Final Results

Centrica PLC Centrica plc Preliminary Results for the year ended 31 December 2003 (unaudited) Financial Highlights: -- Turnover, including Accord trading, up 25% to Â£17,931m. -- 14% increase in operating profit* to Â£1,058m. -- Earnings* up 12% at Â£714m. -- Adjusted basic earnings per share 16.8p compared with 15.2p in 2002. -- Operating cash inflow Â£992m, compared with Â£717m in 2002. -- Full year dividend 5.4p per share, up 35% on 2002. Operating Overview: -- Record group performance in a challenging year -- Operating profit* in North America more than double 2002 at Â£130 million -- Further investments made in power generation including renewables -- Strong growth in AA core business leading to 27% increase in operating profit* -- Acquisition of Rough received Competition Commission clearance; operating profit Â£40 million -- British Gas impacted by adverse combination of warm weather and high commodity costs -- Sale of Goldfish credit card and personal loan business completed Statutory Results: -- Operating profit Â£897m (2002: Â£809m) -- Earnings Â£500m (2002: Â£478m) -- Basic earnings per share 11.8p (2002: 11.4p) 'The underlying strength of the Centrica model, with its unique balance of upstream and downstream positions, enabled us to deliver record profits despite adverse external factors.' -- Sir Roy Gardner, Chief Executive * including joint ventures and associates, before goodwill amortisation and exceptional items CHAIRMAN'S STATEMENT Centrica has made steady progress during 2003 against a backdrop of uncertain economic conditions, rising energy prices and challenging regulatory issues in some of our markets. Our continued focus on understanding and providing what our customers want, and our skill in managing the risks of sourcing the energy to meet their needs, has helped us to achieve growth to record levels in both revenues and earnings. The development of competitive markets is important for our strategy. In 2003 we saw a continuing commitment to a fully transparent energy market in Britain, with new legislation to introduce a competitive electricity trading system in Scotland. In Europe, the new energy directives are now in place, and we look forward to the establishment of a properly competitive market. The regulatory environment in North America remains varied, but overall we have continued to prosper in our chosen markets. There has been further progress in improving the competitive nature of the UK telecommunications market, but there is some way to go before a level playing field is firmly established. In 2003 there were sharp rises in UK wholesale prices in both gas and electricity despite lower than average consumption due to warmer weather. The long term outlook for gas supply in the UK is improving, with an increasing diversity of supply and further links between the UK and mainland Europe. It seems inevitable, however, that the increasing costs of complying with the UK and EU regulations designed to deliver a low carbon economy will create upward pressure on consumer electricity prices. Dividend The board of directors is proposing a final dividend of 3.7 pence per share to be paid in June 2004. This means that, when combined with the interim dividend of 1.7 pence per share paid in November 2003, the total dividend for 2003 will be 5.4 pence per share. This total per share increase of 35% reflects our continuing confidence in the outlook for both cash flow and earnings in the medium term. The board of directors Sir Brian Shaw retired in May 2003 and we are most grateful for the part he played in the development of Centrica. It is fitting that he continues to chair the AA Motoring Trust, an independent charity supported by Centrica. Mike Alexander, who made a considerable contribution to the success of Centrica, retired from the company in February 2003. In December, my own retirement was announced and my successor, Roger Carr, subject to re-election to the board, will be taking over as chairman at the end of the annual general meeting (AGM) in May. The future Centrica has made enormous progress over the past seven years, rising from the bottom half of the FTSE 100 Index to position itself in the top 30 companies in the UK; growing from our British Gas base through the acquisition of the AA, the movement into telecommunications and international expansion. I am delighted that we have established a solid platform from which continued delivery of our strategy will produce strong medium term growth. The commitment and dedication of our employees have ensured that 2003 has been another very successful year for the group and I would like to thank them all for their hard work. I am confident that, with the excellent management team led by Sir Roy Gardner, along with the experience brought by Roger Carr as the new chairman, and the collective efforts of all our employees, the company will continue to go from strength to strength. Sir Michael Perry GBE, Chairman 12 February 2004 Earnings and operating profit numbers are stated, throughout the commentary, before goodwill amortisation and exceptional charges where applicable. The directors believe this measure assists with understanding the underlying performance of the group. The equivalent amounts after goodwill amortisation and exceptional charges are reflected in note 1 and are reconciled at group level in the group profit and loss account, with descriptions of the exceptional items in note 3. Adjusted earnings and adjusted basic earnings per share are reconciled to their statutory equivalents in note 7. All current financial results listed are for the year ended 31 December 2003. All references to 'the prior year', '2002' and 'last year' mean the year ended 31 December 2002. CHIEF EXECUTIVE'S REVIEW Overall the Group delivered strong performance in 2003 with adjusted basic earnings per share up 11% on 2002. This was delivered despite the impact of the second consecutive year of warm weather which, unusually, in 2003 also brought with it higher commodity costs: both of these depressed reported margins in our gas supply businesses. However, the underlying strength of the Centrica model with its unique balance of upstream and downstream positions, together with the positive impact of acquisitions, have enabled us again to deliver record profits despite these adverse external factors. Turnover and profitability Group turnover (excluding Accord trading revenue) was Â£11.7 billion in 2003, up 17% from 2002. Increases were achieved in all of the main customer facing businesses as well as in the industrial and wholesaling division of the Centrica Energy Management Group. The highest growth came from North America (up 112%) due mainly to the full year impact of the 2002 acquisitions in Texas. Despite the unseasonably warm weather, turnover in British Gas increased with positive year-on-year contributions from energy, home services and telecoms. Group operating profit* of Â£1,058 million was up 14% from Â£932 million in 2002. The lower profits in British Gas Residential and Centrica Business Services, due to the impact of weather and higher commodity and transportation costs, were more than offset by significant improvements in other units, particularly North America, the AA and the Centrica Energy Management Group and the full year contribution from Centrica Storage. Cash flow, capital expenditure and acquisitions Group operating cash flow (from continuing operations, including dividends from joint ventures and associates, before exceptional payments) was Â£1,321 million for 2003 compared with Â£795 million for 2002. An increase of Â£141 million to Â£1,463 million in operating profit* before depreciation was supplemented by a decrease in Petroleum Revenue Tax (PRT) payments of Â£109 million and the acceleration in 2002 of transportation payments of Â£168 million. In 2003 there was a considerable reduction in acquisition expenditure compared to the prior year. Receipts from disposals net of acquisitions were Â£292 million versus net expenditure in 2002 of Â£935 million. This was primarily due to the net receipt on the disposal of Goldfish Bank, partially offset by both our purchases of the Roosecote and Barry power stations, and deferred consideration on the 2002 acquisition of customers in Texas. Operating cash outflow on discontinued activities of Â£301 million mainly reflected the repayment of Goldfish Bank deposit accounts. Lower spend in respect of the business transformation programme within British Gas was the main contributor to the reduction in net capital expenditure and financial investment, down Â£120 million at Â£282 million (2002: Â£402 million). The group's net cash inflow (before management of liquid resources and financing) was Â£652 million, against a net outflow of Â£918 million in 2002. Net interest, net debt and net assets Net interest payable was Â£52 million (2002: Â£62 million) and was covered 20 times by operating profit* (2002: 15 times). At the year end the group had net cash on the balance sheet (excluding the Â£216 million of non-recourse debt in respect of the Canadian water heaters and the Goldfish Bank facility in 2002) of Â£163 million versus net debt of Â£529 million at 31 December 2002. Net assets grew by 15% over 2002, from Â£2.4 billion to Â£2.8 billion due to retained earnings. * including joint ventures and associates, before goodwill amortisation Taxation The taxation charge (excluding the effect of goodwill and non-operating exceptional items) of Â£282 million for 2003 represents an effective 28% rate on profits adjusted for goodwill amortisation and exceptional items (2002: Â£243 million, representing an effective rate of 28%). The overall charge reflects the recognition of deferred tax assets during 2003 which were unrecognised at the last year-end, offset by higher tax rates for offshore gas production and in North America. Outlook We believe that the fundamental drivers of profitability within our customer facing brand units will continue to improve as we broaden and deepen the relationships we have with our customers through innovative product offerings and improved service and targeting. This will be underpinned by further investment in our gas and power asset