TIDMCNA
27 April 2015 Centrica plc ('the Company')
Interim Management Statement
Summary
Centrica is today providing an update on its business
performance. Overall, the Group continues to trade in line with the
guidance provided at the time of its 2014 Preliminary Results in
February, with improved year-on-year profitability downstream
expected to be more than offset by the impact of lower commodity
prices on the upstream business. In the year to date, the Group
has:
-- experienced colder than normal weather in both the UK and North
America, resulting in higher than expected energy consumption
in
British Gas and Direct Energy;
-- progressed capital expenditure and cost reduction programmes in E&P
against a continued low commodity price backdrop;
-- made good progress in strengthening its balance sheet and financial
metrics, through the issue of GBP1 billion equivalent of
hybrid
securities and the sale of Lincs wind farm debt; revised
Moody's
credit rating of Baa1 (stable outlook) is consistent with the
Group's
target to maintain a strong investment grade credit rating;
-- launched group-wide strategic review covering: (i) outlook and sources
of growth;(ii) portfolio mix and capital intensity; (iii)
operating capability and efficiency;(iv) Group financial
framework. The outcome will be presented at the time of the
Interim
Results in July 2015.
The Group's earnings remain subject to the usual variables of
commodity prices, weather and asset performance, and the uncertain
outcomes of the UK General Election and the Competition and Markets
Authority investigation into the UK energy market.
Business update
British Gas
Average British Gas year-on-year residential gas consumption was
10% higher and average year-on-year electricity consumption was 2%
higher in the first three months of 2015, reflecting colder than
normal temperatures in the UK compared to a warm 2014. The number
of residential energy accounts on supply is broadly unchanged at
around 14.8 million since the start of the year, reflecting the 5%
reduction in our residential gas tariffs from 27 February 2015 and
our competitive fixed price and collective switch offerings. We are
also dedicating further resource to improve customer service, and
have set aside an additional GBP50 million to invest in this area
over the next three years.
We continue to lead the industry in technology, innovation and
smart connected homes. We have installed 1.4 million residential
smart meters in the UK, and have sold nearly 200,000 smart
thermostats, mostly under our Hive Active Heating brand. In March
we completed the acquisition of AlertMe, the provider of the
technical platform that underpins our existing connected homes
activity, and the integration of the business is proceeding to
plan.
In British Gas Services, the net promoter score for our
engineers increased further from its record high in December 2014,
to +69 in March 2015. The number of contract holdings fell by
62,000 to just over 7.9 million in the first quarter, with good
retention of existing customers but the environment for new
contract sales remaining challenging. In British Gas Business, the
number of accounts fell by 28,000 to 826,000 in the first quarter,
in a competitive market place. The resolution of transitional
issues following the implementation of a new billing system is
ongoing.
Direct Energy
In North America, Direct Energy remains on track to deliver
material operating profit growth in 2015 relative to a weak result
in the prior year. Total Direct Energy gas consumption in the first
quarter was 1% higher than the same period last year as, like in
2014, we experienced much colder than normal weather in the first
quarter. However a combination of more stable physical
infrastructure, market re-design and management action meant we did
not see a repeat of the additional costs incurred last year. We
continue to make good progress in building our brand in North
America. In March it was announced that Direct Energy was joining a
range of well-known brands to launch Plenti, the first United
States-based coalition loyalty programme, where consumers can earn
and use reward points for purchasing a wide range of products.
Direct Energy Business is now benefiting from increased unit
margins on contracts sold in prior periods, while average
commercial and industrial sold unit margins again improved in the
first quarter of 2015, and were higher than in the second half of
2014 for both gas and electricity. In Direct Energy Residential,
the number of accounts fell by 62,000 to just under 3.2 million in
the first quarter, in a competitive sales environment. We continue
to make good progress in Direct Energy Services, although service
contract relationships reduced by 42,000 to 855,000 as we focused
acquisition and retention efforts on our highest value customer
segments. Following the acquisition of Astrum Solar last year, we
completed 42% more solar installations in the first quarter than
Astrum completed over the same period in 2014, albeit from a low
base. Astrum Solar was rebranded as Direct Energy Solar in
April.
Bord Gáis
In Ireland, Bord Gáis has performed well in the year to date,
with colder weather resulting in higher customer consumption. The
number of residential energy accounts remained broadly flat over
the first quarter, at around 600,000, while the Whitegate gas-fired
power station operated in line with expectations.
