a 20 year contract with Cheniere to purchase approximately 89 billion cubic feet (bcf) per annum of LNG for export from the Sabine Pass liquefaction plant 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. Federal Energy Regulatory Commission (FERC) approval is currently anticipated for the fifth train at Sabine Pass around the end of 2014, and if approval is received, the US Department of Energy would then assess the export licence application. Subject to these regulatory approvals being received, we expect a final investment decision on the fifth train to be made in the first half of 2015, with a target date for first commercial delivery in September 2018.


In UK power, the performance of the nuclear fleet was once again strong, with volumes in the first half 7% higher than in the same period in 2013. This reflects continued investment in the fleet and underlines the quality of the original investment we made in 2009. Nuclear operating profit was slightly up, as the benefit from higher generation volumes was mostly offset by the impact of lower wholesale power prices and inflationary cost increases.

Our renewables assets performed well, with favourable wind yields in the spring. Generation volumes increased substantially, reflecting a full contribution from the Lincs offshore wind farm, which was fully commissioned in the second half of 2013, and higher load factors due to windy weather conditions over the period. We have reviewed the economic viability of our Round 3 Irish Sea Zone project, Celtic Array, and following discussions with The Crown Estate and our partners in the project, Dong Energy, development activity has now stopped. We have recognised a charge of £40 million, principally in respect of writing off the total book value of the project, and as a result the renewables business reported an operating loss. However underlying renewables operating profit nearly doubled, when also taking account of £24 million of net one-off profit in 2013, predominantly reflecting a profit on disposal related to the sale of the Braes of Doune onshore wind farm.

The market remained challenging for our fleet of gas-fired power stations, with low market clean spark spreads resulting in low load factors and continued operating losses. Against this backdrop, and with the UK generation market undergoing significant structural change and capacity payments due to be introduced from 2018, we completed a strategic review of our gas-fired power business during the first half of the year. Following this review, we announced that we intend to focus our UK gas-fired generation strategy on smaller flexible “peaking” plants and we will seek to release capital through the sale of the three larger operating power stations in our portfolio.


The Rough gas storage asset delivered strong operational performance during the first half, with good reliability. The warmer than normal weather meant the net reservoir volume (NRV) ended the first half at the highest level for that time of year since Centrica acquired the asset in 2002. However seasonal gas price spreads were at historically low levels towards the end of 2013 and although forward summer / winter gas price differentials for the 2014/15 storage year increased slightly over the course of the first half, the financial impact was limited. We announced in April that we had sold all SBUs for the 2014/15 storage year at 20.0p, lower than the 23.3p achieved in 2013/14 and the 33.9p achieved in 2012/13. As a result, operating profit in the first half of the year was substantially lower than for the same period in 2013.

At the start of the year, Centrica Storage commenced a three year programme to deliver £15 million of cost reductions through operational improvements, starting with a reorganisation of our business and operational support functions, while maintaining a sharp focus on safety and capital discipline.



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 2014 Interim Results presentation for analysts and institutional investors at 9.30am (UK) on Thursday 31 July 2014. There will be a live audio webcast of the presentation and slides from 9.30am at

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 Interim Results 2014".

An archived webcast and full transcript of the presentation and the question and answer session will be available on the website on Monday 4 August 2014.


Investors and Analysts: Andrew Page / Martyn Espley 01753 494 900
Media: Greg Wood / Sophie Fitton 0800 107 7014

Financial calendar

Ex-dividend date for 2014 interim dividend   24 September 2014
Record date for 2014 interim dividend   26 September 2014
Payment date for 2014 interim dividend   12 November 2014
Interim Management Statement   20 November 2014
2014 Preliminary Results announcement   19 February 2015

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