base. British Gas is now part way through its transformation with the heavy financial investment in hardware and software having taken place. We believe this root and branch reform of systems and processes will genuinely transform the customer experience which is at the heart of the profitability of the business. We are now allocating Â£40 million to the programme for costs which were previously in other British Gas budgets; for example property costs, post-commissioning running costs and the cost of staff back-filling. Together with some additional home services functionality now specified (Â£10 million) we expect the programme to cost around Â£400 million. We have now decided to extend both the pilot and deployment phase for the cross-selling technology and are now around nine months behind the original timeline; this decision was taken to ensure the integrity of the system and to preserve our customer service levels as we roll-out to the wider user base. The delay in implementation is not expected to materially impact either costs or benefits from the programme. The next two years will be challenging as we put the remaining elements of the systems infrastructure in place and the investment continues in the wider transformation programme. The first material net financial benefits are still expected in 2005 and we retain our 2005 margin target for British Gas at 8%. With churn rates within the British retail energy industry stabilising, we expect recent levels of customer losses in gas and gains in electricity to be maintained throughout 2004. As yet it is too early to assess the precise effect of the price rise in January 2004 aimed at restoring gross margins to 2002 levels. A key aim for us will be to build on our success in 2003 in retaining in gas, and gaining in electricity, a greater proportion of higher value customers. To assist the expansion of the British Gas brand, early in 2004 we will trial a Wholesale Line Rental (WLR) telecoms solution in the UK which would allow us to provide a single bill to customers for both line rental and call charges. This will enhance the customer experience and give us the platform we require to accelerate the growth of British Gas Communications and so further contribute to strengthening the relationship we have with our customers. With Centrica Business Services we will seek to consolidate our position as the leading supplier of energy products to the commercial sector in Britain. Having integrated the businesses acquired over the last two years, we are now concentrating on investing to transform the customer experience, on enhancing our ability to react to market changes and on cross-selling. We intend to add to our gas and power asset portfolio in 2004. We continue to target further investment of around Â£100 million per year in gas reserves to support our UK customer demand and we also intend to increase our equity hedge in electricity in the UK with an investment of around Â£250 million over the next three years. 2004 may also bring the first material spend on our renewable generation assets as, with successful surveys, we begin construction of the 90MW offshore wind farm at Barrow. We are also actively seeking further assets in North America, particularly in Texas, where we aim to acquire electricity generation plant to support our retail business. We have taken measures over recent years to increase the deliverability from our gas fields. While on average, over the medium term, gas production from Morecambe will decline by around 10% per year, we expect production levels in 2004 to be similar to 2003. We have an ongoing programme of maintenance work on our Rough storage asset which will further improve the operational performance of the asset and reduce the risk of material outages. With this, and the market-driven movement in the summer/winter gas price differential, we expect Rough's profitability to exceed our initial expectations and to show a marked year-on-year improvement. The AA will continue to seek revenue growth through value-adding product developments underpinned by further improvements in operational efficiency. We expect to see real benefits from the roll-out of new technology to the roadside patrols with improved service to our customers and reduced cost-to-serve. An integrated single customer services organisation will help to further deepen the customer relationship and enhance the cross-selling opportunities within the AA. In order to maintain its competitive position in the UK telecoms market, One.Tel is establishing a call centre in India. We expect this to lower the cost base significantly while maintaining the current levels of customer service. A successful trial in 2004 of a WLR solution will further enhance the customer experience. In North America we have achieved a scale which allows us to move steadily forward. We will add organically to our top-line with a concentration on value. Alongside this we will use our new Business Services organisation to support our current retail positions and enter new markets, targeting medium sized enterprises with a full range of energy and related services. We continue to pursue acquisition opportunities but, in the current regulatory environment and given our concentration on value, these are likely to be complex and difficult to execute. The competitive environment is likely to continue to develop at different speeds across Europe in the short term. However there is a clear timeline for deregulation and we are well positioned to enter the available markets at the right time and when the right opportunity appears. In summary, our strategy has always been and remains to maximise long term value by deepening our relationships with customers assisted by sharing knowledge and best practice across the company while achieving a cost of goods advantage through optimal upstream procurement. This strategy and our clear focus on value delivery, including value-adding acquisitions when identified, will enable us to grow both top-line revenue and, through improving operational performance, bottom line earnings in the medium term. We remain committed to a financial structure, including appropriate debt levels, which best rewards our shareholders. We expect this to include, in 2004, another significant step towards our targeted dividend payout ratio of 40%. Sir Roy Gardner 12 February 2004 Chief Executive SEGMENTAL BUSINESS COMMENTARY British Gas Residential In a challenging year for the retail energy industry in Britain with the impacts of warm weather unusually coupled with rises in commodity costs, British Gas increased its turnover by 2.4% to Â£6.2 billion (2002: Â£6.0 billion). This was due to an increase in our electricity market share, higher energy pricing and continued growth in our home services business. However, operating profit* was down 16% at Â£206 million (2002: Â£244 million). The main elements of this year-on-year fall were the impact of a Â£54 million National Transmission System (NTS) credit in 2002 and a significant increase in commodity and transportation costs in the second half of 2003. Transportation costs for British Gas increased by around 5% in 2003 as Transco made up for a cost under-recovery in 2002 when lower gas volumes were transported as a result of the warm weather. We also made further investments of Â£61 million (2002: Â£38 million) to meet our obligations under the government's Energy Efficiency Commitment and Â£32 million (2002: Â£22 million) on our engineer training academy to increase our engineer numbers to meet the projected demand for energy related services. Correspondingly, the number of training centres and partnerships with further education establishments has now increased to 13 across the country with 1,267 engineers currently in training. The customer relationship management infrastructure has now been rolled out to 9,700 staff, enabling them to have a single view of the customer giving them the ability to serve customers appropriately. For integrated cross-selling functionality, we have extended the testing period between pilot and full ramp-up to ensure system integrity throughout. As a consequence, we will now be testing the billing engine in the second half of 2004, with full roll-out by early 2006. During 2003 we incurred Â£11 million in revenue costs and Â£67 million in capitalised costs (cumulative spend to the end of 2003, Â£325 million). Energy During 2003 we continued to focus on the value we derive from our customer relationships rather than simply on the number of customers we supply. This involved greater emphasis on investing to retain customers. Our analysis shows that retention is enhanced by higher product holdings and improved customer service. Churn rates have fallen in both fuels with gas churn down to 10% (2002: 13%) and electricity down to 16% (2002: 23%). The net result of this was that we increased our energy customer relationships in 2003 by 145,000 against a loss of 191,000 in 2002 while spending Â£30 million less on acquisition activities. In 2003 our ability to target more accurately our sales activity resulted in higher conversion rates and an increase in product holdings per customer to 1.62 from 1.53. As part of our drive to reduce cost-to-serve, almost 130,000 customers have now signed up for on-line e-bills since the launch of paperless billing in May 2003. Average gas consumption in 2003 was in line with 2002 with similarly warm temperatures through the year. However, the 2002 Transco recovery and differing weather patterns, along with a consequent lower payout from our weather hedging activities, led to a reduction in gross margin of Â£32 million. Energy gross margin was also impacted by increased commodity costs. Wholesale market prices in gas and electricity increased by approximately 15% in 2003. The full impact of commodity cost increases, particularly in the second half, was not anticipated and therefore was not recovered from customers in 2003 in the 2.5% price rise in April. The 5.9% price rise from 10 January 2004 (1 March 2004 for prepayment customers) reflects the commodity cost increases experienced late in 2003. * including joint ventures and associates, before goodwill amortisation FY 2003 FY 