Final Results
Centrica PLC
21 February 2002
Centrica plc
Preliminary Results
for the year ended 31 December 2001
(unaudited)
SUMMARY
For the year ended 31 December 2001 2000
as restated
Turnover £12,611m £9,933m
Operating profit (including joint ventures & associates) £679m £526m (2)
Earnings £482m (1) £406m (2)
Operating cash inflow £869m £1,139m
Earnings per share (adjusted basic) 12.1p 10.2p
Dividend per ordinary share (final / total) 1.9p / 3.1p 1.7p / 2.8p
All financial figures are stated before exceptional charges and goodwill
amortisation.
'We have continued to make excellent progress towards realising our vision of
becoming a leading supplier of essential services in our chosen markets.' -- Sir
Michael Perry GBE, Chairman
Highlights:
• Turnover up 19% excluding energy trading
• Operating profit up 29% for the year, doubling in the second half from
prior year period
• Earnings up 19% before exceptional charges and goodwill amortisation
• UK energy supply operating profit up 23% despite residential gas margin
squeeze leading to only £3 million contribution; 19.5 million energy
customer relationships
• Electricity operating profit £40 million, up by £147 million reflecting
40% growth in customer base
• Home Services operating profit up 38%, reflecting new products and
controlled costs; over 5 million products and services delivered to
customers
• AA Road and Personal Finance operating profit up 48% and 54%,
respectively; AA roadside membership at new record of over 12 million
• Full year operating profit contribution from North America businesses of
£68 million
• Sustained investment in growth opportunities across the Group including
Goldfish Bank and Telecommunications
• Final dividend for 2001 of 1.9 pence
'These results show good organic growth and strong returns from acquisitions
while demonstrating both investment in the future and our ability to deliver
extra value by expanding from a controlled cost base.'-- Roy Gardner, Chief
Executive
All financial figures are stated before exceptional charges and goodwill
amortisation.
1. The results reflect the adoption of FRS 19 which has reduced earnings before
exceptional charges and goodwill by £21 million in 2001 and
increased earnings as previously reported in 2000 by £17 million.
2. The adoption of mark-to-market accounting resulted in a £14 million reduction
in operating profit in 2000 as restated
CHAIRMAN'S STATEMENT
We have continued to make excellent progress towards realising our vision of
becoming a leading supplier of essential services in our chosen markets. We have
further strengthened our position in the United Kingdom, and we have taken
important initiatives in North America and continental Europe.
Performance
Turnover was £12.6 billion, up 27% over last year, and growth excluding Accord's
trading activities was 19%. Before exceptional charges and goodwill
amortisation, operating profit (including joint ventures and associates) was
£679 million, up 29%, and on the same basis earnings were £482 million, 19%
ahead of 2000, reflecting our encouraging business performance. Earnings after
exceptional charges and goodwill were slightly down by 4% over 2000 due to
higher exceptional charges, goodwill amortisation and taxation.
There were some significant highlights in 2001. We remain the premier supplier
of energy to British homes, with 13.4 million residential gas accounts and more
than 5.4 million electricity accounts, and it is pleasing to note that our
electricity business moved into profit last year. The home services division
also performed well and by the year end over 3.3 million homes relied on British
Gas for home heating cover.
Our Morecambe Bay gas fields produced good results and during the course of the
year we acquired economic interests in three electricity power stations in line
with our strategy to supply around 20% of our customers' energy requirements
from our own resources.
The AA continues to prosper, with membership reaching a record of over 12
million by the year end. We have extended the range of services we offer to the
motorist and the AA personal finance business has also grown. In financial
services, preparations continued for the launch of Goldfish Bank and as part of
these we obtained our banking licence. Our telecommunications business has also
made good progress. With the acquisition of One.Tel in the UK, we have
comfortably achieved our 2001 year-end target of 1 million telephone customers.
In North America we are steadily developing our customer base in both Canada and
the United States and in September we established a presence in the energy
markets of continental Europe, by acquiring 50% of the Belgian company, Luminus
NV.
Dividend
The Board proposes a final ordinary dividend of 1.9 pence per share, to be paid
in June 2002. When combined with the interim dividend of 1.2p per share paid in
November 2001 the total ordinary dividend for 2001 would be 3.1 pence per share,
an increase of 10.7% on the previous year.
The future
The global outlook seems less certain and more challenging than a year ago but
Centrica is well placed to compete effectively for further growth. As the energy
markets in North America and Europe are opened up to competition, the potential
for our business is considerable, and we shall seek to deliver the same benefits
for customers, shareholders and the economy that the liberalised energy market
has already delivered in Britain. We see accelerated opportunities for
well-capitalised businesses, particularly in North America. In
telecommunications there are still some major barriers to overcome here at home
before we see a fully competitive market.
I have every confidence that our positive business performance and financial
strength, combined with the steps we have taken to lay the foundations for
strategic growth, position Centrica well for the way ahead.
Sir Michael Perry GBE
Chairman 21 February 2002
CHIEF EXECUTIVE'S REVIEW
Group Results
Delivering our strategy
Progress towards realising our corporate vision was marked by significant
strategic achievements across the Group in 2001. There are key components of our
strategy implementation which are having a positive impact on the Group's
business value creation. These include good organic growth, leverage on our
profitability by controlling our cost base, increasing returns from our
acquisitions and investment in new businesses for the future. Each of these is
making, and will continue to make, an important contribution to the Group's
success in providing sustainable growth in business value to our shareholders.
Operating profit
Operating profit (including joint ventures and associates, before exceptional
charges and goodwill amortisation) of £679 million in 2001 was up 29%, from £526
million in 2000. UK energy supply profit was £652 million in 2001, up 23% from
£531 million in 2000. This was influenced by a profit decline of £291 million in
residential gas supply offset by higher profitability of £243 million in gas
production and £147 million in electricity supply. North American energy supply
profit contributed £68 million to Group operating profit. Additionally, our home
services business benefited from a growing product range and focused
cross-selling activity, achieving record operating profit in 2001 of £36
million, an increase of 38% over last year. Operating profit at our AA Road and
Personal Finance units was up 48% and 54% respectively, to £74 million in total.
We made substantial investments (excluding acquisition costs) in growing our
Telecommunications businesses (£64 million) and in the development of Goldfish
Bank (£14 million). Our operating margin, excluding our Accord trading
operations, was unchanged at 7% in 2001.
Exceptional charges and goodwill amortisation
Exceptional charges of £80 million (2000: £14 million) included £35 million of
costs incurred in the integration of the AA and One.Tel, and £8 million in
relation to the impairment of cylinder assets in our LPG business. The Group has
also recognised exceptional losses of £37 million arising from the failure of
Enron Corporation, a major participant in UK and North American energy markets
which has filed for protection from its creditors.
The goodwill amortisation charge was £86 million (2000: £60 million), of which
£49 million related to the AA and £29 million related to energy supply in North
America.
Net interest
Net interest payable was £43 million (2000: £28 million) and was covered 15.8
times by operating profit (including joint ventures and associates, and before
exceptional charges and goodwill amortisation) compared with 18.8 times coverage
in 2000. The increase in net interest was due to higher average indebtedness as
a result of the Group's acquisitions, partly offset by lower interest rates.
Taxation
Our accounts for 2001 reflect the adoption of Financial Reporting Standard (FRS)
19, Deferred Taxation, under which the Group recognised its full deferred tax
liabilities and certain deferred tax assets as a restatement of prior year
results. These assets largely arise from tax losses brought forward from earlier
years and are recognised only when there is persuasive and reliable evidence
that the assets can be realised. The tax charge of £155 million (2000: £89
million as restated) mainly arose from the higher profits of offshore gas
production activities which are ring fenced for tax purposes. The effect of the
restatement was to reduce 2001 earnings (post exceptionals and goodwill) by £21
million and increase earnings as previously reported in 2000 by £20 million. The
group has net unrecognised deferred tax assets of £198 million (2000: £198
million restated).
Accounting Policy - FRS17: Retirement Benefits
Our accounts for 2001 do not reflect the adoption of this standard, which is not
mandatory until 2003. If the standard had been fully adopted in 2001, earnings
would have been reduced by £16 million, which is the net of £53 million charged
to operating profit and £37 million credited to net interest income. The net
assets of the group would have been reduced by £117 million.
Cash flow and balance sheet
Operating cash flow (from continuing operations, before exceptional payments)
was £869 million compared with £1,139 million in 2000. The decrease largely
reflects our first significant petroleum revenue tax (PRT) payments and ongoing
royalty payments relating to the South Morecambe field which, in aggregate, were
£242 million in 2001 as against £54 million in 2000. The positive impact of
increased profitability in most of our businesses was partially offset by
significant cash investment in Goldfish Bank and in our Telecommunications
business. Our North American business made a positive contribution of £133
million to operating cash flow in its first full year of operation.
Net assets increased by £238 million over the period to £1,536 million. Net debt
(excluding Goldfish Bank) rose from £117 million as at 31 December 2000 to £433
million at year end 2001, related largely to the Group's acquisitions across
several of our business areas. Debt funding incurred by Goldfish Bank to fund
its credit card receivables amounted to £610 million.
