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Preliminary Results for the year ended 31 December 2014

Download the full Preliminary Results for the year ended 31 December 2014

Financial summary

Year ended 31 December 2014 2013 Change
  1. The Group’s definition of net debt has been restated to include cash collateral posted or received, to support wholesale energy procurement.

Unless otherwise stated, all references to operating profit or loss, taxation, earnings and earnings per share throughout the announcement are adjusted figures, reconciled to their statutory equivalents in the Group Financial Review on pages 8 to 11.

Revenue £29.4bn £26.6bn 11%
Adjusted operating profit £1,746m £2,695m (35%)
Adjusted effective tax rate 30% 43% (13ppt)
Adjusted earnings £962m £1,370m (30%)
Adjusted basic earnings per share (EPS) 19.2p 26.6p (28%)
Full year dividend per share 13.5p 17.0p (21%)
Group net debt (i) £5,196m £4,942m 5%
Group net investment £829m £2,565m (68%)
       
Statutory operating (loss)/profit (£1,137m) £1,892m nm
Statutory (loss)/profit for the year attributable to shareholders (£1,012m) £950m nm
Net exceptional items after tax included in statutory (loss)/profit (£1,161m) (£667m) nm
Basic earnings per share (20.2p) 18.4p nm

2014 Group results

  • Group adjusted EPS down 28%, reflecting challenging trading conditions, including extreme weather patterns and falling oil and gas prices. Post-tax impairments of £1,385 million on E&P and power assets
    • British Gas operating profit down, primarily reflecting lower consumption in record warm year, with average dual fuel profit per household falling to £42. Average actual household energy bill around £100 lower than in 2013
    • Direct Energy operating profit down due to impact of polar vortex in Q1 and narrowing of energy supply margins in a competitive environment
    • Centrica Energy gas operating profit before tax down, reflecting lower market prices. Post-tax earnings largely protected by hedging, tax allowances on previous investments, and strong midstream performance. Power profit impacted by unplanned nuclear outages

2015 environment and response

  • Since the November IMS, our forecast 2015 adjusted EPS has been negatively impacted by about 2.5p, primarily due to changes in the external environment. 2015 adjusted earnings are expected to be down compared to 2014
  • Taking action in a low commodity price environment
    • 40% reduction in E&P capex to £650 million by 2016
    • Continued focus on competitiveness, service and efficiency downstream
    • Group-wide performance improvement plan, with a strong cost focus
    • Dividend rebased by 30%, commencing with the 2014 final dividend. 2014 full year dividend of 13.5p per share
  • Decision to retain UK CCGTs, with bids received significantly below our internal valuation
  • Strategic review launched, to be concluded by Interim Results in July 2015 covering; (i) outlook and sources of growth; (ii) portfolio mix and capital intensity; (iii) operating capability and efficiency; (iv) Group financial framework

Iain Conn, Centrica Chief Executive

“2014 was a very difficult year for Centrica and the recent fall in oil and gas prices creates further challenge. We are cutting investment and costs in response. However, it is with regret that, along with reducing capital expenditure and driving efficiency beyond planned levels, we have taken the difficult decision to rebase the dividend by 30%, commencing with the final distribution for 2014. In addition, given the changed external environment we are reviewing the longer term strategy, and will conclude this by the Interim Results in July. Despite the obvious current challenges, I am confident in the quality of Centrica’s team and the platform which has been established, and I believe the Group is well-placed to take advantage of the longer term trends in the global energy markets. Our priorities remain to serve our customers competitively and with integrity, to develop new offers and services, to provide secure and reliable energy supplies and to deliver long term value for shareholders.”

DIVISIONAL OPERATING PROFIT

Adjusted operating profit

Year ended 31 December 2014 2013 Change
British Gas      
Residential energy supply £439m £571m (23%)
Business energy supply and services £114m £141m (19%)
Residential services £270m £318m (15%)
Total British Gas £823m £1,030m (20%)
Direct Energy      
Residential energy supply £90m £163m (45%)
Business energy supply £32m £77m (58%)
Residential and business services £28m £36m (22%)
Total Direct Energy £150m £276m (46%)
Bord Gáis Energy £7m - nm
Centrica Energy      
Gas £606m £1,155m (48%)
Power £131m £171m (23%)
Gas-fired (£120m) (£133m) nm
Renewables (operating assets) £27m £36m (25%)
Renewables (one-off write-offs, profit/loss on disposal) (£17m) (£11m) nm
Nuclear £210m £250m (16%)
Midstream £31m £29m 7%
Total Centrica Energy £737m £1,326m (44%)
Gas — adjusted operating profit after tax £302m £325m (7%)
Centrica Storage £29m £63m (54%)
Total adjusted operating profit £1,746m £2,695m (35%)

KEY PERFORMANCE INDICATORS

Key Operational Performance Indicators

Year ended 31 December 2014 2013 Change
  1. British Gas 2013 residential energy customer accounts have been restated to exclude 110,000 accounts subsequently reclassified as dormant
  2. British Gas 2013 business energy supply points have been restated to include 4,000 supply points to align to industry reporting changes
  3. Direct Energy 2014 residential services product holding reflects the disposal of the Ontario home services business, which had 1.9 million product holdings at the time of disposal
  4. Includes 100% share of Canadian assets owned in partnership with QPI
  5. Centrica’s share of reserves, including a 60% share of Canadian assets owned in partnership with QPI, and excluding Rough cushion gas of 30mmboe. Includes the impact of QPI’s investment in 40% of our wholly-owned Canadian gas and liquids assets in the year
Group      
Lost time injury frequency rate (per 100,000 hours worked) 0.14 0.11 27%
British Gas      
Residential energy customer accounts (year end, ’000) (i) 14,778 15,146 (2%)
Residential services product holding (year end, ’000) 7,970 8,227 (3%)
Business energy supply points (year end, ’000) (ii) 854 916 (7%)
Total gas volumes (mmth) 4,085 5,126 (20%)
Total electricity volumes (TWh) 39.1 42.4 (8%)
Direct Energy      
Residential energy customer accounts (year end, ’000) 3,256 3,360 (3%)
Residential services product holding (year end, ’000) (iii) 897 2,608 (66%)
Business energy supply gas volumes (mmth) 5,923 1,839 222%
Business energy supply electricity volumes (TWh) 96.9 63.9 52%
Total gas volumes (mmth) 8,163 3,883 110%
Total electricity volumes (TWh) 116.3 83.4 39%
Bord Gáis Energy      
Residential energy customer accounts (year end, ’000) 608 nm
Total gas volumes (mmth) 106 nm
Total electricity volumes (TWh) 1.4 nm
Total power generated (TWh) 0.9 nm
Centrica Energy      
Gas production (mmth) (iv) 3,772 3,557 6%
Liquids production (mmboe) (iv) 17.3 18.7 (7%)
Total gas and liquids production (mmth) (iv) 4,822 4,690 3%
Total gas and liquids production (mmboe) (iv) 79.5 77.3 3%
Upstream proven and probable reserves (mmboe) (v) 585 711 (18%)
Total UK power generated (TWh) 22.1 21.7 2%

Enquiries

Investors and Analysts:     Martyn Espley     tel: 01753 494900     email: ir@centrica.com
Media:     Sophie Fitton     tel: 0800 107 7014     email: media@centrica.com

Interviews with Iain Conn (Chief Executive), Jeff Bell (Interim Chief Financial Officer), Mark Hanafin (Managing Director, Centrica Energy) and Ian Peters (Interim Managing Director, British Gas) are available on www.centrica.com

CHIEF EXECUTIVE’S STATEMENT

Overview

Centrica occupies a vital role in the energy affairs of the UK in particular, and also in the US and the Republic of Ireland. We are a customer facing business, and our principal role is to deliver excellence in the supply and reliability of energy and services to those customers. Although we are facing some significant challenges at present, it is clear to me that Centrica has built a solid set of positions, from which we will be able to continue to play an important role in the developing energy markets on both sides of the Atlantic.