2002 ^% H2 2003 H2 2002 ^% Customer numbers (period end) (000): Residential gas 12,590 12,839 (1.9%) 12,590 12,839 (1.9%) Residential electricity 6,189 5,795 7% 6,189 5,795 7% Estimated market share (%): Residential gas 62 64 (2 ppts) 62 64 (2 ppts) Residential electricity 24 22 2 ppts 24 22 2 ppts Average consumption: Residential gas (therms) 614 609 0.8% 260 262 (0.8%) Residential electricity (kWh) 4,178 4,146 0.8% 2,138 2,089 2.3% Weighted average sales price: Residential gas (p/therm) 47.57 47.01 1.2% 48.81 47.49 2.8% Residential electricity (p/kWh) 6.19 6.03 2.7% 6.22 5.99 3.8% Weighted average unit costs: Residential gas (WACOG, p/therm) 22.65 21.81 3.8% 23.46 21.24 10% Residential electricity (WACOE, p/kWh) 2.46 2.47 (0.40%) 2.52 2.46 2.4% Transportation & distribution (Â£m): Residential gas 1,305 1,256 3.9% 614 592 3.7% Residential electricity 479 444 8% 253 213 18% Total 1,784 1,700 4.9% 867 805 8% Turnover (Â£m): Residential gas 3,742 3,805 (1.7%) 1,613 1,629 (1%) Residential electricity 1,547 1,380 12% 808 706 14% Total 5,289 5,185 2.0% 2,421 2,335 3.7% Operating profit/(loss) (Â£m) Residential energy 136 218 (38%) (33) 21 n/m Operating margin (%) Residential energy 2.6 4.2 (1.6 ppts) (1.4) 0.9 (2.3 ppts) ----------------------------------------- ----------- ----------- ----------- ----------- ----------- --------- British Gas product holding** Average British Gas products per customer (period end): 1.62 1.53 6% 1.62 1.53 6% ----------------------------------------- ----------- ----------- ----------- ----------- ----------- --------- ** British Gas brand Home Services British Gas home services reported strong growth in 2003 with turnover increasing by 4.6% to Â£847 million (2002: Â£810 million). Operating profit* increased by 38% to Â£84 million (2002: Â£61 million) with full year operating margins up over two percentage points at 10%. One in four homes in Britain with gas central heating now has a service contract with British Gas while the newer products of home electrical care, kitchen appliance care and plumbing and drains care continued to grow rapidly, displaying our ability to understand and service customer requirements. Our central heating installations activity was down in 2003 with the number of installations lower by 16% and turnover down by 12% at Â£228 million (2002: Â£260 million) due to a contraction in the overall market. Home services products continue to have a positive impact on the retention of energy customers. We are targeting significant growth in our share of the home services market and therefore have continued to increase our staff numbers throughout 2003 with the total number of qualified engineers growing by 955 to 7,160. FY 2003 FY 2002 ^% H2 2003 H2 2002 ^% Customer product holdings (period end) (000): Central heating service contracts 3,250 3,093 5% 3,250 3,093 5% Other central heating service contracts 837 849 (1.4%) 837 849 (1.4%) Kitchen appliances care (no. of appliances) 1,109 871 27% 1,109 871 27% Plumbing & drains care 1,084 905 20% 1,084 905 20% Electrical care 598 367 63% 598 367 63% Home security 28 28 - 28 28 - Total holdings 6,906 6,113 13% 6,906 6113 13% Central heating installations 86 102 (16%) 43 53 (19%) Turnover (Â£m) Central heating service contracts 391 349 12% 201 178 13% Central heating installations 228 260 (12%) 112 140 (20%) Other 228 201 13% 123 104 18% Total 847 810 4.6% 436 422 3.3% Engineering staff employed 7,160 6,205 15% 7,160 6,205 15% Operating profit (Â£m)* Home services 84 61 38% 43 39 10% Operating margin (%) Home services 10 8 2 ppts 10 9 1 ppt ----------------------------------------- ----------- ----------- ----------- ----------- ----------- --------- * including joint ventures and associates, before goodwill amortisation British Gas Communications Turnover increased by 8% to Â£56 million (2002: Â£52 million) driven by a significant improvement in average revenues per customer (up 13%). In the absence of a workable WLR solution we have intentionally acquired fewer customers this year and focused on significantly reducing customer churn. This has reduced by nine percentage points driven primarily by the promotion of the enhanced Carrier Pre-Selection (CPS) product that was introduced in July 2002. 91% of our fixed line customer base is now on CPS. These actions have significantly reduced the operating loss of the business to Â£14 million (2002: Â£35 million). FY 2003 FY 2002 ^% H2 2003 H2 2002 ^% Customer numbers (fixed line) (period end) (000) 376 367 2.5% 376 367 2.5% Average minutes used per month (fixed line) 374 340 10% 392 336 17% ARPU (fixed line) (Â£) 11.86 10.52 13% 12.49 10.55 18% Turnover (Â£m) 56 52 8% 30 26 15% Operating profit/(loss) (Â£m) British Gas Communications (14) (35) 60% (4) (9) 56% ----------------------------------------- ----------- ----------- ----------- ----------- ----------- --------- Centrica Business Services Centrica Business Services continues to consolidate and improve its position as the number one supplier of energy to the commercial sector in Britain, measured by supply points, with an overall market share of 29% (2002: 27%). As with the residential business, 2003 has proved a challenging year. Turnover was up by 16% at Â£1.1 billion due to the full year effect of the Electricity Direct (ED) acquisition and growth of the electricity customer base. Operating profit* fell to Â£51 million (2002: Â£65 million), hit mainly by warmer than average weather which lowered gas consumption and a higher than forecast rise in wholesale prices. The business also expensed Â£5 million of integration costs for ED and Â£4 million in the overhaul of customer systems and processes. The Â£6 million one-off NTS credit received in 2002 was more than matched by the full year effect of Â£7 million from the ED acquisition. Improving customer service continues to be a major initiative. In total we expect investment here to be Â£40 million over three years. The intention is to rationalise the disparate systems the business has inherited and so enhance service levels, lower cost-to-serve and lower costs to acquire new product relationships. Roll-out of new systems to the business will commence in 2005. FY 2003 FY 2002 ^% H2 2003 H2 2002 ^% Customer supply points (period end) (000): Gas 370 383 (3.4%) 370 383 (3.4%) Electricity 535 516 3.7% 535 516 3.7% Total 905 899 0.7% 905 899 0.7% Average consumption: Gas (therms) 3,124 3,276 (4.6%) 1,353 1,402 (3.5%) Electricity (kWh) 25,700 23,785 8% 13,436 12,638 6% Weighted average sales price: Gas (p/therm) 37.75 36.72 2.8% 38.11 36.22 5% Electricity (p/kWh) 4.84 4.79 1.0% 4.77 4.74 0.6% Weighted average unit costs: Gas (WACOG, p/therm) 21.56 20.71 4.1% 21.88 19.47 12% Electricity (WACOE, p/kWh) 2.29 2.25 1.8% 2.28 2.20 3.6% Transportation & Distribution (Â£m): Gas 130 126 3.2% 63 62 1.6% Electricity 221 170 30% 119 99 20% Total 351 296 19% 182 161 13% Turnover (Â£m): Gas 455 457 (0.4%) 202 191 6% Electricity 670 514 30% 348 306 14% Total 1,125 971 16% 550 497 11% Operating profit (Â£m)* 51 65 (22%) 8 25 (68%) Operating margin (%) 4.5 7 (2.5 ppts) 1.5 5 (3.5 ppts) ----------------------------------------- --------- ----------- ----------- ----------- ----------- --------- * including joint ventures and associates, before CEMG Centrica Energy Management Group continued to apply its assets and skills to minimise input costs for the downstream businesses whilst at the same time delivering steady upstream revenues against a backdrop of warmer than average weather and volatile commodity prices. Operating profit for 2003 was up by 8% to Â£561 million. Gas production Despite a 4% reduction in production volumes year on year, upstream gas profits increased by 7% to Â£480 million. The impact of reduced volumes was offset by a 4% increase in average selling prices and lower operating costs due to the full year effect of the abolition of royalties on offshore gas production net of the additional PRT charge. An extremely successful reperforation campaign in our South Morecambe field has increased daily deliverability from four wells by an average of 15%. Plans are in place to reperforate a further 10 wells in the North and South Morecambe fields which would increase deliverability and therefore medium term production flexibility. After completing the acquisition of the remaining 60% of Rose field, development progressed more rapidly than originally anticipated, bringing first gas on stream in January 2004. We also secured a contract to develop and operate a new gas reception terminal at Easington, which will land gas from Norway's Ormen Lange field. First gas through the terminal is expected in 2006. The project will make more efficient use of the Easington terminal operation and bring in further revenue in the form of fees, with Centrica managing the design, construction and commissioning of this terminal. As announced in January 2004, we reached agreement to acquire a further 280 million therms of gas reserves with the acquisition of interests in the Orwell and Statfjord fields for Â£60.7 million. The agreement included nine million barrels of oil reserves which will produce a revenue stream and act as a valuable hedge to our exposure to gas contracts linked to oil prices. Industrial sales and wholesaling Sales volumes were up by 7% against 2002 due to increased wholesaling activity. As with 2002, warm weather depressed consumption in our retailing businesses, allowing profitable sales of excess contracted gas into the wholesale market, particularly in the first half of the year. However, operating profits were down by 11% at Â£64 million due to a number of one-off costs including an adjusting payment of Â£10 million related to prior year charges for a wholesale electricity purchase contract. Electricity generation In April, we acquired the 229MW Roosecote plant in Barrow and, in July, the 240MW Barry plant in South Wales, taking our total equity generation capacity to 2,174MW. Total electricity generated in the year was 8.7TWh (21% of our downstream requirements) with the stations running on average, for the portion of the year they were in the portfolio, at a load factor of 59%. Renewables In the supply year April 2002 to March 2003, Centrica fulfilled its obligation