We retain credit ratings of A2/A (long term) and P1/A1 (short term) from Moody's
and Standard & Poor's respectively. At the year end, net debt (excluding
Goldfish Bank) as a proportion of total book capitalisation stood at 22%. We
succeeded in raising £493 million in 2001 through our issuance of medium term
bonds at attractive funding costs, providing good evidence of our access to
capital markets.
Customer service
Customer satisfaction levels have remained consistently high throughout 2001
across British Gas branded services. The number of complaints to energywatch
with regard to gas supply was down by 25% compared with the same period last
year, the second successive year of reduction. British Gas was ranked highest in
the J.D. Power and Associates 2001 customer satisfaction study of UK electricity
suppliers. The AA reported its highest ever level of customer satisfaction,
following an upward trend throughout the year. Further improvements in customer
service remain at the heart of our strategy.
Enhancing our customer relationships
We continue to look at ways to enhance our organisational capability to deliver
the strategy. Our approach builds upon our considerable experience in developing
brands, managing customer relationships and competing in fast-changing markets.
Centrica has embarked on a five-year programme to develop, in partnership with
Accenture, advanced systems, processes and technology for coordinating our
customer relationships across the British Gas brand with an investment of
approximately £340 million, of which £60 million was incurred in 2001. This will
bring together all our knowledge of each British Gas customer, and provide
considerable benefits to both us and our customers through enhanced, more
efficient customer service. It will improve our cross-selling capabilities and
will reduce operating costs as our support systems are streamlined. Benefits in
excess of £100 million per annum are anticipated by the end of the project
period.
Outlook
We saw the impact of high input costs on our residential gas business in 2001:
the price increase implemented in January 2002 will go some way to restoring
profitability. Looking ahead to the gas year commencing in 2002, the benefit of
lower current oil prices will likely be offset to some degree by an ongoing
shift in our gas purchase contracts towards greater linkage to gas price
indices, which have not fallen to the same extent as oil indices.
In UK electricity, home services and the AA, we see opportunities to build
further scale and value in these growing businesses. We intend to maintain
investment levels in order to expand the Group, build on our strengthening brand
platforms and increase product breadth to further leverage our customer
relationships.
Since receiving our banking licence for Goldfish, we have developed the product
launch plan for the next two years. In our Telecommunications business, the
acquisition from the iomart Group plc of its customers and service capability
for £2 million gives us important expertise from which to launch our product
offerings in the UK broadband market.
Since year end, our acquisition of Enbridge Services in North America has
resulted in a Group commitment to fund £437 million to complete the transaction
from our existing debt facilities. This acquisition will add around 1.8 million
customer relationships to our North American business. We are also proceeding
with an equity placement that is expected to amount to up to 5% of the Group's
share capital, from which proceeds will be used to reduce debt and increase
shareholders' funds. For comparison, our net assets and net debt (excluding
Goldfish Bank) outstanding at the end of 2001, pro forma for the Enbridge
acquisition and the equity placement, would have been £1,933 million and £450
million, respectively.
In these less certain times, further investment opportunities may arise and
Centrica will be well placed, with the scale, management and financial resources
to take advantage of those which are value enhancing. We have a US$2 billion
medium term note programme, under which £493 million of bonds have been issued,
and a US$2 billion commercial paper programme which is supported by £935 million
of undrawn committed revolving bank lines. Together with the equity placement,
we consider these facilities are sufficient to support our continuing organic
and acquisition growth plans, as well as our normal energy supply seasonality
which peaks in winter.
We anticipate that 2002 will bring us further opportunities as we continue to
achieve good organic growth and leverage on our profitability by controlling our
cost base, together with good returns from our acquisitions and further
investment in new businesses for the future.
Roy Gardner
Chief Executive 21 February 2002
Performance by Business
UK
Energy
Turnover for our energy business (excluding energy trading operations) was £6.7
billion in 2001, an increase of 11% from £6.0 billion in 2000. Operating profit
(including joint ventures and associates, before exceptional charges and
goodwill amortisation) was £652 million in 2001, an increase of 23% from £531
million in 2000. Higher wholesale prices for gas production from our own fields
throughout the year, and improvement in operating profitability from electricity
supply and energy trading operations, more than offset the effects of
significant retail gas margin erosion from higher gas input prices. The 2001
operating margin for our aggregate energy operations (excluding energy trading
activities) was 9.4%, similar to 2000.
Residential energy market share
We were largely successful in stemming net losses of gas customers beginning
mid-summer 2001, with the level remaining relatively flat through the fourth
quarter of the year. At the same time, net increases in our electricity customer
base accelerated through most of the year, from a gain of approximately 25,000
customers per week in the second quarter to increases of approximately 40,000
customers per week during the fourth quarter. The net effect was that we
increased the total number of residential energy accounts by 5% over the year.
At 31 December 2001 we were supplying 5.4 million residential customers with
electricity, an increase of 38% from 3.9 million a year earlier. Our resulting
share of the residential electricity market in Great Britain was 22% at
year-end, up from 16% at the end of 2000. We had 13.4 million residential gas
customers representing a market share of 67%, down from 14.0 million customers
and a 70% market share a year earlier (as restated in accordance with the
Utilities Act definition of residential customers).
This solid performance in increasing our energy market position has taken place
amidst an environment of increased competition and further steps towards full
deregulation of the industry by the UK Office of Gas and Electricity Markets. We
believe our continued success is attributable to a strong value-for-money
offering to customers, together with the increasing importance attached by our
customers to high levels of service quality and responsiveness.
British Gas: gas supply
Turnover from our residential gas business in 2001 was £4.0 billion, compared
with £4.1 billion in 2000. Given our small decrease in share of this highly
competitive market, our residential gas sales volumes decreased to 9.0 billion
therms in 2001, down by 2% from 2000, and were affected by an unusually warm
autumn. In our non-residential business, turnover was £1.4 billion and sales
volumes were 5.8 billion therms in 2001, up 24% and 4% respectively from £1.1
billion and 5.6 billion therms in 2000. Average non-residential selling prices
increased by 13%. The combined gas supply business showed reduced gross profit
performance compared with 2000, reflecting higher gas procurement costs.
A residential price increase averaging 4.7% was implemented in April 2001 to
begin to respond to the higher cost environment. The weighted average cost of
gas to meet our supply requirements was 20.5p per therm in the calendar year
2001, an increase of 25% from 16.3p per therm in the calendar year 2000.
From April through September 2001 we paid higher than expected charges in
respect of national (long-distance) gas transportation due to the high prices
resulting from the National Transmission System entry capacity auction. These
increased charges are being partially offset by a reduction in other
transportation charges over the period June 2001 to March 2002. In this regard,
2002 results are expected to benefit by some £50 million. Local transportation
and residential metering charges were also lower in 2001. Aggregate
transportation and metering costs of £1.7 billion were virtually unchanged from
2000.
The residential gas supply business returned an operating profit (before
exceptional charges and goodwill amortisation) of only £3 million, compared with
£294 million in 2000 (as adjusted to reflect intra-group transfers at market
prices). Non-residential supply operating profit declined from £55 million in
2000 to £41 million in 2001, reflecting the increase in gas procurement costs.
British Gas: electricity supply
Turnover from our electricity business in 2001 was £1,242 million, up 57% from
£792 million in 2000. We booked sales of 20.6 TeraWatt-hours (TWH) to an average
of 4.6 million customers on supply, an increase of 62% and 53%, respectively,
from 12.8 TWH and 3.0 million customers in 2000. We believe this very
substantial customer and volume growth is attributable to our ability to offer
attractive dual-fuel package products, successful marketing, and the trust and
confidence that customers attach to the nationwide British Gas brand. Our
average unit pricing was 6.0 pence/kilowatt hour (kWh) in 2001, slightly down
from 6.2 pence in 2000 following an average reduction of 3.7 per cent in
electricity prices from April.
Our gross profit has increased, driven by our rapid growth in customer numbers.
Average electricity unit costs for our supply business fell by 19%, to 2.6p/kWh
in 2001 from 3.1p/kWh in 2000. At operating level, the business has rapidly
progressed from its loss-making revenue investment phase to contribute a profit
for 2001 of £40 million, before exceptional charges and goodwill amortisation,
(an operating margin of 3%), compared with a 2000 loss of £107 million. This
operating profit was earned after the costs of acquiring new customers,
including advertising, selling and processing, which amounted to £66 million in
2001. This business has been built entirely organically since September 1998,
and our upsurge in market presence and customer numbers has been accompanied by
the application of our effective supply forecasting and balancing expertise.
With respect to upstream generation assets, in May we took a 60% stake in Humber
Power in Lincolnshire, and in October we acquired the operations and entire
economic interests in power stations in Peterborough and Kings Lynn by way of
long-term lease arrangements. The aggregate consideration, including leases
entered into, in these transactions was £482 million. The combined output of
these facilities at 1,455 MW was acquired at £331 per kilowatt. This capacity
offers us increased peak-time sourcing flexibility, long-term stability and
protection against major changes in electricity prices, and is in line with our
risk management goal of operating generation assets which can provide between
20-25% of our peak capacity needs.