The 2014 environment was very difficult for Centrica, with record mild weather in the UK, extreme cold weather in North America early in the year and a highly competitive market environment on both sides of the Atlantic. Upstream, the exploration and production (E&P) business faced falling oil and gas prices, while Centrica Storage was impacted by lower seasonal gas price spreads. Political uncertainty and the launch of the Competition and Markets Authority investigation provided further challenges in the UK.

Operationally, in British Gas these conditions translated into falls in gas and electricity sales volumes of 20% and 8% respectively, and a 2% fall in residential energy customer accounts, mostly in the first half of the year. Direct Energy also saw a 3% fall in residential energy customer accounts. In Centrica Energy, oil and gas production volumes of 79.5mmboe were up 3% compared to 2013, but realisations fell as a consequence of lower oil and gas price levels. he power business experienced unplanned outages on the nuclear fleet.

As a result, adjusted earnings per share fell by 28% compared to 2013. We also recognised pre-tax exceptional items of £1,597 million, £1,161 million post-tax, which included substantial impairments on E&P and power assets totalling £1,385 million post-tax, primarily as a result of the current low commodity price environment. These were partially offset by profits on disposal relating to the sale of the Texas gas-fired power stations and the Ontario home services business totalling £224 million.

The Group continues to face a number of challenges as we enter 2015, particularly the significant further reductions in wholesale oil and gas prices since the middle of December and continuing low spark spreads. While we plan for normal weather patterns in 2015, and relative to 2014 should see an associated improvement in earnings and cash flows in the customer-facing businesses, the current forward price curves for oil and gas are likely to more than offset this. It is not clear that the forward price curves for oil and gas will improve in the near term, and we therefore need to plan on the basis that lower wholesale prices will persist for all of 2015 and potentially through 2016 and into 2017. During this time we expect the E&P supply chain costs to respond to the lower price environment. Until that time, the Group’s cash flows from Centrica Energy will be materially impacted.

Centrica balances the significant energy commitments of our downstream obligations to customers with two sources of supply: upstream assets, whose cash flows have been materially impacted by current prices; and our procurement, hedging and optimisation activities which require strong investment grade credit ratings to ensure our supply of energy is delivered efficiently.

We are taking immediate actions to improve cash flows, focusing on reducing E&P capital expenditure relative to 2014 levels by around £250 million in 2015 and a further £150 million in 2016, and reducing cash production costs. In addition, we have initiated Group-wide performance improvement efforts, including a strong cost focus, and we will also pay close attention to working capital management.

Despite these actions, with 2014 adjusted earnings per share of 19.2p, and with 2015 adjusted earnings per share having been negatively impacted by around 2.5p since the Interim Management Statement in November and therefore expected to be down compared to 2014, the Group has taken the very difficult decision to re-base the dividend, commencing with the final payment for 2014. This reduction is driven by three things:

  • The need to operate with strong investment grade credit ratings
  • The desire to balance sources and uses of cash in 2015
  • Maintaining a healthy payout ratio

Going forward, the future level of dividend payments will be determined by the health and growth of the Group’s operating cash flow after tax.

To underpin future growth in cash flows, we have launched a strategic review to be concluded by the time of the Interim Results in July 2015. The review will focus on four key areas:

  • Outlook and sources of growth
  • Portfolio mix and capital intensity
  • Operating capability and efficiency
  • Group financial framework

Despite the challenging current environment, my initial assessment of the Group is that Centrica has an excellent and committed team, and has established a strong platform from which to play an important part in the evolution of energy supply and services in the UK, Republic of Ireland and North America.

2014 business performance summary

The top priorities for the Group are safety, compliance and market conduct. he lost time injury frequency rate (LTIFR) per 100,000 hours worked was 0.14, up compared to the 2013 level of 0.11. No significant process safety incidents were recorded during the year.

Downstream in the UK, British Gas faced continued political and regulatory scrutiny, competitive market conditions in each division and lower consumption due to the mild weather. Account numbers declined in both energy and services. In residential services we also experienced a shift in mix towards lower priced products, although we increased our sales of services products in the fourth quarter of the year and returned to account growth.

Overall we delivered improved service levels in British Gas, and we have now completed the implementation of a new combined residential energy and services customer relationship management (CRM) platform. We also completed the implementation of a new billing system in British Gas Business, although we have encountered some transitional issues following the migration of accounts, which we are now resolving. We continue to lead the industry in smart metering, innovation and connected homes, having installed around 1.3 million residential smart meters and we have now sold over 170,000 smart thermostats in the UK.

In North America, the business was impacted by extreme cold weather caused by the polar vortex in early 2014, resulting in additional network system charges. In addition, lower margin sales made in prior years impacted Direct Energy Business. However margins on new B2B sales materially increased in 2014 compared to 2013, reflecting a re-pricing of risk following the polar vortex, and this will benefit the business in 2015.

Market conditions remained highly competitive for Direct Energy Residential, particularly in the US North. Against this backdrop, we are differentiating our offering through innovative propositions that are attractive to the most valuable customer segments. During the year we delivered increased sales of protection plans, combined energy and services products and smart thermostats, while also adding residential solar capability through the acquisition of Astrum Solar. In Direct Energy Services, our focus is now on delivering growth in the US and Alberta following the disposal of our Ontario home services business in October 2014.

At the end of June 2014, Centrica completed the acquisition of Bord Gáis Energy, the incumbent gas supplier and largest dual fuel supplier in the Republic of Ireland. The transaction added some 600,000 residential energy accounts, giving us a leading position in an adjacent deregulated market and providing a platform for growth. We will look to use our experience from the UK and US to develop innovative propositions for our customers in the Republic of Ireland, in both energy and services.

In Centrica Energy, upstream gas post-tax earnings in the year were largely protected from falling wholesale prices by the impact of hedging, tax allowances, and strong midstream performance. e delivered increased E&P production, reflecting a full year of production from assets acquired in Canada in 2013 in partnership with Qatar Petroleum International (QPI). During the year we further strengthened our important relationship with the State of Qatar, selling a 40% share of our wholly owned gas assets in Western Canada to fully align our interests in the region.

In power generation, nuclear output was lower reflecting the temporary shut-down of four reactors following the discovery of a boiler spine issue at Heysham 1 nuclear power station. All four reactors are now back on-line, although at reduced power until modifications are made to the boilers during planned maintenance periods.