to source 3% of all electricity supplied from renewable sources through the purchase of certificates and is on track to meet the target of 4.3% for the current supply year. To meet the Government's renewable power generation target, Centrica announced an investment programme of Â£500 million over the next five years, working alongside joint venture partners. In 2003, investments included the joint venture with DONG and Statkraft to build a 90MW windfarm offshore at Barrow-in-Furness; and the acquisition of the Inner Dowsing and Lynn offshore wind farm developments in the Greater Wash area (with a combined generation potential of at least 180MW). Centrica was also successful in acquiring sufficient Round 2 licences to give the flexibility to build up to a further 1,250MW of offshore wind capacity. Accord Despite the anticipated tough trading environment with fewer counterparties participating, Accord made an operating profit of Â£17 million in 2003, Â£13 million of which came in the first half. In the second half, Accord experienced reduced gas trading profits due to the severe unplanned restrictions in gas flow through the continental interconnector and field closures in the UK North Sea. Physical volumes traded during 2003 were equal to 2.7 times the gas and 3.4 times the electricity volumes supplied to our UK downstream customers (2002: 1.4 times and 2.2 times, respectively), and reflected increased activity in Europe to support our retail operations in Belgium and Spain. FY 2003 FY 2002 ^% H2 2003 H2 2002 ^% Gas production: Production volumes (m therms) Morecambe 3,429 3,639 (6%) 1,350 1,509 (11%) Other 457 417 10% 199 203 (2%) Total 3,886 4,056 (4.2%) 1,549 1,712 (10%) Average sales price (p/therm) 22.4 21.5 4.2% 23.8 19.9 20% Turnover (Â£m) 919 932 (1.4%) 391 367 7% External turnover (Â£m) 54 74 (27%) 24 33 (27%) Operating costs (Â£m): Royalties (3) 67 n/m (3) 24 n/m Petroleum revenue tax 128 76 68% 60 29 107% Volume related production costs 213 237 (10%) 88 106 (17%) Other production costs 101 105 (3.8%) 48 51 (6%) Total 439 485 (9%) 193 210 (8%) Operating profit (Â£m) 480 447 7% 198 157 26% Power stations Power generated (GWh) 8,668 7,662 13% 4,947 4,239 17% Industrial & wholesale: Sales volumes (m therms) 6,093 5,694 7% 2,502 2,970 (16%) Average sales price (p/therm) 20.5 19.8 3.5% 21.2 19.4 9% Turnover (Â£m) 809 784 3% 349 383 (9%) Operating profit (Â£m) 64 72 (11%) 2 41 (95%) Accord Traded volumes (physical) Gas (m therms) 24,546 20,399 20% 11,456 10,686 7% Electricity (TWh) 139 95 46% 69 58 19% Turnover (Â£m) 6,218 4,304 44% 3,097 2,353 32% Operating profit (Â£m) 17 - n/m 4 (15) n/m CEMG operating profit (Â£m) 561 519 8% 204 183 11% ----------------------------------------- ----------- ----------- ----------- ----------- ----------- --------- Centrica Storage On 18 December the Secretary of State gave final clearance to Centrica's acquisition of the Rough storage field and associated assets, with the behavioural undertakings offered addressing all competition concerns. This removal of any remaining uncertainty allowed the forward selling of storage services to recommence. Operational difficulties in the first half were resolved and the field experienced no major outages during the second half of the year. The maintenance backlog inherited at the time of acquisition has been significantly reduced and a related HSE deferred prohibition order was lifted. Operating profits increased to Â£40 million (2002: Â£1 million) due to a full year's operation and the selling of a proportion of 2003/2004 storage services at prices more reflective of the current market differential between summer and winter. This differential, which was between 6.5p and 7p per therm at the time of acquisition, has traded since November 2003 at between 10p and 13p. The AA In 2003 the AA delivered strong growth in the profitability of its core roadside and personal finance operations and continued its investment in technology, infrastructure and training. Overall turnover grew 4.9% to Â£797 million and operating profit* increased by 27% to Â£93 million. By the end of 2003 the average product holdings per customer had increased to 1.31 (2002: 1.23). Our website, theAA.com, continues to be developed and the number of website visits increased by 45% to 31 million, with a high demand for online routes and maps. This increase in visits led to record online sales figures for personal loans, up year-on-year from 8,647 to 16,452, and membership sales, up from 61,677 to 79,507. AA Roadside Services Turnover increased by 3% to Â£492 million due to growth in the business services market and an increase in personal membership income. The continued drive towards increasing customer value rather than volume growth led to an increase in operating profit* of 13% to Â£61 million. Further measures to contain the cost base, including the closure of loss making sales channels, together with increasing productivity, improved the operating margin to 12% (2002: 10%). AA Business Services won the contract to provide breakdown assistance to the 365,000-strong fleet of new and used Volkswagen vehicles, and recruited additional dedicated patrols to service this contract. The AA won the annual JD Power & Associates UK Roadside Assistance Study award for customer satisfaction for the second successive year and for the fourth time in the six years it has been awarded. AA Personal Finance Turnover increased by 8% to Â£186 million (2002: Â£172 million). Although motor insurance premiums fell year on year, improved customer targeting and more competitive products enabled the business to increase operating profit* by 6% to Â£50 million (2002: Â£47 million). The total value of personal finance advances reached Â£1 billion for the first time following the continued success of the AA personal loan and development of the new AA Visa card. The year closed with a portfolio of 160,000 loans (2002: 123,000); 20% of new AA loans were sold online in 2003. The value of motor and home insurance commissions grew by 1% despite a 2% reduction in the average annual premium, driven mainly by the cyclical nature of pricing conditions in the motor insurance industry. This was achieved through a major differentiating service initiative, 'Keeping the Customer Mobile', launched in March. In December this mobility initiative was recognised by the insurance industry with the Insurance Times Award for innovation of the year. This and other initiatives resulted in a record renewal rate of 82% (2002: 78%). The innovative parts and labour product, where AA members are covered for the cost of breakdown repairs, has continued its rapid take-up rate. By the end of the year the total number sold had reached 214,000 (2002: 114,000). All of these sales have been as a result of cross-selling to current AA members. Other AA Services The AA Service Centres made an operating loss* of Â£20 million (2002: Â£15 million). We have continued to take actions to reduce the losses, including a staff redeployment programme which has reduced the operating cost base. There are a number of new initiatives in place aimed at growing the customer base in order to build on the year-on-year turnover increase of 10%. AA Tyre Fit, the mobile tyre fitting business acquired last year, made an operating loss* of Â£7 million, although turnover has increased by Â£6 million following the expansion of the fleet. * including joint ventures and associates, before Operating profit* in the driving school more than doubled over 2002 as pupil and instructor numbers reached record levels. Publishing, car data check and roadside signs also made positive contributions. In the Republic of Ireland, the AA nearly doubled its profits to Â£3 million, due to growth in both insurance and roadside assistance, remaining the leading roadside assistance provider and personal insurance intermediary in the country. FY 2003 FY 2002 ^% H2 2003 H2 2002 ^% Roadside Services: Customer numbers (period end) (000) 13,522 12,975 4.2% 13,522 12,975 4.2% Customer renewal rate (%) 85 85 - 85 85 - Average transaction value (Â£) 36 34 6% 36 34 6% Roadside patrols employed 3,479 3,651 (4.7%) 3,479 3,651 (4.7%) Personal Finance: Insurance customers (000): Motor 952 959 (0.7%) 952 959 (0.7%) Home 693 664 4.4% 693 664 4.4% Overall renewal rate (%) 82 78 4 ppts 82 77 5 ppts Average annual premium (Â£) 257 261 (1.5%) 256 259 (1.2%) Motor & Home Insurance Commissions (Â£m) 94 93 1.1% 48 49 (2.0%) Loans (fixed term) book size (Â£m) 1,043 661 58% 1,043 661 58% Lending share of JV operating profit (Â£m) 19 17 12% 10 9 11% No. of fixed term personal loans (000) 160 123 30% 160 123 30% AA Service Centres: Site numbers 127 129 (1.6%) 127 129 (1.6%) Average turnover per site (Â£000) 356 320 11% 166 156 6% Turnover (Â£m): AA Roadside Services 492 476 3.4% 249 243 2.5% AA Personal Finance 186 172 8% 101 89 13% Other AA Services 119 112 6% 58 59 (1.7%) Total 797 760 4.9% 408 391 4.3% Operating profit/(loss) (Â£m)*: AA Roadside Services 61 54 13% 35 30 17% AA Personal Finance 50 47 6% 27 24 13% Other AA Services (18) (28) 36% (8) (17) 53% Total 93 73 27% 54 37 46% Operating margin (%) Total AA 12 10 2 ppts 13 9 4 ppts AA product holding Average AA products per customer (period end) 1.31 1.23 7% 1.31 1.23 7% ----------------------------------------- ----------- ----------- ----------- ----------- ----------- --------- One.Tel In 2003 turnover grew by 16% to Â£178 million (2002: Â£153 million), as a result of the growth in customer numbers along with an increase in the average products per customer to 1.29 (2002: 1.21). Fixed line monthly average revenue per user (ARPU) has declined slightly year on year to Â£16.18, (2002: Â£16.20), as a result of significant competition-related price reductions, especially in international and national rates. However, the further uptake of CPS has enabled us largely to offset these price reductions. 