In December we acquired the energy supply business of Enron Direct Limited,
which is principally engaged in electricity supply to commercial customers. For
a total consideration of £98 million, we acquired a business with annual
turnover over £200 million and approximately 160,000 direct customers. The
transaction provided a strong platform for advancing our move into the
commercial electricity market and nearly doubled our customer base in the
segment. The increase in sales volume and flattening of our hourly demand
profile will also enable us to realise further strategic and financial value
from our wholesale procurement activities.
The New Electricity Trading Arrangements (NETA) became effective from 27 March
2001. The new electricity demand forecasting, energy balancing and settlement
systems we introduced, as required by NETA, operated successfully. We welcomed
the UK government's implementation of NETA, which has helped to reduce our
procurement costs and provide value to customers.
Gas production
Amidst a market environment in 2001 in which annual wholesale gas prices ended
the year approximately 30% higher, placing intense pressure on the profitability
of our retail gas business, our ability to sustain high production levels from
our own fields has proven the valuable flexibility of our substantial upstream
reserve assets. Production for 2001 was 4.3 billion therms in aggregate from our
Morecambe fields and those fields in which we hold an equity interest. This was
close to the previous year's record level of 4.6 billion therms, despite warm
autumn weather, and represented 26% of the volume requirement of our total
downstream gas supply businesses.
Operating profits (before exceptional charges and goodwill amortisation) from
gas production were £552 million in 2001, up 79% from £309 million (as adjusted
to reflect intra-Group transfers at market prices) in 2000. The large increase
was attributable to higher year on year contract prices, offset by higher
resulting PRT and government royalties and a small reduction in output volume.
Operating and overhead costs were reduced by 5% year-on-year. The resulting
operating margin (after depreciation and provision for petroleum revenue tax)
was 53% in 2001, up from 40% in 2000.
In our interim 2001 results report, we referred to our multi-year investment of
£60 million (£30 million spent in 2001) in our South Morecambe Onshore
Compression facility to enhance our gas delivery capability by 14% and in
further development of the field to increase reserves by 70bcf, both of which
are now successfully on stream. We have augmented our upstream reserves in the
second half by acquiring additional interests in North Sea and East Irish Sea
equity reserves for a consideration of £62 million, adding a further 110 bcf of
gas and 2.1 million barrels of oil to Centrica's portfolio. We also reached
agreement with Burlington Resources to process gas from the Rivers field in the
East Irish Sea and to operate their new offshore and onshore facilities.
Delivery of first gas is expected by early 2004.
Accord
Accord's underlying energy trading activities returned to profitability,
contributing an operating profit (before exceptional charges and goodwill
amortisation) of £16 million in 2001, up from a £20 million operating loss in
2000. The Group has also recognised exceptional losses of £37 million arising
from the failure of Enron Corporation, a market participant in UK and North
American energy markets which has filed for protection from its creditors. Of
these losses, £30 million were related to Accord for profitable trading
contracts with Enron subsidiaries which have since been terminated and for which
the Group has made claims for profits foregone. (The remaining £7 million was
not attributable to Accord, but was rather in respect of the Group's share of
market losses under UK energy market balancing arrangements and provisions
against stock held by Enron under virtual gas storage contracts.)
UK trading operations expanded in 2001 and Accord further established itself as
a major player in the British gas and developing power markets. In continental
Europe, Accord initiated and played a major role in the establishment of a new
gas trading hub at Bunde and increased traded volumes in continental Europe by
24%.
British Gas Home Services
Our Home Services business generated strong growth in 2001, expanding beyond its
traditional home heating cover and installation and demonstrating its ability to
build on our customer relationships. Its turnover was £722 million in 2001, an
increase of 14% from £636 million in 2000.
We install and service residential heating systems. Our revenue from central
heating installation contracts grew by 23% in 2001, to £255 million from £207
million in 2000. This was driven in part by a successful television advertising
campaign. Our core gas service cover business was stable, with a net increase of
1% in live contracts, to 3.3 million.
Our increasing ability to sell new British Gas home service products has
produced encouraging results. Plumbing and drain service contracts increased by
47% to 743,000, demonstrating a good linkage to our heating-based customer
relationships. We introduced home electrical service contracts during 2001, with
143,000 customers by year end, and increased the number of kitchen appliances
under contract by a multiple of 2.7 to 562,000. Home security installation and
monitoring is another product with good growth potential and we are now the UK
leader in the domestic segment of the market.
Operating profit (before exceptional charges and goodwill amortisation), at £36
million in 2001, increased 38% from £26 million in 2000, reflecting growth
amongst our multi-product portfolio whilst costs have remained controlled.
Advertising expenses were held to approximately 3% of revenue including our
successful television campaign. General and administrative costs increased only
modestly in relation to our revenue growth and expanding product range.
In aggregate, beyond gas service contracts, we now have 1.5 million of our
customers' essential services or appliances under contract, approximately double
2000's figure. The resulting growth in Home Services operations has demonstrated
the operational and financial economy of scale of the business, with the
expansion of operating margin by a percentage point to 5%.
The acquisitions of National Homecare and Trolhurst Limited helped us to address
our need for further well-trained engineering staff, a key challenge to the
growth of this business. These purchases added trained workforces of 450
engineers, giving us additional capacity to develop our services to customers.
AA Road Services
Road Services' turnover was £486 million in 2001, an increase of 9% from £447
million in 2000. Total AA membership reached a new record level in 2001, growing
to over 12 million, an increase of over 10% from 10.9 million a year earlier,
including personal, affinity and fleet accounts. We believe that this membership
represents a 48% share of the UK roadside assistance market, up from 46% a year
earlier, and demonstrates good progress in the AA's marketing and service
operations. AA personal retention rates remain high, exceeding 80%.
Operating profit (before exceptional charges and goodwill amortisation) was £37
million, up from £25 million in 2000. The business continued to make progress
reducing its cost structure whilst maintaining a premium level of service to
customers. Operational efficiency improvements and tighter cost control led to
operating margin improvement to 8% this year from 6% in 2000, despite high
levels of customer roadside service calls during the first half. We have
achieved higher productivity of roadside service personnel as our membership has
grown, increasing the number of service calls per average staff day whilst
simultaneously reducing average customer waiting time.
In July we purchased Halfords garages, which was the largest independent chain
of car repair, service and maintenance centres in the UK, for £5.75 million.
This has been followed with a programme of training, accreditation and
refurbishment in preparation for launching these 129 garages, along with the
AA's 28 existing fleet workshops, as AA Service Centres. These retail outlets
will offer customers a flexible, value-for-money service, and will allow the AA
to build on its core strategy of providing essential motoring services for
members and other motorists.
The acquisition has furthered a substantial drive by the AA to expand a range of
other benefits for members and customers, including vehicle servicing, on site
vehicle inspections, and free brake and tyre checks. We have also started trials
of a mobile tyre replacement service that can attend at a time and place to suit
the customer. In December we signed an agreement with Inchcape plc to offer an
AA branded service for the supply of new and used cars, together with a range of
financing options and other motoring-related products and services.
AA Personal Finance
AA Personal Finance increased turnover to £141 million, up 10% from £128 million
in 2000. Strong performance was evident in the operating profit result (before
exceptional items and goodwill amortisation) of £37 million, a 54% increase from
£24 million in 2000. Our insurance business benefited from a first-half rise in
UK motor premiums, and began to reap returns from investments in customer
retention and telephone and internet-based channel infrastructure.
The AA remains the UK's largest independently owned insurance intermediary and
its growth is continuing. The increasingly competitive breadth of the AA's
20-strong insurer panel led approximately 900,000 drivers and 600,000 homeowners
to arrange their policies through us in 2001, an aggregate increase of 4% over
2000. Around one third of our customers have also chosen to take an extended
credit plan from the AA, a profitable and complementary product to our
underlying insurance offerings. We believe that our sales volumes are being
supported by heightened consumer concern to obtain good value for money amidst
an environment of rising premiums. Our retention rates remain high for both
motor and home policies at over 74%.
In just two years, the online insurance service on 'theAA.com' has grown to
provide 45% of our motor insurance quotes in 2001. The online service won the
British Insurance Industry's e-commerce quality award for the second consecutive
year. We expect its efficiency to contribute to a continuing reduction in
average servicing costs per contract. Operating cost reduction is being
partially offset by increased advertising investment as we seek to increase the
market penetration of our brand.
The unsecured consumer lending business, our joint venture with HBOS plc, also
improved upon the previous year, with 77,000 personal loans outstanding (up from
66,000 a year earlier) and generating a 27% increase in operating profit. Its
progress is attributed largely to our ability to differentiate our products by
including other AA 'add-on' products, against a background of growth in UK
consumer credit. AA car loans were advertised for the first time on television.
At the year end, the loan book stood at a record £424 million, up from £326
million the prior year.