In Centrica Storage, our Rough gas storage asset reached its highest ever net reservoir volume in November 2014, reflecting mild UK weather and good asset reliability. However the low seasonal gas price spreads resulted in much reduced year-on-year profitability.

Disposal programme

We completed the disposal of our Texas gas-fired power stations for £411 million in January 2014, releasing capital from non-core assets. In addition, during the year we announced a £1 billion programme of further non-core asset disposals and we completed the sale of our Ontario home services business for £270 million in October. We also ran a process to dispose of our three larger UK CCGTs - Langage, Humber and Killingholme. However, the bids we received were significantly lower than our internal valuation and we have concluded that it is not in the best interest of shareholders to proceed with the disposal of these stations. In addition, the fall in oil and gas prices has made the proposed disposal of our Trinidad and Tobago gas assets more challenging, although we will continue to review our options to release capital from the assets.

Competition and Markets Authority Investigation

The Competition and Markets Authority investigation into the UK energy market commenced in June, and we continue to engage constructively and comprehensively with this full review by an independent body. The CMA published their updated statement of issues on 18 February 2015 and is expected to set out provisional findings in May or June 2015.

2015 environment and outlook

Against the low commodity price backdrop we are taking positive action to improve earnings and cash flows in 2015 and 2016. We are focused on reducing capital expenditure through driving efficiencies on in-flight projects and putting a hold on certain new projects. Absent a material change in commodity prices, we expect E&P capital expenditure to fall to approximately £800 million in 2015 and to approximately £650 million in 2016, around 40% lower than 2014 levels. We will also maintain a tight control on production costs, examining all internal and external supply costs for our operated fields and working with our partners to reduce costs where we are not the operator. Reflecting these actions, we are targeting a 10% or £100 million reduction in our 2016 lifting and other cash production costs compared to 2014 levels, including absorbing the incremental costs of the Valemon and Cygnus fields which will be on-stream.

In power, the Humber and Langage gas-fired stations are cash generative at the operating level in the current environment. We will retain these assets, however following a review we plan to close the Killingholme and Brigg power stations. We will also be taking action to make the management of our power portfolio more efficient.

Downstream, it is vital that we focus on competitive pricing, customer service and operational efficiency. arly in 2015, we were able to announce price reductions for both our British Gas and Bord Gáis Energy residential customers, improving our competitive positions. n North America, margins on new B2B sales improved during 2014, resulting in much improved second half profitability and leaving the business well placed for further profit growth in 2015. We also made good progress in improving our service levels. However, there are further improvements we can make, in part enabled by investment in our IT platforms on both sides of the Atlantic.

We will continue to develop our leading position in smart metering, innovation and connected homes in the UK, which will enable us to offer enhanced customer offerings and drive greater customer engagement, while also creating new skilled jobs. Smart meters are already providing significant benefits to over 600,000 British Gas customers, providing an end to estimated bills and a greater ability to monitor and reduce consumption, while also delivering higher levels of customer satisfaction.

We will also continue to drive sales of our Hive Active Heating smart thermostat, which has extremely positive customer reviews, and we have a strong development pipeline of further innovative products, including time of use tariffs and a ‘connected boiler’. In February 2015 we agreed to acquire AlertMe, the company that provides the technical platform that underpins British Gas’ existing connected homes activity, including Hive. The acquisition will enable further development of connected homes products and services across the Group. In North America, we have also focused on differentiating our offering to the more valuable customer segments, through joint energy and services products, solar and innovative partnership agreements.

Across the Group, we are reviewing our resource efficiency, with a focus on cost to serve, overhead levels and working capital consumption, and have initiated a Group-wide performance improvement plan, including a strong cost focus.

Despite these actions, since our Interim Management Statement in November 2014 the reductions in commodity prices and power margins, the associated impact on our ability to make asset disposals in the current environment and the impact of systems implementation delays in BGB are estimated to have had a negative impact of about 2.5p on 2015 adjusted EPS. As a result, we expect adjusted earnings to be down in 2015 compared to 2014. arnings remain subject to the usual variables of commodity prices, weather and asset performance.

We have also taken the very difficult decision to rebase the dividend from the 2014 final payment. We are proposing a 2014 final dividend of 8.4 pence per share, 30% lower than the 2013 final dividend, which when added to the interim dividend of 5.1 pence, gives a 2014 full year dividend of 13.5 pence. We will also commence a scrip dividend programme as an alternative to the cash dividend, commencing with the final dividend, subject to shareholder approval.

Our primary role as a Group is to supply energy and services to our customers, and we provide security for that energy both by owning gas and electricity production and also in midstream by hedging, procurement and optimisation activities. To do this, the Group requires a strong investment grade credit rating.

The Group currently has an A3 credit rating with Moody’s and an A- credit rating with S&P, with both agencies having placed their rating on negative outlook in the summer. Since then, the fall in commodity prices has impacted the Group’s cashflows, with a corresponding reduction in its credit metrics. The actions we are taking to improve cashflow through the reduction of capital expenditure and operating costs, and the rebasing of the dividend, are therefore necessary both to balance sources and uses of cash in 2015 and to underpin the financial metrics necessary for strong investment grade credit ratings.

Summary

I joined Centrica at the start of the year and have spent my first weeks visiting our operations, meeting people and deepening my understanding of the Group. Despite the challenges we face, under Sam Laidlaw Centrica has built attractive positions and good capabilities in the UK, Republic of Ireland, Norway, Netherlands and North America. Given the current commodity price environment, we are taking a number of immediate actions and regrettably have had to take action to re-base the dividend. We are also conducting a review of our longer term strategy, including the financial framework for the company. We will be in a position to share our conclusions by the time of the Interim Results in July 2015.

Despite the current challenges, I am convinced that the Group is well-placed to build on its existing strengths and be able to compete and contribute materially against the emerging long term trends in global energy markets.

Iain Conn
Chief Executive
19 February 2015

GROUP FINANCIAL REVIEW

Group revenue

Group revenue increased by 11% to £29.4 billion (2013: £26.6 billion). British Gas gross revenue decreased by 9%, reflecting the impact of record mild weather in the UK in 2014 compared to colder than normal temperatures in 2013. Residential energy supply gross revenue fell by 12%, with the warmer weather resulting in a 21% fall in total gas consumption and a 9% fall in total electricity consumption. Residential services gross revenue was broadly flat, with the impact of higher central heating installation volumes and inflationary price increases offset by lower product holdings and a shift towards lower priced offerings. Business energy supply and services gross revenue fell by 3%, with lower consumption due to the warm weather and lower average accounts only partially offset by higher retail tariffs.

Direct Energy gross revenue increased by 62%. This primarily reflects a full year of revenue from the Hess Energy Marketing acquisition, completed in November 2013, with business energy supply gross revenue more than doubling as a result. Residential energy supply gross revenue increased by 2%, reflecting additional gas volume as a result of extreme weather conditions across much of North America. Residential and business services gross revenue fell by 8%, reflecting the disposal of the Ontario home services business in October. Bord Gáis Energy reported gross revenue of £391 million in the six months of trading following completion of the acquisition at the end of June.