37% of the fixed line customer base is now on CPS tariffs with the average revenue per user on these tariffs being more than 35% higher than non CPS tariffs. The average minutes of use per month increased by 21% to 345 minutes and, as a result of product enhancements and service improvements, fixed line churn levels declined by seven percentage points year on year. Operating profit* for 2003 was Â£4 million, double that of 2002 (Â£2 million). Investment in our brand campaign has increased by Â£1.7 million to Â£3.6 million as we highlighted the comprehensive range of telecommunications services available from One.Tel. Acquisition costs were up 31% at Â£29 million supporting a 13% growth in the customer base. This reflects the higher costs of acquiring customers, associated with offering a greater range of products through a wider array of distribution channels, as well as a full year of mobile acquisition costs. In 2003 there was significant progress in the industry debate around WLR deregulation, and we, along with other market entrants, will trial a WLR product in early 2004, enabling our customers to benefit from a single relationship for all their telecommunications requirements. Following the success of a trial in 2003, in January 2004 we announced the setting-up of a call centre in Bangalore, which will lower One.Tel's cost base. * including joint ventures and associates, before FY 2003 FY 2002 ^% H2 2003 H2 2002 ^% Customer numbers (period end) (000): Fixed line 793 746 6% 793 746 6% Mobile 73 36 103% 73 36 103% Other services 218 180 21% 218 180 21% Total (30 day tolling) 1,084 962 13% 1,084 962 13% Average minutes used per month (fixed line) 345 284 21% 373 286 30% ARPU (fixed line) (Â£) 16.18 16.20 (0.1%) 16.72 16.01 4.4% ARPU (mobile) (Â£) 14.44 12.77 13% 15.11 12.77 18% Average products per customer (period end) 1.29 1.21 7% 1.29 1.21 7% Turnover (Â£m) 178 153 16% 94 78 21% Operating profit/(loss) (Â£m)* 4 2 100% 4 (3) n/m Operating margin (%) 2.2 1.3 0.9 ppts 4.3 (3.8) 8.1 ppts ----------------------------------------- ----------- ----------- ----------- ----------- ----------- --------- Centrica North America In 2003 operating profit* increased by 106% to Â£130 million (2002: Â£63 million), after Â£10 million of costs relating to our exit from Pennsylvania home services, the entry into Alberta and adverse foreign exchange movements. This reflected strong performances in our electricity markets, especially in Texas where the full year impact of the acquisition exceeded expectations. Residential and small commercial gas Turnover increased by 9% over 2002 reflecting the colder winter, together with revenues from approximately 300,000 customers acquired in 2002. Higher wholesale gas costs in the second half lowered margins on renewing customers and contributed to a reduction in operating profit* to Â£1 million (2002: Â£16 million). In addition we increased our investment in brand building and experienced increased costs of customer renewals in Ontario associated with regulatory changes which significantly affected customer renewals in the prime mid-year renewal period. Our intensive efforts brought about favourable changes to the regulations in June and resulted in renewal rates rising and the costs of renewals falling late in the year. The second half performance reflected the seasonal weighting of sales volumes towards the first half against a much flatter profile of operating costs. In our US gas markets, the regulatory climate, together with a volatile gas price environment, has continued to make it difficult to add value-creating customers. We will participate only in markets that offer an appropriate return on capital and accordingly we announced our withdrawal from Georgia and Maryland. In the first half we re-evaluated the returns achievable on our original investment in Energy America in the light of the current regulatory and business environments and increased the amortisation charge by Â£12 million in respect of part of the goodwill and shortened the life over which the remaining goodwill is to be amortised. Residential and small commercial electricity Turnover and operating profit* increased sharply, reflecting the full year contribution and performance of our recently acquired businesses in Texas and a full year of Ontario electricity sales. Owing to the high electricity consumption per customer in Texas, overall average consumption rose by 56%. Our Texas customers fall into two categories. For those in West and South Texas, acquired at the end of 2002, energy prices were increased in March by an average of 17% under the Price to Beat (PTB) mechanism, allowing us to maintain target margins despite a sharp increase in gas costs, a key driver of power prices. Customer numbers have reduced by 10% in this category as expected in a PTB environment. In the second category, we continue to build an organic electricity business, now under the Direct Energy brand name, principally in the Houston and Dallas/Fort Worth areas. Customer numbers grew year-on-year by 59% and our focus on value has raised average annual consumption per customer from 98% to 121% of the overall Texas average and significantly reduced bad debt levels. * including joint ventures and associates, before goodwill amortisation The Ontario electricity market for residential and small commercial customers remains effectively closed to further growth under the price cap introduced in November 2002. Customer churn has reduced and our margins remain strong but it has not been possible to acquire new customers in the price cap environment. The new government recently announced its intention to increase the level of the price cap from 1 May 2004 and that the provincial regulator, the Ontario Energy Board, will take back the responsibility for setting retail power rates by 1 May 2005. Home & Business services Turnover and operating profit* improved with the benefits of increases in customer numbers and margins being partially offset by investment in customer service and capacity expansion. We rebranded the Enbridge Services Inc. business acquired in May 2002 as Direct Energy Essential Home Services and Direct Energy Business Services, and focused on driving efficiency and growth using our experience in the British Gas home services business. Integration of our home services and retail energy businesses in Ontario enables us to leverage cross-selling opportunities. Customer numbers in the core heating and cooling protection products increased by 16% to over 390,000. During 2003, the formation of a new Business Services group enabled us to market energy and services to medium sized commercial and industrial customers. Early signs are encouraging with several large contracts already signed. This area will be a particular focus for 2004. In February 2003 we reduced our holding in the Consumers' Waterheater Income Fund from 41.9% to 19.9%, realising further proceeds of Â£46 million in addition to the Â£304 million raised in 2002. We continue to account for the earnings, assets and liabilities of the fund on a fully consolidated basis as required under FRS5. At the end of 2003, we announced the closure of the remaining nine retail stores in Ontario with a Â£16 million exceptional pre-tax charge taken on closure. Upstream activities Gas production volumes declined marginally with a successful new well development programme largely offsetting the natural decline rates inherent in mature fields. Additionally, we drilled, completed and began production on 131 wells during 2003 compared with 218 in 2002. Our production met 22% (24% in 2002) of our customer requirements in Canada and the northern US in 2003. Despite increases in market price, our average gas selling prices reduced by 4% compared with the same period in 2002 following the expiry of favourably priced forward sales contracts in November 2002. Together with higher royalty charges, this had a significant dampening effect on operating profit*. FY 2003 FY 2002 ^% H2 2003 H2 2002 ^% Customer numbers (period end): Residential and small commercial gas (000) 1,116 1,339 (17%) 1,116 1,339 (17%) Residential and small commercial electricity (000) 1,318 1,416 (7%) 1,318 1,416 (7%) Home & business services (000) 1,690 1,627 3.9% 1,690 1,627 3.9% Average consumption: Residential and small commercial gas (therms) 1,340 1,138 18% 427 537 (21%) Residential and small commercial electricity (kWh) 16,630 10,666 56% 8,071 8,579 (6%) Gas production: Gas production volumes (m therms) 362 380 (4.7%) 180 184 (2.2%) Average sales price (p/therm) 19.3 20.1 (4%) 18.7 19.1 (2.1%) Turnover (Â£m): Residential and small commercial gas 531 486 9% 184 189 (2.6%) Residential and small commercial electricity 1,144 189 505% 570 158 261% Home & business services 193 159 21% 99 120 (18%) Gas production & energy trading (including I&C) 501 284 76% 241 152 59% Total 2,369 1,118 112% 1,094 619 77% Operating profit/(loss) (Â£m)*: Residential and small commercial gas 1 16 (94%) (11) (5) (120%) Residential and small commercial electricity 87 (10) n/m 47 10 370% Home & business services 29 23 26% 19 17 12% Gas production & energy trading (including I&C) 13 34 (62%) 2 16 (88%) Total 130 63 106% 57 38 50% Operating margin (%) Total North America 5 6 (1 ppt) 5 6 (1 ppt) ----------------------------------------- ----------- ----------- ----------- ----------- ----------- --------- * including joint ventures and associates, before goodwill amortisation Europe In Belgium the residential gas and electricity market in Flanders opened fully for competition on 1 July 2003. Centrica's joint venture, Luminus, successfully switched across its 800,000 customers (approximately 600,000 electricity and 200,000 gas). Luminus is the clear number two in the Flanders market which is already beginning to see increasing competition as new entrants respond to the market opening. Luminus had a turnover of Â£362 million and produced a positive contribution in the year. The Walloon and Brussels markets will open, on a phased basis, from July 2004 to July 2007, at which point the residential markets will be fully open to competition. Centrica entered the Spanish energy market under the Luseo Energia brand and has been actively acquiring commercial electricity customers organically since the launch in June 2003. Discontinued business On 1 August Centrica announced that Goldfish Bank Ltd had agreed to sell its credit card and personal loan business to Lloyds TSB, the joint venture partner, for a premium of Â£112.5 million above the receivables book value. The