AA Personal Finance operating margins grew to 26% in 2001 from 19% in 2000,
demonstrating the scalability afforded the business by its internet operations,
insurance product breadth (motor and home) and its cross-selling (insurance and
loan finance) business platform.
Goldfish Financial Services
The year was marked by our agreement in early August with HFC Bank plc for
Goldfish Bank (in which Goldfish Financial Services holds a 70% economic
interest with Lloyds TSB Bank plc holding 30%) to acquire its rights and
interest in the Goldfish credit card. In addition to the value of the credit
card receivables book, HFC will receive consideration of £85 million (net) for
its interest in the card, of which £50 million has been paid to date. As a
result of these structural changes in the Goldfish operations, 2001 financial
results for this business should be analysed in two parts, before and after 3
September 2001.
Prior to 3 September, Centrica's economic interest in the operations of the
Goldfish credit card consisted of a 50% interest in a joint venture with HFC
Bank. This joint venture managed the customer acquisition, marketing and loyalty
scheme of the card under brand licence from Centrica and, in turn, received a
profit stream from HFC Bank which itself funded the receivables and ran the
processing operations. Our share of the income generated by the joint venture
was £4.2 million for 2001 up until 3 September, as against £3.0 million for the
entire year 2000.
Commencing on 3 September 2001, the economic interest in the credit card
operation indirectly accrued for the benefit of Goldfish Bank, which received
its banking licence on 29 November and purchased the credit card book on 28
December. HFC Bank is providing payment card and management services to Goldfish
Bank, for a fixed fee per account, which is included in our operating expenses.
This will continue until late 2002 when migration to our own provider is
scheduled to occur. Goldfish card revenue from 3 September until year end was
£34 million (before bad debt and interest expenses), while the card operating
profit over the same period was £5 million, after marketing expenses of £2
million associated with a new card advertising campaign.
Goldfish Bank applied £32 million in 2001 to the development of infrastructure
for its wider financial services offering and migration of the credit card from
HFC, of which £18 million was capitalised and £14 million expensed as revenue
investment. After this investment in technology, personnel and marketing
expenses, together with the card's operating profit, Goldfish Financial Services
reported an aggregate operating loss of £32 million for the year (before
amortisation of goodwill and minority interest).
Shareholders' funds at Goldfish Bank underlying the £673 million credit card
book were £215 million at year end. The book is currently being funded primarily
by an initial revolving debt facility from Lloyds TSB Bank PLC of up to £850
million, maturing in December 2003, beyond which Centrica and Lloyds TSB Bank
PLC have agreed to provide further finance.
The market position of the Goldfish credit card remained solid throughout the
year notwithstanding the structural changes to the business. Customer volume
remained steady at approximately 735,000 open accounts through the year with
just over one million cards in issue. The size of the credit card receivables
book at the year end was £673 million (2000: £670 million), on which full year
gross interest income of £68 million was generated from customers spending an
average of over £4,000 over the year. Annualised credit and fraud losses
remained at less than 4%.
Goldfish Bank has exclusive rights to use the Goldfish brand for financial
services in the UK and combines Centrica's customer care and marketing skills
with advanced systems and banking expertise. Our primary focus is to build on
the strong brand franchise and public recognition of our credit card, increasing
membership and card usage and improving profitability. New marketing and
customer acquisition activities are proceeding in support of this effort.
Telecommunications
Centrica Telecommunications is one of the largest indirect access competitors to
BT in the UK. The business launched its services under the British Gas
Communications brand in September 2000 and then acquired One.Tel plc, one of the
UK's largest indirect telecommunications providers, in July 2001. The
combination of organic growth and the acquisition enabled Centrica
Telecommunications to gain critical scale and to exceed its 2001 target of 1
million active fixed and mobile customers whilst delivering over 100,000 active
internet service accounts.
Turnover in 2001 was £102 million, which included sequential growth from the
first half (£14 million) to the second (£88 million), largely as a result of
One.Tel turnover of £65 million within the second half result. This rapid growth
was driven by the rise in customer volumes and an increase in our average
revenue per user (ARPU). ARPU increased with the acquisition of One.Tel due to
the higher proportion of international calls billed to One.Tel's customer
segment. At year end there were 1.2 million fixed, mobile or internet accounts
active in the previous 30 days, up from less than 200,000 a year earlier.
Breadth of our product offerings increased to include bundled fixed, mobile and
internet services and we are planning additional new broadband services.
The 2001 operating loss (before exceptional charges and goodwill amortisation)
was £97 million after revenue investment of £64 million. We are moving
aggressively to reduce both variable and fixed overhead costs of service. We now
route the majority of our call volumes using a switched reseller model which is
resulting in lower transmission expenses, and therefore higher gross margins, by
using a lowest-cost routing capability. Excess market capacity provided a
further opportunity to negotiate favourable transmission (or carrier) charges.
We are implementing initiatives to realise the synergy benefits of the One.Tel
acquisition, the largest of which is a migration of our British Gas
Communications customers to the One.Tel billing system by the middle of 2002. It
is anticipated that this will result in a significant reduction in platform
running and development costs. One.Tel has a highly efficient direct marketing
and telesales capability that we are using to reduce average customer
acquisition costs across the business.
Our acquisition and retention of customers continues to be adversely affected by
the lack of either Carrier Pre-Selection (CPS) or an economic access product,
the latter required to enable a single billing relationship with the customer.
Both CPS and the single billing relationship, when made economic and practical
by industry development, will provide us with a more loyal customer base.
Reduction of customer defections has been a keen focus during 2001: however, a
number of structural constraints persist in the industry, which will have to be
addressed in order to fully address our churn rate and provide a level
competitive playing field. Pending these structural industry developments, our
focus in 2002 will be on further increasing the value of our customer base
through enhanced product offerings and operational efficiencies, rather than
sustaining the dynamic growth rate we achieved in 2001.
North America
Our energy operations under the Direct Energy and Energy America brands
contributed turnover of £768 million in 2001 in their first full year of
operations under Centrica, compared with turnover in the period August 18 to
December 31 2000 which was £267 million. The increase in turnover was supported
by customer growth as well as higher billings resulting from an increase in
average commodity prices. Customer numbers increased to 1.3 million at the year
end, and we have signed approximately 600,000 Ontario electricity contracts
ahead of the market opening in May 2002.
Commodity prices were extremely volatile in 2001. The Ontario market saw a
threefold increase in gas prices early in the year, though prices have
subsequently fallen back to previous levels. Our Canadian customers are
generally protected from this uncertainty by five-year fixed price contracts and
in 2001 saved an average of C$200 per household compared with customers of local
utilities. We generally hedge these fixed price sale arrangements with parallel
fixed cost procurement contracts. We sold 2.4 billion therms of gas in 2001.
Our upstream gas assets are held by Direct Energy and Centrica Canada Limited,
which includes the assets of Avalanche Energy, acquired in December 2000. Total
2001 output was 37 bcf, equivalent to 24% of our Canadian gas sales, in line
with our strategy of hedging 20-30% of sales with internal production to retain
supply flexibility amidst volatile wholesale markets.
Operating profit (before exceptional charges and goodwill amortisation) in 2001
was £68 million, after £28 million of revenue investment in our customer base.
This result constitutes a substantial improvement from our operating profit
(before exceptional charges and goodwill amortisation) of £8 million in the
period of Centrica ownership, 18 August to 31 December 2000 and demonstrates the
growth of this business to higher profitability in its first full year. Our
resulting operating margin was 9% in 2001. During the year, the business began
investing heavily for future growth, including a major re-engineering of
customer facing operations, expansion of the Toronto call centre, new IT systems
and billing platforms and opening of our Houston office in preparation for the
electricity market opening in Texas.
North American outlook and strategy
We are making good progress in delivering our North American strategy. In Texas,
we secured retail electric provider status in January 2002 upon the market
opening, allowing us to offer deregulated power to a potential customer base of
over 5 million households in a market with peak electricity demand of
approximately 80% of UK levels. Texas customers are now being signed up on
three-year contracts at the rate of 1,000 per working day.
Centrica has also accelerated its plans to enter the home services business in
North America to further the creation of a cross-selling platform for energy and
other services as we have done in the UK. In this respect, we announced the
acquisition of Enbridge Services Inc. (ESI) in January 2002. ESI has 1.3 million
water heater rental customers, 325,000 heating installation contract maintenance
customers and 80,000 residential gas customers, as well as a Canada-wide
business services operation and 14 retail stores.
Once completed and following the opening of the Ontario electricity market, this
acquisition will bring Centrica's total number of customer relationships with
North American households to approximately 3.6 million. We expect higher
revenues to be at least partially offset by continuing heavy investments in
systems development, customer marketing and regional facilities as we begin to
serve markets in a variety of states and provinces.