Centrica Energy gross revenue fell by 17%. Gas gross revenue fell by 21%, reflecting falling oil and gas prices and power gross revenue fell by 3% primarily reflecting lower nuclear output. Centrica Storage gross revenue fell by 21% reflecting lower seasonal gas price spreads.

Operating profit

Throughout the statement, reference is made to a number of different profit measures, which are shown below:

    2014 2013
Year ended 31 December Notes Business performance
£m
Exceptional items and certain re-measurements
£m
Statutory result
£m
Business performance
£m
Exceptional items and certain re-measurements
£m
Statutory result
£m
Adjusted operating profit              
British Gas   823     1,030    
Direct Energy   150     276    
Bord Gáis Energy   7        
Centrica Energy   737     1,326    
Centrica Storage   29     63    
Total adjusted operating profit 5c 1,746     2,695    
Depreciation of fair value uplifts from Strategic Investments (nuclear post-tax) 5c (78)     (66)    
Interest and taxation on joint ventures and associates 5c (100)     (111)    
Group operating (loss)/profit 5c 1,568 (2,705) (1,137) 2,518 (626) 1,892
Net finance cost 7 (266) (266) (243) (243)
Taxation 6,8 (375) 773 398 (942) 243 (699)
(Loss)/profit for the year   927 (1,932) (1,005) 1,333 (383) 950
Attributable to non-controlling interests   (24)        
Depreciation of fair value uplifts from Strategic Investments, after taxation 10 59     37    
Adjusted earnings   962     1,370    

British Gas operating profit fell by 20%. Residential energy supply operating profit fell by 23%, with lower revenue only partially offset by lower total wholesale commodity costs. Residential energy supply operating profit also included £46 million of costs from transportation and LNG capacity, previously reported in Centrica Energy, which enables the business to bring gas into the UK. Residential services profit fell by 15% reflecting lower margins in challenging trading conditions and a lower average number of contracts. Business energy supply and services operating profit fell 19% reflecting the lower revenue, competitive pressures resulting in lower margins, and a higher bad debt charge due to the impact of the transition to a new billing system.

Direct Energy operating profit fell by 46%. This predominantly reflects challenging competitive market conditions leading to a narrowing of margins in both residential and business energy supply, in particular in our legacy B2B power business, and additional ancillary and other charges incurred as a result of the polar vortex, estimated at approximately $110 million (£65 million). Residential energy supply profit fell by 45% and business energy supply profit fell by 58%. Residential and business services profitability fell by 22%, reflecting the sale of the Ontario home services business.

Bord Gáis Energy made an operating profit of £7 million in the six months post acquisition, including one-time acquisition-related costs.

Centrica Energy operating profit fell by 44%. In gas, despite increased production, the benefits of prior year hedging, and strong midstream performance, operating profit almost halved reflecting the impact of a lower wholesale price environment. Power profitability fell by 23%, reflecting lower output from the nuclear fleet, and higher net losses associated with asset impairments and disposals.

Centrica Storage operating profit more than halved, reflecting the impact of low seasonal gas price spreads.

Group finance charge and tax

Net finance cost increased to £266 million (2013: £243 million), reflecting higher notional interest. The taxation charge reduced to £375 million (2013: £942 million) and after taking account of tax on joint ventures and associates and the impact of fair value uplifts, the adjusted tax charge was £432 million (2013: £1,022 million). The resultant adjusted effective tax rate for the Group was 30% (2013: 43%), reflecting a shift in the mix of profit towards the lower taxed downstream businesses. In addition, a number of items acted to reduce the rate, specifically upstream small field tax allowances, deferred tax credits relating to the disposal of the Greater Kittiwake assets and a re-organisation of Power legal entities. Without these allowances and credits, the adjusted UK effective tax rate would have been 29%. An effective tax rate calculation, showing the UK and non-UK components, is shown below:

  2014 2013
Year ended 31 December UK £m Non-UK £m Total £m UK £m Non-UK £m Total £m
Adjusted operating profit 1,285 461 1,746 1,903 792 2,695
Share of joint ventures/associates interest (62) (62) (60) (60)
Net finance cost (152) (114) (266) (146) (97) (243)
Adjusted profit before taxation 1,071 347 1,418 1,697 695 2,392
Taxation on profit 125 250 375 493 449 942
Tax impact of depreciation on Venture fair value uplift 19 19 29 29
Share of joint ventures’/associates’ taxation 38 38 51 51
Adjusted tax charge 182 250 432 573 449 1,022
Adjusted effective tax rate 17% 72% 30% 34% 65% 43%

Group earnings and dividend

Reflecting all of the above, profit for the year fell to £927 million (2013: £1,333 million) and after adjusting for profits attributable to non-controlling interests and fair value uplifts, adjusted earnings were £962 million (2013: £1,370 million). Adjusted basic earnings per share (EPS) was 19.2 pence (2013: 26.6 pence).

The statutory loss attributable to shareholders for the year was £1,012 million (2013: profit of £950 million). The reconciling items between Group profit for the year from business performance and statutory loss/profit are related to exceptional items and certain re-measurements. The change compared to 2013 is due to lower profit from business performance, a net loss from certain re-measurements of £771 million (2013: profit of £284 million) and higher net exceptional charges of £1,161 million (2013: £667 million). The group reported a statutory basic EPS loss of 20.2 pence (2013: profit of 18.4 pence).

In addition to the interim dividend of 5.1 pence per share, we propose a final dividend of 8.4 pence, giving a total ordinary dividend of 13.5 pence for the year (2013: 17.0 pence).

Group cash flow, net debt and balance sheet

Group operating cash flow before movements in working capital was lower at £2,726 million (2013: £3,737 million), reflecting the reduced profit from business performance. After working capital adjustments, tax, and payments relating to exceptional charges, net cash flow from operating activities was £1,217 million (2013: £2,940 million), which includes the impact of a net outflow of £640 million (2013: £82 million inflow) of cash collateral due to falling commodity prices.

The net cash outflow from investing activities was lower at £651 million (2013: £2,351 million), reflecting the disposal of the Texas gas-fired power stations and Ontario home services business, and significant acquisition spend in 2013 primarily related to the Hess Energy Marketing acquisition.

The net cash outflow from financing activities was £663 million (2013: £791 million). The outflow was lower than in 2013 due to the investment by QPI in our Canadian upstream gas business and a lower cash outflow from the purchase of treasury shares under the share repurchase programme.

Reflecting all of the above, the Group’s net debt at 31 December 2014 was £5,196 million (2013:  £4,942 million), which now includes within its definition cash collateral posted or received, to support wholesale energy procurement.

During the year net assets reduced to £3,071 million (2013: £5,257 million). This reflects the impact of dividend payments, the share repurchase programme and the statutory loss in the year.

Exceptional items

Net exceptional pre-tax charges of £1,597 million were incurred during the year (2013: £1,064 million). Taxation on these charges generated a credit of £436 million (2013: £397 million) which resulted in exceptional post-tax charges of £1,161 million (2013: £667 million).

Reflecting declining wholesale oil and gas prices, the Group recognised a total pre-tax impairment charge of £1,189 million (post-tax charge £712 million) on a number of E&P assets.