sale included the brand, the loyalty programme and the associated business assets. This transaction was completed on 30 September 2003. The operating loss* up to the September 2003 disposal was Â£27 million. The transaction triggered a pre-tax exceptional loss on disposal of Â£51 million, which after tax and minority interests, amounted to a net loss of Â£43 million. * including joint ventures and associates, before goodwill amortisation Summary Group Profit and Loss Account Year ended 31 December Before Before goodwill goodwill amortisation amortisation and Results and Results for exceptional for the exceptional the year charges year Notes charges 2003 2003 2002 2002 Â£m Â£m Â£m Â£m Turnover: Continuing operations (excluding Accord energy trading) 11,612 11,612 9,918 9,918 Accord energy trading 6,218 6,218 4,304 4,304 ------------- ------------ -------------- ----------- Continuing operations 1 17,830 17,830 14,222 14,222 Discontinued operations 1 101 101 123 123 ------------- ------------ -------------- ----------- Group turnover 1 17,931 17,931 14,345 14,345 Cost of sales 2 (14,572) (14,572) (11,358) (11,358) ------------- ------------ -------------- ----------- Gross profit 3,359 3,359 2,987 2,987 Operating costs before goodwill amortisation 2 (2,367) (2,367) (2,108) (2,108) Goodwill amortisation 3 - (155) - (116) ------------- ------------ -------------- ----------- Group operating profit 992 837 879 763 Share of profits less losses in joint ventures and associates - continuing operations 66 60 53 46 ------------- ------------ -------------- ----------- Operating profit including joint ventures and associates: ------------- ------------ -------------- ----------- Continuing operations 1 1,085 935 972 863 Discontinued operations 1 (27) (38) (40) (54) ------------- ------------ -------------- ----------- 1 1,058 897 932 809 Continuing operations: ------------- ------------ -------------- ----------- Loss on closure of business 3 - (16) - - Loss on disposal of business 3 - - - (14) Loss on disposal of fixed assets 3 - - - (14) Discontinued operations: Loss on disposal of business 3 - (51) - - ------------- ------------ -------------- ----------- 3 - (67) - (28) Net interest payable (52) (52) (62) (62) ------------- ------------ -------------- ----------- Profit before taxation 1,006 778 870 719 Taxation 5 (282) (266) (243) (250) ------------- ------------ -------------- ----------- Profit after taxation 724 512 627 469 Minority interest (equity and non-equity) (10) (12) 9 9 ------------- ------------ -------------- ----------- Profit after taxation and minority interest 714 500 636 478 ============= ============== Dividends 6 (229) (172) ------------ ----------- Retained profit for the year 271 306 ============ =========== Dividend per ordinary share 6 5.4p 4.0p Earnings per ordinary share Basic 7 11.8p 11.4p Diluted 7 11.6p 11.3p Adjusted Basic 7 16.8p 15.2p ------------- ------------ -------------- ----------- Summary Group Balance Sheet 31 December 2003 2002 Notes Â£m Â£m Fixed assets Intangible assets 1,614 1,813 Tangible assets 2,730 2,763 Investments (including joint ventures) 8 114 102 ----------- ----------- 4,458 4,678 ----------- ----------- Stocks 173 180 Debtors (amounts falling due within one year) 2,921 2,692 Debtors (amounts falling due after more than one year) 117 134 Cash and current asset investments 1,026 348 Borrowings (amounts falling due within one year) (298) (289) Creditors (amounts falling due within one year) (3,698) (3,249) ----------- ----------- 241 (184) ----------- ----------- Goldfish Bank debtors (amounts falling due within one year) - 781 Goldfish Bank debtors (amounts falling due after more than one year) - 11 Goldfish Bank borrowings (amounts falling due within one year) - (430) Goldfish Bank customer deposits (amounts falling due within one year) - (286) ----------- ----------- - 76 ----------- ----------- Net current assets/(liabilities) 241 (108) ----------- ----------- Total assets less current liabilities 4,699 4,570 Borrowings due after more than one year (781) (784) Creditors due after more than one year (104) (122) Provisions for liabilities and charges (1,060) (1,262) ----------- ----------- Net assets 2,754 2,402 =========== =========== Shareholders' funds 2,537 2,248 Minority interests (equity and non equity) 217 154 ----------- ----------- Capital employed 2,754 2,402 =========== =========== Movements in shareholders' funds Shareholders' funds at 1 January 2,248 1,502 Profit attributable to the group 500 478 Dividends (229) (172) Issue of shares net of reserves movement on employee share schemes 13 444 Shares to be issued under long term incentive scheme 9 4 Exchange translation differences (4) (8) ----------- ----------- Shareholders' funds at 31 December 2,537 2,248 =========== =========== Statement of Total Recognised Gains and Losses Year ended 31 December 2003 2002 Â£m Â£m Profit for the year 500 478 Exchange translation differences (4) (8) ----------- ----------- Total recognised gains and losses for the year 496 470 =========== =========== Summary Group Cash Flow Statement Year ended 31 December 2003 2002 Notes Â£m Â£m Cash inflow from continuing operating activities 9 1,293 722 Cash outflow from discontinued operating activities (i) 9 (301) (5) ----------- ------------ Cash inflow from operating activities 9 992 717 Dividends received from joint ventures and associates 28 57 Returns on investments and servicing of finance 10 (15) (25) Taxation paid (181) (192) Capital expenditure and financial investment 11 (282) (402) Disposals and acquisitions 12 292 (935) Equity dividends paid (182) (138) ----------- ------------ Cash inflow/(outflow) before use of liquid resources and financing 652 (918) Management of liquid resources (669) 134 Financing 13 (13) 747 ----------- ------------ Net decrease in cash (30) (37) =========== ============ (i) Cash outflow from discontinued operating activities in 2003 includes the repayment of the Goldfish Bank savings deposits of Â£286 million. Reconciliation of debt, net of cash and current asset investments 2003 2002 Â£m Â£m Debt, net of cash and current asset investments at 1 January (1,155) (1,043) Repayment of Goldfish Bank working capital facility 430 180 Net increase/(decrease) in liquid resources 669 (134) Net decrease in cash (30) (37) Net decrease/(increase) in other debt 53 (117) Exchange adjustments (20) (4) ----------- ------------ Debt, net of cash and current asset investments at 31 December (i) (53) (1,155) =========== ============ Of which: Net cash/(debt) (excluding Goldfish Bank and non-recourse debt) 163 (529) Goldfish Bank working capital facility - (430) Consumers' Waterheater Income Fund (non-recourse) debt (216) (196) ----------- ------------ (53) (1,155) =========== ============ (i) Debt, net of cash and investments, comprised borrowings, bank loans and overdrafts of Â£1,010 million (2002: Â£1,397 million) and finance lease obligations of Â£69 million (2002: Â£106 million) less cash and current asset investments of Â£1,026 million (2002: Â£348 million). Cash and investments included Â£183 million (2002: Â£159 million) held by the group's insurance subsidiary undertakings, Â£7 million (2002: Â£nil) held by the Consumers' Waterheater Income Fund and Â£17 million (2002: Â£10 million) held by the Law Debenture Trust, on behalf of the company, as security in respect of the Centrica unapproved pension scheme. These amounts were not readily available to be used for other purposes within the group. Notes 1 Segmental analysis including share of profits and losses of joint ventures and associates Year ended 31 December Operating Operating profit/(loss) before profit/(loss) after goodwill goodwill Turnover amortisation amortisation 2003 2002 2003 2002 2003 2002 Â£m Â£m Â£m Â£m Â£m Â£m ----------- ----------- ----------- ----------- ----------- ----------- Residential Energy 5,289 5,185 136 218 136 218 Home Services 847 810 84 61 83 60 British Gas Communications 56 52 (14) (35) (14) (35) ----------- ----------- ----------- ----------- ----------- ----------- British Gas Residential 6,192 6,047 206 244 205 243 Centrica Business Services 1,125 971 51 65 40 59 ----------- ----------- ----------- ----------- ----------- ----------- Industrial sales and wholesaling 809 784 64 72 64 72 Gas production 54 74 480 447 480 447 Accord energy trading 6,218 4,304 17 - 17 - ----------- ----------- ----------- ----------- ----------- ----------- Centrica energy management group 7,081 5,162 561 519 561 519 Centrica Storage 82 9 40 1 40 1 The AA 797 760 93 73 44 23 One.Tel 178 153 4 2 1 (4) Centrica North America 2,369 1,118 130 63 50 24 Other operations 6 2 - 5 (6) (2) ----------- ----------- ----------- ----------- ----------- ----------- Continuing operations 17,830 14,222 1,085 972 935 863 Discontinued operations: Goldfish Bank 101 123 (27) (40) (38) (54) ----------- ----------- ----------- ----------- ----------- ----------- 17,931 14,345 1,058 932 897 809 =========== =========== =========== =========== =========== =========== 2 Costs (before goodwill amortisation) Year ended 31 December 2003 2002 Â£m Â£m Cost of sales: Continuing operations 14,529 11,299 Discontinued operations 43 59 ----------- ----------- 14,572 11,358 =========== =========== Operating Costs: Continuing operations 2,282 2,004 Discontinued operations 85 104 ----------- ----------- 2,367 2,108 =========== =========== 3 Goodwill amortisation and exceptional charges Year ended 31 December 2003 2002 Â£m Â£m Goodwill amortisation: Continuing operations 144 102 Discontinued operations 11 14 ----------- ----------- 155 116 Goodwill amortisation within joint ventures and associates 6 7 ----------- ----------- 161 123 =========== =========== Non-operating exceptional charges: Continuing operations ----------- ----------- Loss on closure of business (i) 16 - Loss on disposal of business - 14 Loss on disposal of fixed assets - 14 ----------- ----------- 16 28 Discontinued operations Loss on disposal of business (ii) 51 - ----------- ----------- 67 28 =========== =========== (i) Loss on closure of business relates to the closure of the Direct Energy home services retail stores in Ontario on which a tax credit of Â£6 million has been recognised. (ii) The loss on disposal of business relates to the sale of the group's interest in the Goldfish credit card and loan business for a premium of Â£112.5 million above the receivables book value, resulting in a pre-tax non-operating loss on disposal of Â£51 million on which a tax credit of Â£10 million and a minority interest charge of Â£2 million have been recognised. 