Financial overview:
• Group results in line with trading update in December 2007
• Revenue^ down 0.4% at £16.3bn
• Operating profit*^ up 40% to £1,949m
• Earnings*^ up 60% to £1,121m
• Adjusted basic earnings per share up 58% to 30.6p
• Recommended final dividend of 9.65p/share, full year dividend of 13p/share, up 17%
Operating overview:
• Growth in Group profits driven by strong first six months
• British Gas Residential customer service significantly improved. Over 200,000 customers returned to British Gas in the second half
• Gas production volumes up 18% on prior year
• Investment in upstream asset base up 71% on prior year at £801m
• Growth businesses all produced record profits
* including joint ventures and associates stated net of interest and taxation, and before exceptional items and certain re-measurements
^ from continuing operations
"2007 was a year of substantial achievement for Centrica during which we made further progress on addressing the key priorities for the business. This will enable us to move forward with a leaner and more focused business and to concentrate on securing growth in the competitive markets in which we operate".
Sam Laidlaw, Chief Executive
Statutory results:
• Operating profit £2,184m (2006: £130m)
• Earnings £1,505m (2006: Loss of £155m)
• Basic earnings per ordinary share 41.0p (2006: Basic loss per ordinary share 4.3p)
Centrica Energy
Centrica Energy performed well during a difficult year for our upstream business when the Day Ahead wholesale gas price in the UK fluctuated between a low of 13 pence per therm (p/th) in April to a high of 59p/th in December. The operating profitability of Centrica Energy was adversely affected by the low wholesale gas prices in the first quarter of the year which reduced the Gas Production results. This was partially offset by improved profitability in the legacy industrial and commercial contracts resulting in overall operating profit* being down just 3% to £663 million (2006: £686 million).
The segmental reporting disclosure for Centrica Energy now includes the results from our UK power generation assets as a separate segment, with sales from this segment to the downstream business based on market prices for power. The operating costs of Centrica Energy that were previously held within the industrial sales and wholesaling segment have been allocated across the appropriate business areas. As the power stations were managed on a different basis in 2006, prior period figures have not been restated and no result is reported for the power generation segment for 2006.
Gas production and development
Gas production and development includes all of the activities relating to producing gas, oil and condensates and the related exploration and development activities. It contains both our fully owned assets and our share of joint venture assets.
Operating profit* for gas production and development was down by 50% to £429 million (2006: £864 million). The total hydrocarbon volume produced during the year was up 17% on the previous year after a difficult first half, with a recovery of production levels in the second half of the year as the wholesale price rose and the newly acquired Grove field came on-stream. The low wholesale gas price which affected the first half production levels brought down the average price achieved for the gas produced by 43% at 30.4 p/th (2006: 53.1 p/th). Oil and condensate production volumes were in line with 2006 at 5.6 million barrels of oil equivalent (Mboe).
* including joint ventures and associates stated net of interest and taxation, and before exceptional items and certain re-measurements
The rate of variable operating costs per Mboe produced decreased year-on-year by 5% due to proportionately higher production levels from Morecambe. Other production costs increased due to the inclusion in the 2006 result of profits on disposal and the underlying cost inflation across the industry which particularly affected our joint venture operations.
During the year we added an additional 114 billion cubic feet equivalent (bcfe) to our proven and probable gas and liquids reserve base, of which 67bcfe came from the acquisition of Newfield UK Holdings Limited in October. We also invested £154 million in developing our current portfolio of upstream assets, primarily on the development of the Maria field, which is currently being commissioned, and on the depressurisation of the Statfjord field to bring forward gas recovery.
Following additional capital spend we expect to realise a further 238bcfe from the Newfield acquisition. During the year we also acquired seven licence interests in Norway and one in Trinidad to add to our existing acreage in the UK, Egypt and Nigeria. In November we signed a memorandum of understanding with Statoil and Consolidated Contractors Company to assess the feasibility of developing LNG projects with our joint Nigerian assets and we commenced seismic activities on one of these assets.
Performance review
Centrica delivered very strong financial results during another challenging year for UK energy retailers.
New pipelines from Norway and the Netherlands, which were underpinned by long term gas contracts with British Gas, began to bring additional gas to the UK and helped to bring down wholesale gas prices at the start of the year. This allowed us to show leadership in the market by passing reductions in the wholesale price on to our customers by reducing our retail prices in March and April. Unfortunately the spectre of high wholesale energy prices appeared again in the second half of the year as global oil prices reached record highs and this has continued into the start of 2008. As a result it was necessary for us to raise customer tariffs last month.
Management worked diligently through 2007 to minimise the impact of rising wholesale energy prices, making substantial inroads into the operating cost base of British Gas and extracting efficiencies where possible. At the same time we must continue to invest in high quality energy assets to serve our UK and international customers and this reinvestment in our business can only be funded through the consistent delivery of reasonable and sustainable profits.
In February last year Sam Laidlaw clearly set out four priorities for Centrica and I believe that management has made some real progress against these objectives. Sam reports on this progress in detail in his review of the year.
British Gas delivered strong financial returns in a year when it also reversed the decline in the size of its customer base. This was achieved not only through lower commodity costs in the first half but also through lower pricing, the continued removal of excess costs, the launch of more innovative propositions and a dedication to improving customer service. During the year Centrica Energy completed a gas acquisition in the North Sea and acquired additional gas exploration acreage with strong future potential. We continue to look for opportunities to acquire more substantial gas assets.
Our growth businesses performed very strongly in 2007. British Gas Business and British Gas Services delivered record results, underpinned by ongoing growth in customer numbers. In North America, Direct Energy also delivered record profits against the backdrop of a weakening housing market, early signs of an economic downturn in the United States and adverse exchange rate movements. It was also another year of record profits in Centrica Storage. In Europe however, while the Commission remains supportive of real network unbundling, meaningful progress on market deregulation was limited.