Centrica Energy
Our upstream gas and power businesses both continue to be
impacted by the low commodity price environment. In E&P, we
remain on track to meet our target of a 25% reduction in capital
expenditure to around GBP800 million in 2015, and a 40% reduction
to around GBP650 million in 2016. We have also identified a number
of initiatives to reduce costs and remain on track to achieve a
GBP100 million reduction in cash production costs by 2016. Overall
E&P production was in line with our forecasts in the first
quarter, and we continue to expect full year output of around
75mmboe in 2015. This includes production from the large-scale
Valemon project, which came onstream in January.
In March, the UK Government announced changes to upstream tax
rates, reducing the supplementary charge on UK gas and oil assets
from 30% to 20%, backdated to be effective from 1 January 2015, and
the petroleum revenue tax rate from 50% to 35%, effective from 1
January 2016. A new single investment allowance equal to 62.5% of
expenditure was also announced, effective from 1 April 2015. These
changes are positive for our E&P business, however given
current low levels of profitability the impact on 2015 earnings is
expected to be limited.
In April, the Federal Energy Regulatory Commission (FERC) issued
authorisation to allow Sabine Pass Liquefaction LLC to construct
and operate the fifth train expansion at their LNG facility in
Louisiana. A final investment decision on the project is targeted
in the second quarter, and the project remains on track to enable
the first commercial delivery under our US export contract by the
end of 2018.
In UK power generation, our share of nuclear output in the first
three months of the year was 3.2TWh, up 5% compared to the same
period in 2014. This reflects good operational performance, despite
the Heysham 1 and Hartlepool power stations only running at 75-80%
power. In gas-fired generation, market spark spreads remain low,
while generation volumes were lower in the first quarter than in
the same period in 2014. In February, we announced that we were
planning to close the Killingholme and Brigg power stations. We
have now ceased operations at Killingholme, while we are reviewing
options for the Brigg site having reduced the plant's capacity. We
have also taken the decision to reduce the maximum output from our
South Humber plant until March 2017, in response to current market
conditions.
Centrica Storage
In March, Centrica Storage announced that due to a technical
issue it was limiting the maximum operating pressure of the Rough
wells to 3,000 psi, the equivalent of limiting the maximum stock in
the Rough asset to 29-32TWh. The maximum level reached in 2014 was
41.1TWh. It is anticipated that the limitation will last for up to
six months while testing and verification works are undertaken.
These works will determine whether or not it is necessary for the
limit to be extended. As a result, the business has suspended the
marketing of additional space for 2015/16. The sale of standard
bundled units (SBUs) is unaffected by the limitation, and it was
announced in April that the average price paid for 2015/16 storage
year SBUs was 21.14p/SBU.
Group
On 19 March 2015, Moody's Investors Service downgraded the
issuer and senior unsecured ratings for Centrica plc to Baa1
(stable outlook) from A3 (negative outlook), primarily as a result
of the financial impact of the fall in energy prices and the
continuing political, regulatory and competitive risks in the UK
energy supply business. On 25 March 2015, Standard & Poor's
Rating Services affirmed its A- (negative outlook) credit rating
for Centrica plc. Both ratings are consistent with the company's
target to maintain strong investment grade credit ratings.
The Group remains committed to strengthening its balance sheet
and in April concluded the issuance of EUR750 million and GBP450
million hybrid securities, helping underpin the Group's financial
metrics. The Group also disposed of the portion of the Lincs wind
farm project financing debt owned by Centrica. The transaction will
result in a cash inflow to Centrica of GBP176 million. Reflecting
these actions, the 2015 Group net finance cost is currently
expected to be slightly above GBP300 million.
We continue to engage with the Competition and Markets Authority
on their investigation into the UK energy market. Provisional
findings are expected to be announced in mid-to-late June 2015.
On 14 April 2015, Centrica announced the appointment of Mark
Hodges as Managing Director, British Gas with effect from 1 June
2015, at which time he will also join the Centrica plc Board.
Centrica is due to release Interim Results for the first six
months of 2015 and present the outcome of its strategic review on
30 July 2015.
Enquiries
Investors and analysts: +44 (0)1753 494900Media: 0800 107
7014
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