Reflecting declining clean spark spreads and capacity market auction prices, the Group recognised a pre-tax impairment charge of £371 million (post-tax charge £297 million) relating to Langage and Humber power stations, and a pre-tax impairment charge of £164 million (post-tax charge £162 million) on its other UK gas-fired power stations. The Group also recognised an impairment charge of £214 million (post-tax charge £214 million) on its nuclear investment, also due to declining power prices and the capacity market auction prices.

On 22 January 2014 the Group disposed of its Texas gas-fired power stations to Blackstone Group LP for consideration of $685 million (£411 million). As a result, an exceptional pre-tax gain of £219 million was recognised during the year. Taxation on this gain generated a charge of £77 million, resulting in an exceptional post-tax gain of £142 million.

On 20 October the Group disposed of the Ontario home services business for cash consideration of C$426 million (£235 million) as well as shares in the acquirer, Enercare Inc., of C$106 million (£59 million), which are listed on the Toronto Stock Exchange (TSX). As a result, an exceptional pre-tax gain of £122 million was recognised during the year. Taxation on this gain generated a charge of £40 million, resulting in an exceptional post-tax gain of £82 million.

Certain re-measurements

The Group enters into a number of forward energy trades to protect and optimise the value of its underlying production, generation, storage and transportation assets (and similar capacity or off-take contracts), as well as to meet the future needs of our customers. A number of these arrangements are considered to be derivative financial instruments and are required to be fair-valued under IAS 39. The Group has shown the fair value adjustments on these commodity derivative trades separately as certain re-measurements, as they do not reflect the underlying performance of the business because they are economically related to our upstream assets, capacity/off-take contracts or downstream demand, which are typically not fair valued. The operating loss in the statutory results includes net pre-tax losses of £1,108 million (2013: net gains of £438 million) relating to these re-measurements, largely as a result of falling forward prices, particularly in the second half of the year. The Group recognises the realised gains and losses on these contracts in business performance when the underlying transaction occurs. he profits arising from the physical purchase and sale of commodities during the year, which reflect the prices in the underlying contracts, are not impacted by these re-measurements. See note 6 for further details.

Acquisitions and disposals

On 30 June 2014, the Group acquired Bord Gáis Energy’s gas and electricity supply business in the Republic of Ireland, including the Whitegate gas-fired power station, for total consideration of €214 million (£172 million).

On 29 July 2014, the Group acquired a 100% equity interest in Astrum Solar’s residential business for consideration of $53 million (£33 million).

On 27 June 2014, the Group acquired natural gas assets in the Foothills region of Alberta from Shell Canada Energy for C$42 million (£23 million). The assets were acquired by CQECP, the 60:40 partnership with QPI.

In addition to the disposals of the Ontario home services business and the Texas gas-fired power stations, referenced in ‘Exceptional items’, the Group disposed of the Barrow offshore wind farm to DONG Energy for a consideration of £50 million.

Further details on acquisitions, plus details of asset purchases, disposals and disposal groups are included in notes 5(f) and 15.

Events after the balance sheet date

On 13 February 2015, Centrica announced that British Gas will acquire AlertMe, a UK-based connected homes company that provides innovative energy management products and services. The net cost to British Gas will be £44 million, taking into account an existing 21% holding in AlertMe. It is anticipated that the transaction will close by the end of the first quarter of 2015.

Further details of events after the balance sheet are described in note 17.

Risks and capital management

The Group’s principal risks and uncertainties as disclosed in 2013 remain largely unchanged however the combination of a number of individual risks coming together in 2014 have impacted the results, as outlined above. Details of how the Group has managed financial risks such as liquidity and credit risk are set out in note 4. Details on the Group’s capital management processes are provided under sources of finance in note 11a.

Accounting policies

UK listed companies are required to comply with the European regulation to report consolidated financial statements in conformity with International Financial Reporting Standards (IFRS) as adopted by the European Union. The Group’s specific accounting measures, including changes of accounting presentation and selected key sources of estimation uncertainty, are explained in notes 1, 2 and 3.

BUSINESS REVIEW

British Gas

Year ended 31 December 2014 2013 Change
  1. 2013 residential energy customer accounts have been restated to exclude 110,000 accounts subsequently reclassified as dormant
  2. 2013 business energy supply points have been restated to include 4,000 supply points to align to industry reporting changes
Residential energy supply operating profit (BGR) £439m £571m (23%)
Residential services operating profit (BGS) £270m £318m (15%)
Business energy supply and services operating profit (BGB) £114m £141m (19%)
Total British Gas operating profit £823m £1,030m (20%)
BGR post-tax margin 4.1% 4.5% (0.4ppts)
BGR customer accounts (year end, ’000) (i) 14,778 15,146 (2%)
BGS product holding (year end, ’000) 7,970 8,227 (3%)
BGB supply points (year end, ’000) (ii) 854 916 (7%)
BGR average gas consumption per customer (therms) 408 492 (17%)
BGR average electricity consumption per customer (kWh) 3,498 3,688 (5%)
British Gas total gas consumption (mmth) 4,085 5,126 (20%)
British Gas total electricity consumption (TWh) 39.1 42.4 (8%)

British Gas faced a challenging environment in 2014, with the warmest year on record in the UK, difficult trading conditions, major systems migrations, and continued political, regulatory and media focus. gainst this backdrop, British Gas has a clear strategy focused on three priorities: deliver great service, transform to grow and engage our stakeholders.

British Gas Residential

British Gas Residential operating profit fell, reflecting lower average gas and electricity consumption predominantly due to the mild weather in the UK in 2014 compared to colder than normal temperatures in 2013. The average actual customer bill of £1,152 in 2014 was around £100 lower than in 2013, and the average profit per customer of £42 was nearly £10 lower than last year.

The number of residential accounts on supply reduced by 368,000 in 2014 and ended the year at 14.8 million. At the end of the year, we reviewed our definition of energy accounts on supply, which resulted in a downwards restatement of the number of opening accounts by 110,000. We experienced significant losses in the first quarter of the year, following an increase in residential prices in November 2013. However the rate of losses was reduced over the balance of the year, with British Gas being the first energy company to reduce prices following proposed changes to the Energy Company Obligation (ECO) programme announced in December 2013, improved service levels, and the launch of competitively priced offerings. The market remains highly competitive, with recent reductions in standard tariffs and most suppliers also offering a range of fixed price products.

Service levels in British Gas Residential improved with average call answering times lower than 2013, helping drive a significant improvement in our contact net promoter score (NPS). The British Gas brand NPS also recovered during the year, ending in positive territory for the first time since March 2012. In the fourth quarter we completed the migration of all our residential customers onto a new customer relationship management (CRM) platform, and the new system is helping deliver a more integrated customer experience.

Innovation and smart connected homes

In the UK, we continue to lead the industry in technology, innovation and smart connected homes. Around two thirds of our customer interactions are made through digital channels, with around half of those now initiated from a mobile or tablet device. ustomer downloads of our top-rated app have now surpassed 1.5 million, and we were recently awarded ‘Most Popular Website’ in the utility category in the ‘Website of the Year’ 2014 awards.