Energy deregulation and the opportunities open to skilled and flexible suppliers
continue to develop in the North American state and provincial markets which are
most important to Centrica's near-term investment plans (Ontario, the MidWest,
Georgia and Texas). In Michigan, Centrica already has successfully gained
181,000 gas customers in Western Michigan and will compete in the area around
Detroit upon its opening in May 2002 (2.7 million potential gas customers
statewide). Michigan introduced electricity market initiatives in January 2002
which have the potential to bring choice to 3.3 million households in that state
and which would give Centrica the opportunity to sell both gas and electricity
and build upon our understanding of the market. We are also building our retail
gas supply presence in Ohio (2.7 million potential customers).
Elsewhere, we continually seek opportunities in deregulating markets with
satisfactory availability of commodity on commercial terms, an environment which
enables new marketers to compete on price against incumbents, a local regulatory
regime that facilitates an open and competitive market and the genuine
expectation of achieving critical mass of customer acquisitions. By the end of
2001, customers in 17 states in the US had access to some form of energy choice
programme. Beyond the states discussed above, further opportunities are expected
to open up during the course of the year in other MidWest and NorthEast states
as well as in Canada. In aggregate, Centrica expects to be addressing a market
of over 20 million customers in North America by the end of 2002.
Deregulation is however evolving inconsistently in the US and Canada, with
progress dependent on the focus applied by government and other industry
stakeholders in each state or province. Events in California, US economic
slowdown and the Enron collapse have all had a negative influence on sentiment
and there is some evidence of a slowdown in the widespread emergence of truly
competitive markets. We believe that the industry will become more efficient and
customer choice will improve when independent energy suppliers such as Centrica
are freed to serve customers while regulated utilities reduce their risk profile
by focusing on core infrastructure management.
Other activities
Other Activities include the AA publishing, traffic and travel, driving school,
the AA signs businesses, and most of the Group's e-commerce developments,
including and websites, as well as the Group's
continental Europe operations.
Following its relaunch early in 2001, theAA.com recorded 13.7 million visits for
the year, up from 6.8 million the previous year. In addition to insurance and
loans, the site provided 8.5 million road journey routes, a service which we
believe enhances the value of the AA brand. Up-to-the minute traffic and travel
information is also available to mobile phone users via the new '401 100' and
affiliated services, which took 7 million calls last year. During the year we
launched our AA Street by Street atlases which captured 12% of the UK market by
the end of 2001.
In October we launched house.co.uk, an easy-to-use website that helps customers
manage their energy and telephone accounts, fix problems, make home improvements
and to move house. Another site, britishgasbusiness.co.uk, has been launched to
support our growing number of business customers.
In continental Europe, we have made our first move into energy retailing during
the year with the acquisition for £58 million of a 50% stake in the Belgian
energy company Luminus N.V. This joint venture with five Flemish municipalities
will take over the interest in the 600,000 electricity customers and 200,000 gas
customers within the respective municipal supply zones as the market goes
through a phased introduction of electricity competition between January 2002
and July 2003.
Summary Group Profit and Loss Account
for the year ended 31 December
Before Before
exceptional exceptional
charges and charges and
goodwill goodwill
amortisation amortisation
2001 2001 2000 2000
£m £m £m £m
as restated as restated
Notes
Turnover:
Continuing operations before acquisitions 12,303 9,933
Acquisitions 308 -
Continuing operations 1 12,611 9,933
Cost of sales 2 (10,224) (7,921)
Gross profit 2,387 2,012
Operating costs before exceptional charges and 2 (1,755) (1,504)
goodwill amortisation
Exceptional charges and goodwill amortisation 3 (166) (74)
Group operating profit 632 466 508 434
Share of profits less losses in joint ventures and 47 45 18 18
associates - continuing operations
Operating profit including joint ventures and
associates:
Continuing operations before acquisitions 626 468 526 452
Acquisitions 53 43 - -
Continuing operations 1 679 511 526 452
Net interest payable (43) (43) (28) (28)
Profit before taxation 4 636 468 498 424
Taxation 5 (164) (155) (92) (89)
Profit after taxation 472 313 406 335
Minority interest 10 10 - -
Profit after taxation and minority interest 4 482 323 406 335
Dividends 6 (124) (112)
Retained profit for the financial period 199 223
Dividend per ordinary share 6 3.1p 2.8p
Earnings per ordinary share:
Basic 7 8.1p 8.4p
Diluted 7 8.0p 8.3p
Adjusted Basic 7 12.1p 10.2p
Summary Group Balance Sheet
as at 31 December
2001 2000
£m £m
Notes as restated
Fixed assets
Intangible assets 1,524 1,309
Tangible assets 2,058 1,936
Investments 8 167 57
3,749 3,302
Stocks 193 123
Debtors due within one year 9 2,596 1,734
Debtors due after more than one year 130 149
Cash and investments 526 214
Creditors due within one year (3,842) (2,689)
Net current liabilities (397) (469)
Total assets less current liabilities 3,352 2,833
Creditors due after more than one year (632) (170)
Provisions for liabilities and charges (1,184) (1,365)
Total assets less liabilities 1,536 1,298
Shareholders' funds 1,502 1,298
Minority interests 34 -
Capital and reserves 1,536 1,298
Movements in Shareholders' Funds
2001 2000
£m £m
as restated
Shareholders' funds as at 1 January as previously stated 1,193 967
Prior year adjustment 105 99
Shareholders' funds at 1 January as restated 1,298 1,066
Profit for the financial year 323 335
Dividends (124) (112)
Shares issued 17 43
Reserves transfer (10) (34)
Goodwill adjustment (2) -
Shareholders' funds as at 31 December as restated 1,502 1,298
Statement of Total Recognised Gains and Losses
for the year ended 31 December
2001 2000
£m £m
Notes as restated
Retained profit for the financial year 199 223
Exchange translation differences - -
Total recognised gains and losses arising during the financial 199 223
year
Prior year adjustment 14 105
Total gains and losses recognised for the financial year 304
Summary Group Cash Flow Statement
for the year ended 31 December
2001 2000
Notes £m £m
as restated
Cash inflow from operating activities 10 825 1,063
Dividends received from joint ventures and associates 16 10
Returns on investments and servicing of finance 11 (15) (13)
Taxation paid (109) (147)
Capital expenditure and financial investment 12 (337) (165)
Acquisitions 13 (607) (590)
Equity dividends paid (115) (103)
Cash (outflow)/inflow before use of liquid resources and (342) 55
financing
Management of liquid resources (257) 92
Financing 686 (159)
Net increase/(decrease) in cash 87 (12)
Reconciliation of debt,
net of cash and investments
2001 2000
£m £m
Debt, net of cash and investments as at 1 January (117) (127)
Drawdown from Goldfish working capital facility (610) -
Debt acquired (37) (56)
Net increase/(decrease) in current asset investments (i) 257 (92)
Net increase/(decrease) in cash for the period 87 (12)
Net (increase)/decrease in other debt (635) 168
Exchange adjustments 12 2
Debt, net of cash and investments as at 31 December (ii) (1,043) (117)
Of which:
Goldfish Bank (610) -
Other businesses (433) (117)
(1,043) (117)
i. Cash and investments included £142 million (2000: £136 million) held by the
Group's insurance subsidiary undertakings, £52 million of margin call
deposits held as security in relation to energy trading positions, £50
million deposit held as security in relation to outstanding consideration in
relation to the acquisition of the Goldfish credit card and £9 million
(2000: £7 million) held by the Law Debenture Trust, on behalf of the
Company, as security to cover unfunded pension liabilities. These amounts
were not readily available to be used for other purposes within the Group.
ii. Debt, net of cash and investments as at 31 December 2001 comprised cash and
current asset investments of £526 million (2000: £214 million), less bank
overdrafts and loans of £1,431 million (2000: £176 million) and finance
lease obligations of £138 million (2000: £155 million).
Notes
1. Segmental analysis including share of profits and losses
of joint ventures and associates
for the year ended 31 December
Operating profit/(loss) Operating profit/(loss)
before exceptional after exceptional
Turnover (i) charges and goodwill charges and goodwill
amortisation amortisation
2001 2000 2001 2000 2001 2000
£m £m £m £m £m £m
as restated as restated
UK and Continental Europe
Residential Gas 4,029 4,078 3 294 (9) 293
Non-residential Gas 1,381 1,110 41 55 34 55
Electricity 1,242 792 40 (107) 38 (107)
Gas Production 80 64 552 309 552 309
Accord 3,570 2,346 16 (20) (14) (20)
Total UK Energy Supply 10,302 8,390 652 531 601 530
British Gas Home Services 722 636 36 26 30 26
AA Road Services 486 447 37 25 (8) (19)
AA Personal Finance 141 128 37 24 18 7
Goldfish Financial Services 22 - (32) (15) (37) (15)
Telecommunications 102 1 (97) (49) (111) (49)
Other Activities 68 64 (22) (24) (21) (26)
11,843 9,666 611 518 472 454
North America
Energy Supply 768 267 68 8 39 (2)
Total from operations 12,611 9,933 679 526 511 452
Continuing operations before 12,303 9,933 626 526 468 452
acquisitions
Acquisitions 308 - 53 - 43 -
Total from operations 12,611 9,933 679 526 511 452
i Turnover represents sales to third-parties and excludes
inter-segment sales.