4 Earnings before goodwill amortisation and exceptional charges Year ended 31 December 2003 2002 Â£m Â£m Operating profit including joint ventures and associates 897 809 Add back goodwill amortisation (note 3) 161 123 ----------- ------------ Operating profit before goodwill amortisation 1,058 932 Net interest payable (52) (62) Taxation on ordinary activities (before exceptional items) (282) (243) Minority interest (before exceptional items) (10) 9 ----------- ------------ Earnings before goodwill amortisation and exceptional charges 714 636 =========== ============ 5 Taxation Year ended 31 December 2003 2002 Â£m Â£m Taxation charge before exceptional items 282 243 Tax on exceptional items (16) (2) Exceptional deferred tax charge - 9 ----------- ------------ 266 250 =========== ============ The tax credit arising on the exceptional items related to those costs identified as exceptional in note 3. 6 Dividends A final dividend of 3.7 pence per share (2002: 2.6 pence paid June 2003) will be paid to shareholders in June 2004. An interim dividend of 1.7 pence per share was paid in November 2003 (2002: 1.4 pence per share). 7 Earnings per share Year ended 31 December 2003 2002 Earnings EPS Earnings EPS Â£m Pence Â£m Pence Earnings - basic 500 11.8 478 11.4 Goodwill amortisation and exceptional charges 214 5.0 158 3.8 ------------ ----------- ----------- ----------- Earnings - adjusted basic 714 16.8 636 15.2 ============ =========== =========== =========== Earnings - diluted 500 11.6 478 11.3 ------------ ----------- ----------- ----------- Average number of shares (million) used in the calculation of basic and adjusted basic EPS 4,235 4,181 Average number of shares (million) used in the calculation of diluted EPS 4,296 4,227 ------------ ----------- ----------- ----------- 8 Fixed asset investments 31 December 2003 2002 Â£m Â£m Joint ventures: Share of gross assets 1,014 810 Share of gross liabilities (920) (736) Other investments 20 28 ------------- --------- 114 102 ============= ========= The group's share of joint ventures principally comprised its interest in Humber Power Limited (electricity generation), Centrica Personal Finance Limited (AA and British Gas personal loans activities), AA Financial Services (AA credit card activities) and Luminus NV (energy supply). Share of joint ventures' assets and liabilities 31 December 2003 Centrica Humber Personal AA Power Finance Financial Luminus Limited Limited Services NV Other Total Â£m Â£m Â£m Â£m Â£m Â£m Share of gross assets 314 519 40 126 15 1,014 Share of gross liabilities (292) (516) (40) (66) (6) (920) ----------- ----------- ----------- ----------- ----------- ----------- 22 3 - 60 9 94 =========== =========== =========== =========== =========== =========== Net debt included in share of gross assets and share of gross liabilities (236) (506) (39) (5) (2) (788) ----------- ----------- ----------- ----------- ----------- ----------- 9 Reconciliation of group operating profit to operating cash flow Year ended 31 December 2003 2002 Â£m Â£m Continuing operations Group operating profit 875 817 Add back: Goodwill amortisation 144 102 Depreciation and impairment 394 382 Shares issued to fund share incentive plan 2 - Amortisation of investments 5 7 Profit on sale of investments (8) (12) Profit on sale of fixed assets (3) (6) Provisions (150) (177) Decrease/(increase) in working capital 34 (375) ----------- ----------- Operating cash flow before exceptional payments: Continuing operations 1,293 738 Payments relating to exceptional charges - (16) ----------- ----------- Cash inflow from continuing operations after exceptional payments 1,293 722 ----------- ----------- Discontinued operations Operating loss (38) (54) Add back: Goodwill amortisation 11 14 Depreciation and impairment 11 8 Provisions (3) 16 (Increase)/decrease in working capital (282) 11 ----------- ----------- Cash outflow from discontinued operations (301) (5) ----------- ----------- Cash inflow from operating activities after exceptional payments 992 717 =========== =========== 10 Returns on investments and servicing of finance Year ended 31 December 2003 2002 Â£m Â£m Interest received 54 29 Interest paid (61) (42) Interest element of finance lease rental payments (8) (12) ----------- ----------- (15) (25) =========== =========== 11 Capital expenditure and financial investment Year ended 31 December 2003 2002 Â£m Â£m Purchase of tangible fixed assets (323) (449) Sale of tangible fixed assets 39 28 Loans to joint ventures repaid 2 19 ----------- ----------- (282) (402) =========== =========== 12 Disposals and acquisitions Year ended 31 December 2003 2002 Â£m Â£m Acquisitions: Subsidiary undertakings and businesses (77) (1,107) Joint ventures and associates (10) (4) Deferred consideration (30) (70) ----------- ----------- Total cash payments (117) (1,181) Cash acquired - 222 Overdraft acquired - (30) Disposals: Receipt on disposal of Goldfish credit card and loan business 1,095 - Repayment of Goldfish Bank working capital facility (701) - Proceeds from other disposals 15 54 ----------- ----------- 292 (935) =========== =========== 13 Financing Year ended 31 December 2003 2002 Â£m Â£m Commercial paper: Issued 204 309 Repaid (236) (381) Capital element of finance lease rentals (38) (32) Bonds issued 17 221 Realised net foreign exchange (loss)/gain (12) 57 Investment by equity and non-equity minority shareholders 41 129 Issue of ordinary share capital 11 444 ----------- ----------- (13) 747 =========== =========== 14 Pensions These statements have been prepared under SSAP 24. The group's main pension schemes are subject to independent actuarial valuations for SSAP 24 purposes at least every three years. The date of the most recent actuarial valuation was 31 March 2001. The total pension and other retirement benefit costs arising in the year and the reconciliation to the balance sheet provision were as follows: 2003 2002 Â£m Â£m Pension and other retirement benefits provision at 1 January 75 116 Profit and loss charge (net of amortisation of surplus Â£21m; 2002: Â£21m) 79 68 Acquisition of surplus in year - (2) Employer contributions paid (124) (107) ----------- ----------- Pension and other retirement benefits provision at 31 December 30 75 =========== =========== Set out below is indicative information on changes in net assets which would arise from valuation of the pension scheme assets and liabilities in accordance with FRS 17. The major assumptions used for the actuarial valuation were: 2003 2002 % % Rate of increase in employee earnings 4.25 4.3 Rate of increase in pensions in payment 2.75 2.3 Discount rate 5.5 5.75 Inflation 2.75 2.3 ----------- ----------- On this basis, the market value of the assets in the schemes and the present value of the liabilities in the schemes were: 2003 2002 Â£m Â£m Total fair value of assets 2,359 1,882 Present value of schemes' liabilities (3,430) (2,713) ----------- ----------- Deficit in the schemes (1,071) (831) Related deferred tax asset 321 249 ----------- ----------- Net pension liability (750) (582) =========== =========== Under SSAP24 the group balance sheet includes a provision of Â£30 million at 31 December 2003 (2002: Â£75 million). Had FRS17 been implemented in full at that date, the net assets of the group would have been reduced by Â£720 million (2002: Â£507 million). Had FRS17 been implemented in full for the year, the charge for pension costs in the profit and loss account would have increased by Â£71 million (2002: Â£47 million) compared with that under SSAP24 as set out below: FRS 17 SSAP 24 Increase 2003 2003 2003 Â£m Â£m Â£m Amount charged to operating profit 138 79 59 Amount charged to interest 12 - 12 ----------- ------------ ------------ Charge to profit and loss account 150 79 71 =========== ============ ============ 15 Basis of preparation The preliminary results for the year ended 31 December 2003 are unaudited. The financial information set out in this announcement does not constitute the company's statutory accounts for the year ended 31 December 2003 or 31 December 2002. The financial information for the year ended 31 December 2002 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts; their report was unqualified and did not contain a statement under either Section 237 (2) or Section 237 (3) of the Companies Act 1985. The audit report on the statutory accounts for the year ended 31 December 2003 has not yet been signed. These accounts will be finalised and delivered to the Registrar of Companies in due course. Earnings and operating profit numbers are stated, throughout the commentary, before goodwill amortisation and exceptional charges where applicable. The directors believe this measure assists with understanding the underlying performance of the group. The equivalent amounts after goodwill amortisation and exceptional charges are reflected in note 1 and are reconciled at group level in the group profit and loss account, with descriptions of the exceptional items in note 3. Adjusted earnings and adjusted basic earnings per share are reconciled to their statutory equivalents in note 7. 