We have installed around 1.3 million residential smart meters in the UK. Over 500,000 British Gas customers with smart meters now regularly receive our unique smart energy report, ‘my energy’, which provides 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 to improve levels of customer satisfaction and the overall perception of British Gas.

We have taken the lead in the roll-out of smart meters to prepayment customers, and the ongoing trial of our SMETS1 capable prepayment meter will enable us to commence the full roll-out by the end of 2015. Additionally, leveraging our experience from Direct Energy, we have also successfully trialled our smart meter enabled ‘Free Saturdays or Sundays’ energy tariffs, with a full launch planned in the second half of 2015.

We have now sold over 170,000 smart thermostats, with sales of our Hive Active Heating product currently running at around 3,000 a week, and have established retail partnerships with Apple, John Lewis and Amazon. Hive has been received extremely positively with over 90% of customers recommending the product and 96% saying they feel more in control of their heating than before. In February 2015 we announced the acquisition of AlertMe, the provider of the technical platform that underpins our existing connected homes activity, including Hive, and will enable ownership and control over a scalable technology platform, software development capability, data analytics and a patent portfolio. We have a strong development pipeline of further innovative products with a ‘connected boiler’ and ‘virtual in home display’ both currently on commercial trial and with planned launch dates in the second half of 2015.

Helping people today

Helping customers to reduce and control their energy consumption is the most sustainable way to keep bills down. We have made good progress in delivering our commitments under the ECO programme and we completed our March 2015 targets in December 2014, subject to Ofgem confirmation. To date, we have delivered energy efficiency measures to over 350,000 households under the programme.

We continue to lead the industry in helping customers most in need and in 2014 we helped nearly 1.8 million households. There are also fewer residential energy customers in debt than a year ago, and on average these customers have lower levels of debt. We have one of the widest eligibility criteria among all energy suppliers for the Warm Home Discount, which benefited over 500,000 customers during the year by up to £140. The bills of our customers most in need were on average 13% lower in 2014 than in 2013.

British Gas Services

British Gas Services operating profit reduced reflecting the decline in the number of contract holdings, lower on-demand volumes due to warmer weather, higher pension costs, and the change in product mix towards flexible, cheaper product offerings.

While retention levels for contract customers remained high, the sales environment has been challenging. s a result, the number of product holdings fell by 257,000 in the year, to slightly under 8 million. However we returned to growth in the final quarter of the year. This follows the migration of all accounts onto the new billing and CRM platform and the completion of comprehensive sales and conduct training for our front line staff, as well as the development of an enhanced digital offering and innovative customer propositions. The market for central heating installations showed signs of recovery in the year and the number of boilers installed increased by 3% in the year compared to 2013.

British Gas Services delivered very high levels of customer service in 2014, both in our contact centres and in customers’ homes. Customer complaints fell by 14% compared to last year, while the NPS for our engineers increased to a record high of +68 in December 2014. New terms and conditions, aimed at delivering greater operational flexibility to meet customer needs, were agreed with our engineers and their union in 2014 and are now in place

British Gas Business

British Gas Business operating profit fell, primarily due to lower average consumption as a result of the mild weather, competitive pressures leading to lower margins and accounts, and a higher bad debt charge due to the impact of the transition to a new billing system.

The number of business supply points fell by 62,000 in 2014 reflecting the highly competitive conditions in the business energy market and our decision to lead the industry in ending the auto-rollover of contracts at renewal. Towards the end of the year, cleansing of data following the implementation of the new billing system resulted in the removal of 49,000 supply points.

As a result of some transitional issues following the implementation of a new billing system, which we are now resolving, we now expect to deliver £100 million of targeted reductions in operating costs and bad debt by the end of 2016, a year later than originally planned. These savings will help to offset the margin pressures from a competitive market.

To drive growth in BGB we are focusing our proposition development on dual fuel, energy efficiency and joint energy and services offers. We continue to develop our business services capabilities and revenues from these activities grew by 10% in the year. n July we announced our participation in the Generation Community scheme to deliver up to £60 million in solar photovoltaic solutions for Local Authority and Housing Association properties. The ability to offer energy management services, products and technologies is a key differentiator and will help us retain existing customers and acquire new ones.

Direct Energy

Year ended 31 December 2014 2013 Change
  1. DES 2014 product holding reflects the disposal of the Ontario home services business, which had 1.9 million product holdings at the time of disposal
Residential energy supply operating profit (DER) £90m £163m (45%)
Business energy supply operating profit (DEB) £32m £77m (58%)
Residential and business services operating profit (DES) £28m £36m (22%)
Total Direct Energy operating profit £150m £276m (46%)
Total Direct Energy operating profit (excluding polar vortex impact) £215m £276m (22%)
DER customer accounts (year end, ’000) 3,256 3,360 (3%)
DES product holding (year end, ’000) (i) 897 2,608 (66%)
DER average gas consumption per customer (therms) 1,403 1,296 8%
DER average electricity consumption per customer (kWh) 10,888 10,862 0%
DEB total gas volumes (mmth) 5,923 1,839 222%
DEB total electricity volumes (TWh) 96.9 63.9 52%
Direct Energy total gas volumes (mmth) 8,163 3,883 110%
Direct Energy total electricity volumes (TWh) 116.3 83.4 39%

Direct Energy faced challenging conditions in 2014, with extreme weather conditions caused by the polar vortex in the first quarter of the year, estimated at approximately $110 million (£65 million), and margin pressures across most of our markets in energy supply. Overall operating profit fell by 46% compared to 2013, and on a constant currency basis fell by 43%. However during the year we added significant value through the completion of disposals of non-core assets, recognising a £219 million profit on disposal on the sale of our Texas gas-fired power stations, and a £122 million profit on disposal from the sale of our Ontario home services business.

A $100 million cost reduction programme was launched at the start of the year, to help improve Direct Energy’s competitive position. The programme was successfully completed towards the end of 2014.

The outlook for 2015 is more positive and we are positioned for growth, with the effect of increased sold B2B unit margins in 2014 following the polar vortex starting to positively impact profitability. We also continue to develop a broad range of innovative energy and services product offerings to improve customer retention and attract the highest value customers in our residential energy business, to build innovative partnership offerings in our B2B business in compressed natural gas (CNG) and solar, and have additional growth opportunities in residential services following our acquisition of Astrum Solar.

Direct Energy Residential

Direct Energy Residential operating profit fell due to additional costs relating to the extreme weather conditions in early 2014, and a competitive sales environment in both Texas and the US North East, which led to a reduction in unit margins. he number of residential energy accounts decreased by 104,000 over 2014, predominantly reflecting the expected decline in Ontario, with the Energy Consumer Protection Act (ECPA) making retention of customers difficult, and impact of the competitive market in Texas. Against this challenging backdrop, we remain focused on delivering high levels of customer service and higher levels of customer retention, and we have now successfully implemented a new residential billing platform in Alberta.

Sales through digital channels doubled in 2014 compared to 2013, with the acquisition of Bounce Energy in 2013 having provided a leading internet-based platform and digital marketing capabilities. We are also focused on differentiating our offering to the more valuable customer segments through the development of innovative products and bundled energy and services offerings, which we started selling in the first half of the year and now have over 189,000 joint residential and services customers with sales averaging around 6,000 per week during the fourth quarter. We have also sold over 39,000 smart thermostats through our partnerships with Nest and Honeywell.