2. Costs (before exceptional charges and goodwill amortisation)
for the year ended 31 December
2001 2000
£m £m
as restated
Cost of sales:
Continuing operations before acquisitions 10,015 7,921
Acquisitions 209 -
10,224 7,921
Operating costs:
Continuing operations before acquisitions 1,654 1,504
Acquisitions 101 -
1,755 1,504
3. Exceptional charges and goodwill amortisation
for the year ended 31 December
2001 2000
£m £m
Exceptional costs:
Business integration costs (i) 35 14
Energy trading costs (ii) 37 -
Other (iii) 8 -
80 14
Goodwill amortisation:
Continuing operations 75 60
Acquisitions 11 -
86 60
166 74
Goodwill amortisation on joint ventures and 2 -
associates
168 74
i. Business integration costs comprised £21 million in connection with AA
activities, mainly relating to information technology systems, and £14
million on billing system rationalisation following the acquisition of
One.Tel during 2001.
ii. The Group has recognised operating losses of £37 million arising from the
failure of Enron Corporation, a major participant in UK and North American
energy markets which has filed for protection from its creditors. These
losses comprise a provision of £30 million against amounts owed by an Enron
subsidiary following the termination of profitable trading contracts and for
which the Group has made claims for profits foregone, and £7 million in
respect of the Group's share of market losses under UK energy market
balancing arrangements and gas storage contracts.
iii. Following a period of difficult trading conditions in the liquid petroleum
gas (LPG) cylinder market, cylinder assets have been written down by way of
an £8 million exceptional charge, of which £2 million relates to goodwill.
4. Earnings before exceptionals and goodwill amortisation
for the year ended 31 December
2001 2000
£m £m
as restated
Profit before taxation 468 424
Exceptional charges and goodwill amortisation 168 74
Profit before taxation, exceptional charges 636 498
and goodwill amortisation
Taxation (164) (92)
Minority interest 10 -
Earnings before exceptionals and goodwill amortisation 482 406
5 Taxation
The charge comprised mainly corporation tax on 'ring-fenced'
offshore gas production. The impact of adopting FRS 19 was to increase
the taxation charge by £21 million (2000: reduce charge by £20 million).
6 Dividends
A final dividend of 1.9p per share is proposed, which together with the
interim dividend of 1.2p per share, will bring the total dividend for
the year to 3.1p per share. The dividend will be paid on 19 June 2002 to
shareholders on the register at 3 May 2002.
7 Earnings per share
Basic and adjusted basic earnings per share (EPS) are calculated as
follows:
2001 2000
For the year ended 31 December as restated
Earnings EPS Earnings EPS
£m pence £m pence
Profit for the financial year 323 8.1 335 8.4
Add back exceptional charges and goodwill amortisation 159 4.0 71 1.8
Earnings before exceptional charges and goodwill amortisation 482 12.1 406 10.2
Average number of shares (million) used in the calculation of 3,984 3,976
basic and adjusted basic EPS
Average number of shares (million) used in the calculation of 4,062 4,042
diluted EPS
8. Fixed assets investments
as at 31 December
2001 2000
£m £m
Joint ventures:
Share of gross assets 709 264
Share of gross liabilities (597) (282)
Other investments 55 75
167 57
The Group's share of joint ventures' gross assets and gross liabilities
principally comprised its interests in Humber Power Limited (a power
station), 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 as at 31 December 2001
Centrica AA
Humber Personal Financial
Power Finance Services Luminus Other Total
Limited Limited NV
£m £m £m £m £m £m
Share of gross 357 212 48 59 33 709
assets
Share of gross (322) (202) (42) (3) (28) (597)
liabilities
35 10 6 56 5 112
9. Debtors
as at 31 December
Debtors due within one year include £673 million of Goldfish Bank debtors
(2000: £nil).
10 Reconciliation of operating profit to operating cash flow
for the year ended 31 December
2001 2000
£m £m
as restated
Group operating profit 466 434
Add back:
Profit on sale of fixed assets (7) -
Profit on sale of investments (6) -
Exceptional charges and goodwill 166 74
amortisation
Depreciation and impairment 337 326
Amortisation of investments 14 11
Decrease in working capital 72 250
(Decrease)/increase in provisions (173) 44
Operating cash flow before exceptionals:
Continuing operations before 773 1,115
acquisitions
Acquisitions 96 24
Continuing operations 869 1,139
Expenditure relating to exceptional charges (44) (76)
Cash inflow from operating activities 825 1,063
11 Returns on investments and servicing of finance
for the year ended 31 December
2001 2000
£m £m
Interest received 27 39
Interest paid (28) (34)
Interest element of finance (14) (18)
lease rental payments
(15) (13)
12 Capital expenditure and financial investment
for the year ended 31 December
2001 2000
£m £m
Purchase of tangible fixed assets (312) (157)
Sale of tangible fixed assets 11 17
Purchase of own shares (14) (23)
Loans to joint ventures (22) (2)
(337) (165)
13 Acquisition payments
for the year ended 31 December
2001 2000
£m £m
Subsidiary undertakings:
Goldfish Bank (710) -
Other businesses (402) (516)
Joint ventures and associates (80) (1)
Deferred consideration (17) (63)
Total cash payments (1,209) (580)
Cash acquired 17 -
Overdraft acquired (12) (10)
Drawdown from Goldfish working capital facility (i) 590 -
Proceeds from disposals 7 -
(607) (590)
i The Goldfish working capital facility was made available by Lloyds
TSB plc on the day the Goldfish credit card receivable balances were
acquired (28 December 2001).
14. Accounting policy change
The comparative figures have been restated as a result of implementation of
Financial Reporting Standard (FRS) number 19, Deferred Tax, and because of a
change in the accounting treatment for open positions on energy trading
derivative financial instruments. Previously, as the market for energy
trading derivatives was not fully liquid, gains and losses relating to
energy-derivatives were recognised in the profit and loss account when deals
were closed out. A provision was made, however, where it was expected that a
net loss would arise on settlement of the derivative contracts. The
directors now consider that the market for energy trading derivatives is
sufficiently liquid to recognise movements in the profit and loss account by
marking to market both energy trading derivatives and energy trading open
positions on physical energy contracts using externally derived market
prices, and that the measure of profit in any period is properly made by
reference to market values.
14 Accounting policy change (continued)
The impact of the changes in accounting policies is set out below:
FRS 19 Energy Total FRS 19 Energy Total
For the year ended 31 Trading Trading
December
2001 2001 2001 2000 2000 2000
£m £m £m £m £m £m
Within the Group profit and loss
account:
Cost of sales - 2 2 - (14) (14)
Profit on ordinary activities - 2 2 - (14) (14)
before tax
Tax (charge)/credit on
profit on ordinary (21) - (21) 20 - 20
activities
Profit on ordinary activities after
taxation for the financial year (21) 2 (19) 20 (14) 6
Within the Group cash flow
statement:
Group operating profit - 2 2 - (14) (14)
Other non cash flow items - (2) (2) - 14 14
Cash inflow from operating - - - - - -
activities
As at 31 December
Within the Group balance sheet:
Fixed asset investments (6) - (6) - - -
Debtors due after more than one 91 - 91 106 - 106
year
Creditors due within one year - 2 2 - (40) (40)
Provisions for liabilities and (1) - (1) (1) 40 39
charges
Profit and loss reserve 84 2 86 105 - 105
15. Basis of preparation
The preliminary results for the year ended 31 December 2001 are
unaudited. The financial information set out in this announcement does
not constitute the Company's statutory accounts for the year ended 31
December 2001 or 31 December 2000. With the exception of accounting
policy changes detailed above, the financial information for the year
ended 31 December 2000 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 2001 has not yet been signed.
These accounts will be finalised and delivered to the Registrar of
Companies in due course.
Review of the six months ended 31 December 2001
Group Results
Turnover
Turnover from continuing operations at £5,858 million was up 12% (£632 million)
on the second half of 2000. Of this increase, £116 million was as a result of
increased volumes and prices on commodity trades through our Accord subsidiary.
Organic growth in electricity supply increased turnover by 56% (£257 million)
and in Home Services by 15% (£50 million). Residential gas turnover in Great
Britain decreased by £98 million due to warmer weather and a 3% net reduction in
market share, whilst non-residential gas turnover increased by £84 million.
Turnover from AA Road and Personal Finance activities was £325 million in the
second half of 2001 whereas in 2000 it was £289 million. Our North American
operations contributed £336 million for the second half.
Operating profit
Operating profit, before exceptional items and goodwill amortisation, from
continuing operations, at £242 million, was £120 million higher than in the last
six months of 2000. Profits in our UK energy supply businesses were up by £63
million due to increased electricity supply volumes, offset by increased gas
costs.