16 Comparative figures Goldfish Bank loyalty scheme costs of Â£30 million were reclassified in the prior year from turnover to cost of sales. Debtor balances relating to energy derivatives held for trading in 2002 of Â£94 million have been reclassified from creditors to debtors. Summary Group Profit and Loss Account Six months ended 31 December Before goodwill Before amortisation goodwill and amortisation exceptional Results for and Results for charges the period exceptional the period Notes 2003 2003 charges 2002 2002 Â£m Â£m Â£m Â£m Turnover: Continuing operations (excluding Accord energy trading) 5,451 5,451 4,793 4,793 Accord energy trading 3,097 3,097 2,353 2,353 ------------- ------------ ------------- ----------- Continuing operations a 8,548 8,548 7,146 7,146 Discontinued operations a 38 38 64 64 ------------- ------------ ------------- ----------- Group turnover a 8,586 8,586 7,210 7,210 Cost of sales b (7,075) (7,075) (5,815) (5,815) ------------- ------------ ------------- ----------- Gross profit 1,511 1,511 1,395 1,395 Operating costs before goodwill amortisation b (1,186) (1,186) (1,115) (1,115) Goodwill amortisation c - (70) - (63) ------------- ------------ ------------- ----------- Group operating profit 325 255 280 217 Share of profits less losses in joint ventures and associates - continuing operations 39 37 25 21 ------------- ------------ ------------- ----------- Operating profit including joint ventures and associates: ------------- ------------ ------------- ----------- Continuing operations a 361 293 328 268 Discontinued operations a 3 (1) (23) (30) ------------- ------------ ------------- ----------- a 364 292 305 238 Continuing operations: ------------- ------------ ------------- ----------- Loss on closure of business c - (16) - - Loss on disposal of business c - - - (14) Loss on disposal of fixed assets c - - - (14) Discontinued operations: Loss on a disposal of business c - (51) - - ------------- ------------ ------------- ----------- c - (67) - (28) Net interest payable (23) (23) (33) (33) ------------- ------------ ------------- ----------- Profit before taxation 341 202 272 177 Taxation (96) (80) (75) (57) ------------- ------------ ------------- ----------- Profit after taxation 245 122 197 120 Minority interest (equity and non equity) (10) (12) 8 8 ------------- ------------ ------------- ----------- Profit after taxation and minority interest 235 110 205 128 ============= ============= Dividends (156) (110) ------------ ----------- Retained profit for the period (46) 18 ============ =========== Earnings per ordinary share Basic e 2.6p 3.0p Diluted e 2.5p 3.0p Adjusted Basic e 5.5p 4.8p ------------- ------------ ------------- ----------- Statement of Total Recognised Gains and Losses Six months ended 31 December 2003 2002 Â£m Â£m Profit for the period 110 128 Exchange translation differences (4) (8) ----------- --------- Total recognised gains and losses for the period 106 120 =========== ========= Summary Group Cash Flow Statement Six months ended 31 December 2003 2002 Notes Â£m Â£m Cash inflow from continuing operating activities f 539 426 Cash outflow from discontinued operating activities f (277) (39) ----------- --------- Cash inflow from operating activities f 262 387 Dividends received from joint ventures and associates 25 44 Returns on investments and servicing of finance g (15) (16) Taxation paid (114) (134) Capital expenditure and financial investment h (190) (248) Disposals and acquisitions i 358 (424) Equity dividends paid (72) (59) ----------- --------- Cash inflow/(outflow) before use of liquid resources and financing 254 (450) Management of liquid resources (258) 65 Financing j (47) 465 ----------- --------- Net (decrease)/increase in cash (51) 80 =========== ========= Reconciliation of debt, net of cash and current asset investments 2003 2002 Â£m Â£m Debt, net of cash and current asset investments at 1 July (553) (1,081) Repayment of Goldfish Bank working capital facility 234 186 Net increase/(decrease) in liquid resources 258 (65) Net (decrease)/increase in cash (51) 80 Net decrease/(increase) in other debt 54 (280) Exchange adjustments 5 5 ----------- --------- Debt, net of cash and current asset investments at 31 December (53) (1,155) =========== ========= Notes a Segmental analysis including share of profits and losses of joint ventures and associates Six months ended 31 December Operating Operating profit/(loss) before profit/(loss) after goodwill goodwill Turnover amortisation amortisation 2003 2002 2003 2002 2003 2002 Â£m Â£m Â£m Â£m Â£m Â£m ----------- ----------- ----------- ----------- ----------- ----------- Residential Energy 2,421 2,335 (33) 21 (33) 21 Home Services 436 422 43 39 43 39 British Gas Communications 30 26 (4) (9) (4) (9) ----------- ----------- ----------- ----------- ----------- ----------- British Gas Residential 2,887 2,783 6 51 6 51 Centrica Business Services 550 497 8 25 1 20 ----------- ----------- ----------- ----------- ----------- ----------- Industrial sales and wholesaling 349 383 2 41 2 41 Gas production 24 33 198 157 198 157 Accord energy trading 3,097 2,353 4 (15) 4 (15) ----------- ----------- ----------- ----------- ----------- ----------- Centrica energy management group 3,470 2,769 204 183 204 183 Centrica Storage 41 9 24 1 24 1 The AA 408 391 54 37 30 13 One.Tel 94 78 4 (3) 3 (7) Centrica North America 1,094 619 57 38 23 15 Other operations 4 - 4 (4) 2 (8) ----------- ----------- ----------- ----------- ----------- ----------- Continuing operations 8,548 7,146 361 328 293 268 Discontinued operations: Goldfish Bank 38 64 3 (23) (1) (30) ----------- ----------- ----------- ----------- ----------- ----------- 8,586 7,210 364 305 292 238 =========== =========== =========== =========== =========== =========== b Costs (before goodwill amortisation) Six months ended 31 December 2003 2002 Â£m Â£m Cost of sales: Continuing operations 7,061 5,770 Discontinued operations 14 45 ----------- ----------- 7,075 5,815 =========== =========== Operating Costs: Continuing operations 1,127 1,073 Discontinued operations 59 42 ----------- ----------- 1,186 1,115 =========== =========== c Goodwill amortisation and exceptional charges Six months ended 31 December 2003 2002 Â£m Â£m Goodwill amortisation: Continuing operations 66 56 Discontinued operations 4 7 ----------- ----------- 70 63 Goodwill amortisation within joint ventures and associates 2 4 ----------- ----------- 72 67 =========== =========== Non-operating exceptional charges: Continuing operations ----------- ----------- Loss on closure of business 16 - Loss on disposal of business - 14 Loss on disposal of fixed assets - 14 ----------- ----------- 16 28 Discontinued operations Loss on disposal of business 51 - ----------- ----------- 67 28 =========== =========== d Earnings before goodwill amortisation and exceptional charges Six months ended 31 December 2003 2002 Â£m Â£m Operating profit including joint ventures and associates 292 238 Add back goodwill amortisation (note c) 72 67 ----------- ----------- Operating profit before goodwill amortisation 364 305 Net interest payable (23) (33) Taxation on ordinary activities (before exceptional items) (96) (75) Minority interest (before exceptional items) (10) 8 ----------- ----------- Earnings before goodwill amortisation and exceptional charges 235 205 =========== =========== e Earnings per share Six months ended 31 December 2003 2002 Earnings EPS Earnings EPS Â£m Pence Â£m Pence Earnings - basic 110 2.6 128 3.0 Goodwill amortisation and exceptional charges 125 2.9 77 1.8 ------------ ------------ ------------ ------------ Earnings - adjusted basic 235 5.5 205 4.8 ============ ============ ============ ============ Earnings - diluted 110 2.5 128 3.0 ------------ ------------ ------------ ------------ f Reconciliation of group operating profit to operating cash flow Six months ended 31 December 2003 2002 Â£m Â£m Continuing operations Group operating profit 256 247 Add back: Goodwill amortisation 66 56 Depreciation and impairment 182 184 Shares issued to fund share incentive plan 2 - Amortisation of investments 1 7 Profit on sale of fixed assets (3) (5) Provisions (183) 38 Decrease/(increase) in working capital 218 (101) ----------- ----------- Cash inflow from continuing operations 539 426 ----------- ----------- Discontinued operations Operating loss (1) (30) Add back: Goodwill amortisation 4 7 Depreciation and impairment 4 3 Provisions - 16 Increase in working capital (284) (35) ----------- ----------- Cash outflow from discontinued operations (277) (39) ----------- ----------- Cash inflow from operating activities 262 387 =========== =========== g Returns on investments and servicing of finance Six months ended 31 December 2003 2002 Â£m Â£m Interest received 34 19 Interest paid (45) (28) Interest element of finance lease rental payments (4) (7) ----------- ----------- (15) (16) =========== =========== h Capital expenditure and financial investment Six months ended 31 December 2003 2002 Â£m Â£m Purchase of tangible fixed assets (211) (290) Sale of tangible fixed assets 19 27 Loans to joint ventures repaid 2 15 ----------- ----------- (190) (248) =========== =========== i Disposals and acquisition Six months ended 31 December 2003 2002 Â£m Â£m Acquisitions: Subsidiary undertakings and businesses (37) (617) Joint ventures and associates (1) (4) Deferred consideration (4) (37) ----------- ----------- Total cash payments (42) (658) Cash acquired - 222 Overdraft acquired - (30) Disposals: Receipt on disposal of Goldfish credit card and loan business 1,095 - Repayment of Goldfish Bank working capital facility (701) - Proceeds from other disposals 6 42 ----------- ----------- 358 (424) =========== =========== j Financing Six months ended 31 December 2003 2002 Â£m Â£m Commercial paper: Issued (32) - Repaid - 72 Capital element of finance lease rentals (19) (17) Bonds issued (3) 221 Realised net foreign exchange gain 11 57 Investment by equity and non-equity minority shareholders (4) 123 Issue of ordinary share capital - 9 ----------- ----------- (47) 465 =========== =========== Enquiries For further information please contact: Charles Naylor, Director of Corporate Affairs Kath Kyle, Director of Investor Relations Telephone: 01753 494 085 (Media) 01753 494 900 (Investors and Analysts) Facsimile: 01753 494 090 (Media) 01753 494 909 (Investors and Analysts) Financial Calendar Ex-dividend date for 2003 final dividend 28th April 2004 Record date for 2003 final dividend 30th April 2004 Annual General Meeting 10th May 2004 2003 final dividend payment date 16th June 2004 2004 interim results announcement 29th July 2004 Websites www.centrica.com www.house.co.uk www.britishgasbusiness.co.uk www.theaa.com www.onetel.co.uk www.centrica-sl.co.uk www.directenergy.com www.energyamerica.com www.cplretailenergy.com www.wturetailenergy.com www.luminus.be www.luseoenergia.com Registered Office Millstream Maidenhead Road Windsor Berkshire SL4 5GD

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