Direct Energy Business

The integration of the Hess Energy Marketing acquisition is now fully completed and the business is performing ahead of our investment case. Direct Energy is now the largest commercial and industrial (C&I) gas supplier and the second largest C&I power supplier in the competitive US retail market, as well as a top 10 wholesale gas marketer in North America in the Platts third quarter rankings. In addition to enhanced scale, the business is also set up to benefit from portfolio diversification and expansion along the gas value chain.

Despite increased volumes resulting from the Hess Energy Marketing acquisition, Direct Energy Business operating profit fell, reflecting the one off impact of the polar vortex, lower margins on power sales made in prior periods, and mild weather late in the year resulting in low levels of commodity price volatility and leading to fewer optimisation opportunities. However, average C&I sold unit margins in the second half of 2014 were 35% higher for gas and 50% higher for power compared to the second half of 2013, reflecting a re-pricing of risk following the polar vortex, with second half profit being significantly higher than in 2013. Combined with a lower amortisation charge relating to the Hess acquisition, this leaves the business well placed for strong underlying growth in 2015.

We continue to develop innovative propositions for our C&I customers. We have a partnership agreement with Panoramic Power to offer wireless energy sensors to help customers better understand their power consumption. We are also helping our customers implement energy efficiency projects through a network of partners across the US. In the fourth quarter, we agreed a joint venture with Xpress Natural Gas on a CNG station in New York State, that will enable us to transport CNG to customers with no access to distributed natural gas. In solar, to date we have deployed around 60% of our $125 million fund with SolarCity and are expanding our offering, both in funds and the types of projects we support.

In January 2014 we completed the sale of our three Texas gas-fired power stations for £411 million. Following the sale we are supporting our downstream demand needs in Texas through a combination of the liquid physical and financial power markets and a three-year heat rate call option for an equivalent amount of capacity.

Direct Energy Services

In Direct Energy Services we completed the sale of the Ontario home services business for C$532 million (£294 million) in October. This was an attractive opportunity to realise value from the business in a region where joint energy and services opportunities are more limited, and focus our attention on opportunities in the US and Alberta, where we see good prospects for growth.

Total Direct Energy Services operating profit reduced by 22%, although profit from the non-Ontario business remained flat. Excluding the Ontario home services business, which had 1.9 million customer accounts, the number of services accounts was up 23%. We now have over 312,000 protection plan customers across the US, while our HVAC (heating, ventilation and air conditioning) leasing proposition continues to perform well as customers are willing to undertake a higher value of work when purchased through rental payments as opposed to upfront payment. In addition, the future pipeline of work for our residential new construction, commercial and solar business was $79 million, a record for the business. The business continued to deliver high levels of customer service, with NPS closing the year at +62.

In July, we entered the rapidly growing US residential solar market through the acquisition of Astrum Solar. This transaction enables Direct Energy to sell solar alongside its existing range of energy and services products, as we look to develop further attractive propositions to attract the highest value customers. We completed around 600 residential solar installations in 2014 following the acquisition, 50% more than Astrum Solar installed over the same period in 2013.

Bord Gáis Energy

Year ended 31 December 2014 2013 Change
Total Bord Gáis Energy operating profit £7m nm
Residential energy customer accounts (year end, ’000) 608 nm
Residential average gas consumption per customer (therms) 127 nm
Residential average electricity consumption per customer (kWh) 2,373 nm
Total gas volumes (mmth) 106 nm
Total electricity volumes (TWh) 1.4 nm
Total power generated (TWh) 0.9 nm

On 30 June 2014, Centrica completed the acquisition of Bord Gáis Energy in the Republic of Ireland, a supply business with power generation capacity in an adjacent deregulated market, providing a good platform for growth. Bord Gáis Energy is the incumbent gas supplier and largest dual fuel supplier in the Republic of Ireland with over 600,000 residential accounts and 30,000 business supply points.

The business made an operating profit of £7 million in the first six months of Centrica’s ownership, including one-time integration and acquisition costs and some unplanned outages at the Whitegate gas-fired power station. In 2015 we expect the business to contribute around €40 million (£31 million) EBITDA, in line with the investment case.

Centrica Energy

Year ended 31 December 2014 2013 Change
  1. Includes 100% share of Canadian assets owned in partnership with QPI
  2. Centrica’s share of reserves, including a 60% share of Canadian assets owned in partnership with QPI, and excluding Rough cushion gas of 30mmboe. Includes the impact of QPI’s investment in 40% of our wholly-owned Canadian gas and liquids assets in the year
Gas operating profit £606m £1,155m (48%)
Power operating profit/(loss) £131m £171m (23%)
Gas-fired (£120m) (£133m) nm
Renewables (operating assets) £27m £36m (25%)
Renewables (one off write-offs, profit/loss on disposal) (£17m) (£11m) nm
Nuclear £210m £250m (16%)
Midstream £31m £29m 7%
Total Centrica Energy operating profit £737m £1,326m (44%)
Gas operating profit after tax £302m £325m (7%)
Gas production (mmth) (i) 3,772 3,557 6%
Liquids production (mmboe) (i) 17.3 18.7 (7%)
Total gas and liquids production (mmth) (i) 4,822 4,690 3%
Total gas and liquids production (mmboe) (i) 79.5 77.3 3%
Upstream proven and probable reserves (mmboe) (ii) 585 711 (18%)
Total UK power generated (TWh) 22.1 21.7 2%

Centrica Energy’s diversified upstream and midstream portfolio and hedging helped to mitigate against the impact of a falling wholesale oil and gas price environment in 2014. However the lower wholesale price environment creates a challenging backdrop, and we are enforcing strict financial discipline, with the management team taking action to reduce capital expenditure and costs and progressing asset disposals to release capital.

Gas

Our E&P business continued to see good production from previous investments in Norway and Canada, however production from the UK and Netherlands was disappointing. Total gas and liquids production increased by 3% to 79.5mmboe, with gas volumes up 6% and liquids volumes down 7%.

Production in the Americas increased by 68% reflecting a full year of production from the assets acquired from Suncor in September 2013, in partnership with Qatar Petroleum International (QPI). During 2014, we strengthened our relationship with QPI, who invested in 40% of our wholly-owned Canadian gas and liquids assets in October for C$215 million (£119 million), fully aligning our interests in the region. The partnership also acquired a package of natural gas assets in Alberta from Shell Canada Energy for C$42 million (£23 million) and production from these assets, combined with new production wells, helped the Canadian business end the year at record high production volumes.

Production in Europe decreased by 16%, partly as a result of the disposals of three packages of North Sea assets, all announced in late 2013. We experienced some production issues in the UK and Netherlands, with gas export constraints in the Greater Markham Area (GMA) and lower than expected flows from York. However production rates in the GMA increased towards the end of the year, and a fourth well was brought online at York in the second half. Our assets in Norway performed well, with strong production from the Kvitebjorn asset, ahead of our original investment case.