Exceptional charges and goodwill amortisation
The exceptional charges of £67 million in the second half of the year mainly
related to the failure of Enron (£37 million), business integration costs in the
AA and telecommunications business (£22 million) and £8 million in relation to
the impairment of assets in our LPG business. In the second half of 2000
exceptional charges were £11 million, principally in respect of the AA
integration. The goodwill amortisation charge was £46 million (last six months
of 2000: £35 million), the change being principally due to our North American
acquisitions and Goldfish Bank.
Net interest
Net interest payable was £23 million (last six months of 2000: £11 million).
Taxation
In the last six months of 2001 the tax charge was £64 million compared with £69
million as restated in the equivalent period in 2000.
Cash flow
Operating cash flow before exceptionals was £502 million compared with £655
million in the second half of 2000. The difference of £153 million was mainly
due to changes in working capital. Cash outflow before management of liquid
resources and financing was £395 million (last six months of 2000: outflow of
£237 million). In the second half of 2001 acquisition cash outflows were £504
million.
Second Half 2001 Business Highlights
UK energy
Turnover for our energy business (excluding trading operations) was £3.0 billion
in the second half of 2001, an increase of 9% from £2.8 billion in the
comparable 2000 period. Operating profit (including joint ventures and
associates, before exceptional charges and goodwill amortisation) was £209
million in the second half of 2001, an increase of 43% from £146 million in
2000. Higher wholesale prices for gas production from our own fields, a move to
operating profit from electricity supply, and return to profitability of our
energy trading operations more than offset the effects of significant retail gas
margin erosion from higher input prices. The second-half operating margin for
our aggregate energy operations (excluding Accord) was 7%, up from 6% a year
earlier.
British Gas: gas supply
Turnover from our residential gas business in second half 2001 was £1.7 billion,
down 6% from £1.8 billion in second half 2000. We were largely successful in
stemming net losses of gas customers beginning mid-summer 2001, with the level
remaining relatively flat through the fourth quarter of the year. Our gas sales
volumes in the residential market in Great Britain decreased to 3.6 billion
therms in the second half of 2001, down by 10% from second half 2000, impacted
by an unusually warm autumn. The volume decrease was largely offset by our price
increase.
The business showed reduced operating profit performance compared with second
half 2000, reflecting higher oil, gas and inflation-linked gas procurement costs
both externally and from our upstream business. The weighted average cost of gas
to meet our supply requirements was 20.5p per therm in the second half 2001, an
increase of 12% from 18.3p per therm in the comparable 2000 period. The
procurement cost increase suffered by the business, was partly offset by our
4.7% price increase which became effective in April 2001. Profitability was
further reduced in the fourth quarter of 2001, due to unseasonably warm weather.
The residential supply business returned an operating loss (before exceptional
charges and goodwill amortisation) of £55 million in second half 2001, compared
with a £11 million loss in the comparable 2000 period. Second half operating
results are generally seasonally poorer than first half results due to lower
customer usage through the summer.
Non-residential supply turnover was £620 million in the second half of 2001, up
16% from £536 million in second half 2000 on volumes which were marginally up
year on year. Our improving non-residential market penetration was accompanied
by stronger results from industrial and commercial gas sales which more than
offset our higher gas procurement costs. The net result was an operating profit
(before exceptional charges and goodwill amortisation) of £21 million for second
half 2001, up from £10 million in second half 2000. An exceptional charge of £7
million was incurred relating to stock provisions and energy balancing charges
following the collapse of Enron.
British Gas: electricity supply
Our second half results reflect the progression of our electricity business from
its loss-making investment phase to operating profitability. Turnover in the
second half was £714 million, up 56% from £457 million in the comparable 2000
period. We booked sales of 11.8 TeraWatt-hours (TWH) to an average of 5.1
million customers on supply, an increase of 60% and 46% respectively from 7.4
TWH and 3.5 million customers in 2000.
The electricity business posted an increasing gross profit, driven by our rapid
increase in customer numbers. Average electricity unit costs for our supply
business fell to 2.6 pence per kilowatt hour (3.2 pence per kilowatt hour in the
prior year). Operating profit (before exceptional charges and goodwill
amortisation) for the second half of 2001 of £21 million (an operating margin of
3%) was up sequentially from £19 million in first half 2001 and compared with a
loss of £62 million in second half 2000. This £21 million of operating profit
was earned even after the costs of acquiring new customers, including
advertising, selling and processing.
Gas production
We significantly reduced gas production volumes in the second half for
operational purposes. Total second-half output of 1.7 billion therms was down by
25% from 2.2 billion therms in the comparable 2000 period. Resulting operating
profit was nearly unchanged in the second half, at £216 million versus £218
million in the comparable 2000 period. Lower volumes in 2001 were further offset
by reduced overhead costs and fixed asset depreciation.
Accord
In a challenging market context, due to both volatility and the demise of Enron,
Accord achieved operating profitability of £6 million in the second half of
2001, before exceptional charges of £30 million related to profitable trading
contracts with Enron subsidiaries which have since been terminated and for which
the Group has made claims for profits foregone. This result is comparable to £10
million in operating profit for the first half of 2001 and a £9 million
operating loss in the second half of 2000.
British Gas Home Services
Our Home Services business generated continuing strong growth in the second half
of 2001 with turnover at £383 million, an increase of 15% from £333 million in
the second half of 2000. Revenue growth from more numerous central heating
installations, together with successful cross-selling of a variety of service
cover contracts, contributed to this increase.
Operating profit (before exceptional charges and goodwill amortisation)
reflected our scalable multi-product growth plan at £25 million, an increase of
47% from £17 million in 2000. Marketing and overhead cost increases were both
moderate in relation to the expansion of our turnover and product lines. The
resulting growth in Home Services operations has demonstrated the financial
scalability of the business and was accompanied by the expansion of operating
margin to approximately 7%, up from approximately 5% in the second half of 2000.
AA Road Services
Road Services' turnover was £253 million in the second half, an increase of 14%
from £221 million in the second half of 2000. Operating profit (before
exceptional charges and goodwill amortisation) for the second half was £15
million, as against £7 million in 2000. The improvement in the cost structure of
the business was particularly notable in this result, featuring enhanced
efficiency whilst maintaining a premium service level. Management action to
strengthen the business contributed to operating margin improvement to 6% for
the second half of 2001, up from 3% in 2000.
AA Personal Finance
Turnover for 2001's second half grew to £72 million, up 6% from £68 million in
2000. Operating profit (before exceptional items and goodwill amortisation) for
the period was £21 million, more than twice the £9 million for the comparable
period in 2000 which was depressed due to the timing of higher marketing
expenditure in late 2000. Growth in aggregate car and home policy volumes in the
second half was 4% after a relatively flat first half. However, average earnings
per new policy fell slightly as market premia flattened (after substantial
growth in the first half).
Growth in the loan book of our joint venture with HBOS plc kept the steady pace
of the first half and was fuelled by successful television advertising, with
loan volume and value increasing in the second half from 71,000 and £374 million
to 77,000 and £424 million. Strong operating profit growth from continuing
operations was partially offset by start up costs of Golf England, in which we
took a majority stake in 2001, of £4 million in the second half.
Goldfish
Commencing on 3 September 2001, the economic interest in the credit card
operation indirectly accrued for the benefit of Goldfish Bank, which received
its banking licence on 29 November and purchased the credit card book on 28
December. Goldfish card revenue from 3 September until year end was £34 million
(prior to adjustment for bad debt and interest expenses), while the card
operating profit over the same period was £5 million, after marketing expenses
of £2 million associated with a new card advertising campaign.
Telecommunications
The business recorded sequential turnover growth from the first half (£14
million) to the second (£88 million), largely as a result of One.Tel turnover of
£65 million within the second half result. This rapid growth was driven by the
rise in customer volumes and an increase in our ARPU, which increased with the
acquisition of One.Tel due to the higher proportion of international calls made
by One.Tel's customers. At year-end there were 1.2 million fixed, mobile or
internet accounts active in the previous 30 days, up from less than 200,000 a
year earlier. The second half 2001 operating loss (before exceptional charges
and goodwill amortisation) was £45 million after revenue investment of £32
million.
North America
Turnover was £336 million in the second half, as against £267 million in the
period from 18 August through 31 December 2000. Operating profit (before
exceptional charges and goodwill amortisation) rose to £39 million in the second
half of 2001 from £8 million during the period of Centrica ownership, 18 August
to 31 December 2000. We continued to invest in a major re-engineering of the
customer facing operations, allowing for future growth in North American
markets.
Summary Group Profit and Loss Account
for the six months ended 31 December
Before Before
exceptional exceptional
charges and charges and
goodwill goodwill
amortisation amortisation
2001 2001 2000 2000
£m £m £m £m
as restated as restated
Notes
Turnover:
Continuing operations before acquisitions 5,643 5,226
Acquisitions 215 -
Continuing operations a 5,858 5,226
Cost of sales b (4,700) (4,333)
Gross profit 1,158 893
Operating costs before exceptional charges and b (950) (781)
goodwill amortisation
Exceptional charges and goodwill amortisation c (113) (46)
Group operating profit 208 95 112 66
Share of profits less losses in joint ventures 34 32 10 10
and associates - continuing operations
Operating profit including joint ventures and
associates:
Continuing operations before acquisitions 192 85 122 76
Acquisitions 50 42 - -
Continuing operations a 242 127 122 76
Net interest payable (23) (23) (11) (11)
Profit before taxation d 219 104 111 65
Taxation (73) (64) (71) (69)
Profit after taxation 146 40 40 (4)
Minority interest 4 4 - -
Profit after taxation and minority interest d 150 44 40 (4)
Dividends (76) (68)
Retained profit/(loss) for the financial period (32) (72)
Earnings per ordinary share:
Basic e 1.1p (0.1)p
Diluted e 1.1p (0.1)p
Adjusted Basic e 3.8p 1.0p
Statement of Total Recognised Gains and Losses
for the six months ended 31 December
2001 2000
£m £m
as restated
Notes
Retained profit for the period (32) (72)
Exchange translation differences - -
Total recognised gains and losses for the period (32) (72)
Prior period adjustment k 94
Total gains and losses recognised for the period 62
Summary Group Cash Flow Statement
for the six months ended 31 December
2001 2000
£m £m
Notes
Cash inflow from operating activities f 488 622
Dividends received from joint ventures and associates 3 8
Returns on investments and servicing of finance g - (4)
Taxation paid (77) (120)
Capital expenditure and financial investment h (258) (110)
Acquisitions i (504) (590)
Equity dividends paid (47) (43)
Cash outflow before use of liquid resources and financing (395) (237)
Management of liquid resources (220) 173
Financing 671 45
Net increase/(decrease) in cash 56 (19)
Reconciliation of debt,
net of cash and investments
2001 2000
£m £m
Debt, net of cash and investments as at 1 July (87) 174
Drawdown on Goldfish working capital facility (610) -
Debt acquired (9) (56)
Net increase/ (decrease) in current asset investments 220 (173)
Net increase/(decrease) in cash for the period 56 (19)
Net decrease in other debt (642) (45)
Exchange adjustments 29 2
Debt, net of cash and investments as at 31 December (1,043) (117)
Notes
a Segmental analysis
for the six months ended 31 December
Operating profit/(loss) Operating profit/(loss)
before exceptional after exceptional
Turnover charges and goodwill charges and goodwill
amortisation amortisation
2001 2000 2001 2000 2001 2000
£m £m £m £m £m £m
as restated as restated
UK and Continental Europe
Residential Gas 1,659 1,757 (55) (11) (65) (12)
Non-residential Gas 620 536 21 10 14 10
Electricity 714 457 21 (62) 19 (62)
Gas Production 38 31 216 218 216 218
Accord 1,635 1,519 6 (9) (24) (9)
Total UK Energy Supply 4,666 4,300 209 146 160 145
British Gas Home Services 383 333 25 17 23 17
AA Road Services 253 221 15 7 (7) (18)
AA Personal Finance 72 68 21 9 10 1
Goldfish Financial Services 22 - (10) (9) (15) (9)
Telecommunications 88 1 (45) (39) (59) (39)
Other Activities 38 36 (12) (17) (10) (19)
5,522 4,959 203 114 102 78
North America
Energy Supply 336 267 39 8 25 (2)
Total from operations 5,858 5,226 242 122 127 76
Continuing operations before 5,643 5,226 192 122 85 76
acquisitions
Acquisitions 215 - 50 - 42 -
Total from operations 5,858 5,226 242 122 127 76
b Costs (before exceptional charges and goodwill amortisation)
for the six months ended 31 December
2001 2000
£m £m
as restated
Cost of sales:
Continuing operations before acquisitions 4,570 4,333
Acquisitions 130 -
4,700 4,333
Operating costs:
Continuing operations before acquisitions 860 781
Acquisitions 90 -
950 781
c Exceptional charges and goodwill amortisation
for the six months ended 31 December
2001 2000
£m £m
Exceptional costs:
Continuing operations 67 11
Goodwill amortisation:
Continuing operations 37 35
Acquisitions 9 -
46 35
113 46
Goodwill amortisation on joint ventures and 2 -
associates
115 46
d Earnings before exceptionals and goodwill amortisation
for the six months ended 31 December
2001 2000
£m £m
as restated
Profit before taxation 104 65
Exceptional charges and goodwill 115 46
amortisation
Profit before taxation, exceptionals 219 111
and goodwill amortisation
Taxation (73) (71)
Minority interest 4 -
Earnings before exceptionals and goodwill 150 40
amortisation
e Earnings per share
Basic and adjusted earnings per share (EPS) are calculated as
follows:
2001 2000
For the six months ended 31 December as restated
Earnings EPS Earnings EPS
£m Pence £m Pence
Profit after taxation and minority interest/Basic 44 1.1 (4) (0.1)
EPS
Add back exceptional charges and goodwill 106 2.7 44 1.1
amortisation
Earnings before exceptional charges and goodwill 150 3.8 40 1.0
amortisation/Adjusted Basic EPS
Average number of shares (million)
used in the calculation of basic and adjusted
basic earnings per share 3,985 3,981
Average number of shares (million)
used in the calculation of diluted earnings per 4,068 4,051
share
f Reconciliation of operating profit to operating cash flow
for the six months ended 31 December
2001 2000
£m £m
as restated
Group operating profit 95 66
Add back:
Profit on sale of fixed assets (7) -
Profit on sale of investments (6) -
Exceptional charges and goodwill 113 46
amortisation
Depreciation and impairment 148 160
Amortisation of investments 14 11
Decrease in working capital 84 382
Increase/(decrease) in provisions 61 (10)
Operating cash flow before exceptionals:
Continuing operations before 405 655
acquisitions
Acquisitions 97 -
Continuing operations 502 655
Expenditure relating to exceptional charges (14) (33)
Cash inflow from operating activities 488 622
g Returns on investments and servicing of finance
for the six months ended 31 December
2001 2000
£m £m
Interest received 11 17
Interest paid (5) (12)
Interest element of finance lease rental payments (6) (9)
- (4)
h Capital expenditure and financial investment
for the six months ended 31 December
2001 2000
£m £m
Purchase of tangible fixed assets (234) (94)
Sale of tangible fixed assets 10 6
Purchase of own shares (14) (20)
Loans to joint ventures (20) (2)
(258) (110)
i Acquisition payments
for the six months ended 31 December
2001 2000
£m £m
Subsidiary undertakings:
Goldfish Bank (710) -
Other businesses (361) (516)
Joint ventures and associates (43) (1)
Deferred consideration (8) (63)
Total cash payments (1,122) (580)
Cash acquired 17 -
Cash/(overdraft) acquired 4 (10)
Drawdown from Goldfish working capital facility 590 -
Proceeds from disposal 7 -
(504) (590)
j Accounting policy change
The impact of the changes in accounting policies on implementation of
Financial Reporting Standard number 19, Deferred Taxation, and on
adoption of mark-to-market accounting on unrealised profits and losses
in respect of energy trading activities, is set out below:
FRS 19 Energy FRS 19 Energy Total
For the six months ended 31 December 2001 Trading Total 2000 Trading 2000
£m 2001 2001 £m 2000 £m
£m £m £m
Within the Group profit and loss account:
Cost of sales - (17) (17) - - -
Profit on ordinary activities before taxation - (17) (17) - - -
Tax (charge)/credit on profit on ordinary
activities (10) - (10) 3 - 3
Profit on ordinary activities after taxation
for the financial year (10) (17) (27) 3 - 3
Within the Group cash flow statement:
Group operating profit - (17) (17) - - -
Other non cash flow items - 17 17 - - -
Cash inflow from operating activities - - - - - -
For the interim results to 30 June 2001 and 30 June 2000 deferred tax
was determined in accordance with SSAP 15. Had FRS 19 been implemented
during those periods the tax charge would have increased by £11m for the
six months ended 30 June 2001 and decreased by £17m for the six months
ended 30 June 2000.
k Prior period adjustment
for the six months ended 31 December
2001
£m
Restatement to 31 December 2001 105
Impact of FRS19 in period
1 January 2001 to 30 June 2001 (11)
94
Enquiries
For further information please contact:
Charles Naylor, Director of Corporate Affairs
Chris Milburn, Director of Investor Relations
Gary Leibowitz, Deputy Director of Investor Relations
Telephone:
01753 494 085 (Press)
01753 494 900 (Shareholder and Analysts)
Facsimile;
01753 494 090 (Press)
01753 494909 (Shareholder and Analysts)
Internet Websites
www.centrica.com
www.britishgasbusiness.co.uk
www.onetel.co.uk
www.goldfish.com
www.theAA.com
www.house.co.uk
www.directenergy.com
www.energyamerica.com
Financial Calendar
2001 Annual Report and Accounts Published End of March 2002
Ex-dividend date for 2001 proposed final dividend 1 May 2002
Record date for 2001 proposed final dividend 3 May 2002
Annual General Meeting 13 May 2002
Proposed 2001 final dividend payment date 19 June 2002
2002 Interim Results announcement 5 September 2002
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guide to future performance and persons needing advice should consult an
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