The large scale Valemon project in the Norwegian North Sea was brought on-stream in January 2015, with further wells being drilled over 2015 and into 2016 to maximise the recoverable reserves from the field. The Cygnus project in the Southern North Sea remains on schedule to produce first gas around the end of 2015. We also produced first gas from the Kew field at the start of 2014 and from an additional well drilled at Grove in the second half of the year. 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 will enable us to optimise the development of the main Butch field.

On exploration, six out of seven wells drilled in Europe were successful in finding hydrocarbons and three, Valemon North, Cepheus and Pegasus were classified as commercial discoveries. e also wrote down exploration costs in respect of Solberg, Ivory and Novus drilled in 2014 and Fulham and Olympus, which were drilled in previous years and face significant development challenges to be commercial in the current price environment. In addition we wrote off exploration licenses originally acquired as part of the Venture acquisition, and impaired the Bains asset and a recent failed well drilled on Buckland.

In the year we recognised exceptional post-tax impairments of £712 million relating to our E&P assets, predominantly as a result of declining oil and gas prices, including £265 million on our assets in Trinidad and Tobago. We will continue to review our options to release capital from these assets.

Centrica Energy’s proven and probable (2P) reserves reduced by 18% to 585mmboe, reflecting production in the year and the sale of a 40% share of our wholly-owned gas assets in Western Canada to QPI. This also reflects a reduction in reserve expectations from some UK fields, with updated production flow data as well as the lower price environment making a number of future developments uneconomic and leading to an earlier forecast cessation of production on some assets.

In view of the current oil and gas price levels, we have taken action to scale back exploration and development expenditure across the portfolio, particularly in Canada where we have flexibility to manage drilling programmes in line with the sharp price drop. In 2014, total E&P capital expenditure was above £1 billion and we expect this to reduce to approximately £800 million in 2015. We have taken further steps to reduce expenditure in 2016 to approximately £650 million, which is substantially below previous guidance. Reflecting lower capital expenditure, we expect total production in 2015 to be around 75mmboe.

Our midstream business performed well as we managed periods of wholesale market volatility and falling commodity prices. We also optimised our flexible gas contracts during the fall in summer gas prices to realise additional value, resulting in a significant increase in the midstream gas profit in 2014, partially offset by a consequential reduction in expected results for 2015. In LNG, Federal Energy Regulatory Commission (FERC) approval for the fifth train at Cheniere’s Sabine Pass export facility is anticipated around the end of the first quarter of 2015, and the project remains on course to enable the first commercial delivery through our contract by the end of 2018. We also took delivery of our first ‘Free on Board’ cargoes in the fourth quarter, as we look to increase our presence and capability in LNG.

 

Gas operating profit fell by 48% despite increased production, reflecting lower wholesale oil and gas prices. However profit after tax was only down 7%, reflecting the benefits from forward hedging, a strong midstream performance, production mix weighted towards lower taxed assets, non-recurring small field tax allowances and a tax credit relating to the disposal of the Greater Kittiwake assets. Unit lifting and other cash production costs increased by 6%, principally reflecting lower production from European fields.

In the low wholesale price environment, we have acted to manage our cost base, examining all our internal and external supply costs for our operated fields.  We are also working with our partners to reduce costs where we are not the operator.  Reflecting these actions, we are targeting our 2016 lifting and other cash production costs to be around 2013 levels.  This requires a 10% reduction on 2014 as well as absorbing the incremental costs of Valemon and Cygnus which will be on-stream.

Power

In December 2014, the UK’s first power capacity auction took place for capacity in 2018/19. The auction clearing price was £19.40/kw/year, significantly below market expectations. Our Humber and Langage gas-fired power stations were both successful in the auction, as were all the nuclear reactors in which we have a 20% equity interest. However our remaining four operational gas-fired stations at Barry, Brigg, Killingholme and Peterborough were unsuccessful, as was King’s Lynn which is currently mothballed.

During the year, we commenced a process to dispose of our three larger UK gas-fired power stations. However the low capacity auction price resulted in an expected consequential decline in bidder confidence, and we decided that a disposal was no longer highly probable.  As a result, the assets were reclassified out of assets held for sale as at 31 December.  In 2015 we received bids that were lower than our internal valuation, and we have concluded that it is not in the best interest of shareholders to proceed with the disposal of these stations. Humber and Langage are cash generative at the operating level in the current environment. We will retain these assets, however following a review we plan to close the Killingholme and Brigg power stations. We will also be taking action to make the management of our power portfolio more efficient.

Reflecting the result of the capacity auction and declining power prices, we recognised a post-tax impairment of £459 million on our UK gas-fired power generation assets and a post-tax impairment of £214 million on our investment in the UK nuclear fleet.

In 2014, output from our interest in the UK nuclear fleet was down 7% compared to 2013, reflecting the temporary shut-down of four reactors at the Heysham 1 and Hartlepool power stations following discovery of a boiler spine issue at Heysham 1 in August. All reactors have now returned to service following inspections of all boiler spines at the affected reactors which found no further defects, however the four affected reactors will operate at 75-80% power until modifications are made to the boilers during standard maintenance periods in 2015 and 2016. Reflecting the lower output, nuclear operating profit fell 16%.

Gas-fired generation volumes were 12% higher than in 2013, although market spark spreads remained low throughout the year, and the forward market currently shows little sign of recovery in 2015. Our gas-fired business reported a reduced operating loss of £120 million, which includes a £39 million depreciation saving as a result of the three larger power stations being classified as held for sale assets for eight months in 2014.

Our wind assets delivered generation volumes up 20%, reflecting a full contribution from the Lincs offshore wind farm. Reflecting our focus on capital discipline, at the half year we reviewed the economic viability of the Round 3 Irish Sea Zone project, Celtic Array, following discussions with The Crown Estate and our partners in the project, DONG Energy, and have now handed the license back to the Crown Estate. As a result we recognised a charge of £40 million, principally in respect of writing off the total book value of the project. In November, the sale of the Lincs transmission assets under the offshore transmission owner (OFTO) regime was completed in line with book value, while in December we sold our 50% non-operated interest in the Barrow offshore wind farm to DONG Energy for £50 million, with Centrica recognising a £26 million pre-tax profit from the disposal.

Renewables operating profit fell by 60% compared to 2013, reflecting a reduced contribution from the disposal of assets and increased costs associated with writing down developments.

Centrica Storage

Year ended 31 December 2014 2013 Change
Total Centrica Storage operating profit £29m £63m (54%)

The Rough gas storage asset reached its highest ever net reservoir volume (NRV) in November 2014, reflecting the lower level of withdrawal in the first quarter due to the warmer than normal weather combined with continued good asset reliability.

Seasonal gas price spreads fell to historic lows towards the end of 2013 due to the abundance of flexible supply across North West Europe and warm weather. As a result the average Standard Bundled Unit (SBU) price for the 2014/15 storage year fell to 20.0p, lower than the 23.3p achieved in 2013/14 and the 33.9p achieved in 2012/13. This resulted in a 21% reduction in SBU revenue in 2014 compared to 2013, and operating profit fell by 54%.

At the start of 2014 we commenced a three year programme to deliver £15 million of cost reductions through operational improvements and capital discipline. We are on track to deliver this with significant progress in the year on business restructuring, reductions in capital expenditure and improved maintenance planning.

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