Centrica Presents Results for Period Ended 30 June 2011 (UK)

Operating and financial overview:

*On track to deliver full year earnings growth in 2011, despite commodity price volatility, challenging economic environment and higher UK upstream gas and oil tax rates

*shift in profits from the downstream to the upstream

*UK residential energy operating profit* halved from the exceptional levels recorded in 2010

*progress in challenging market conditions demonstrates the strength of Centrica’s business model

*Close management focus on cost structure and efficient deployment of capital required to maintain our competitive position and drive long-term shareholder returns

*159,000 increase in residential energy customer accounts, reflecting competitive pricing position, Sainsbury’s and Nectar partnerships and high levels of customer service

*Full year profit* growth expected in BGS and BGB; economic environment increasingly challenging

*Upstream UK business benefiting from strong operational performance and higher commodity prices. Nuclear output up 25%, offsetting weak market environment for gas-fired power generation

*North American operating profit* up 25%; benefiting from operational improvements

*Good progress on organic investment programme

*Lincs wind farm – onshore substation largely complete and first foundations now in place

*Ensign gas field – first gas expected in second half of 2011; York and Rhyl developments approved

*Interim dividend follows established practice of paying 30% of prior year full year dividend

“Global events have resulted in a steep increase in commodity prices, with UK wholesale gas prices 30% higher than last winter. In this challenging market, the resilience of our integrated business model has enabled Centrica to continue to perform well. We are focused on reducing costs and ensuring disciplined deployment of capital, to maintain our competitive position and drive long-term shareholder returns.”–Sam Laidlaw, Chief Executive

Statutory results:

*Operating profit‡: £1,254m (2010: £2,117m)

*Earnings: £468m (2010: £1,386m)

*Basic earnings per ordinary share: 9.1p (2010: 26.8p)

*Profit for the period includes net exceptional charges after taxation of £260m (2010: £nil)

A definition of the profit measures used throughout these results is provided in the Group Financial Review. A reconciliation between operating profit and adjusted operating profit is provided in note 6(b) and a reconciliation between the earnings measures is provided in note 11.

Earnings and operating profit numbers are stated, throughout the Performance Overview and the Operating Review, before depreciation of fair value uplifts to property, plant and equipment from Strategic Investments and exceptional items and certain re-measurements where applicable – see note 3 for definitions. In addition, all references to profit and loss are stated before share of joint venture and associate interest and tax. The Directors believe these measures assist with better understanding the underlying performance of the Group. The equivalent amounts after exceptional items and certain re-measurements are reconciled at Group level in the Group Income Statement. Exceptional items and certain remeasurements are described in note 7. Adjusted earnings and adjusted basic earnings per share are reconciled to their statutory equivalents in note 11. All current financial results listed are for the period ended 30 June 2011. All references to ‘the prior period’, ‘the prior year’, ‘2010’ and ‘last year’ mean the period ended 30 June 2010 unless otherwise specified.

Performance Overview

The first half of 2011 was a dramatic period for global energy markets. With UK indigenous production declining, the country is becoming increasingly dependent on imports, particularly LNG. As a result, UK wholesale gas prices have risen by around 30%, reflecting unrest in the Middle East and North Africa and increased global demand for gas, in part due to closures of nuclear plants in Japan. In addition, seasonal storage spreads and market spark spreads remained narrow during the period. North American gas prices have remained low, providing further evidence that this market has disconnected from the rest of the world.

Economic conditions are increasingly challenging, particularly in the UK, with lower household disposable income impacting our residential services activities and with business customers coming under increasing pressure to reduce costs. In March, the Chancellor of the Exchequer announced an increase in the supplementary tax rate on UK oil and gas production which has impacted Centrica’s earnings and reduced the benefits of vertical integration. We have also seen further activity from the Regulator in the UK, with Ofgem’s Retail Market Review suggesting a number of potential market changes. With the publication of the Government’s White Paper on Electricity Market Reform and the introduction of a carbon price floor likely to result in higher prices, the issue of affordability has moved increasingly into focus.

Against this backdrop, Centrica made good operational progress in the first half of the year, demonstrating the resilience of the Group’s business model. In this uncertain environment, close management focus on cost reduction and optimisation of our existing asset base is required. It is also critical to maintain capital discipline in our investment decisions, although the timescales for a number of our investment options, including new nuclear, remain unclear. We will continue to invest where we see value and acceptable regulatory risk, maintaining the efficient deployment of our capital to maximise shareholder returns.

Centrica reported a 24% reduction in earnings in the first half of 2011, with operating profit in the UK downstream residential energy business less than half the unusually high levels seen in the first half of 2010 and the profitability of our gas storage activities significantly reduced. Higher wholesale commodity prices resulted in an increase in operating profit from the UK upstream business, although the change in the mix of profits, together with the increase in the UK supplementary charge, led to a higher tax rate. For the full year however, we still expect to deliver growth in earnings, subject to the usual variables of weather patterns and commodity price movements.

Operational performance was strong for each area of the business. The number of British Gas residential accounts increased and we continue to make progress in improving our levels of customer service. Our upstream assets performed well, with production growth from our North Sea and Trinidad and Tobago assets partially offsetting lower production from Morecambe, and with much improved nuclear power output. In North America, the Wildcat Hills acquisition has delivered increased production and a further reduction in unit gas production costs, while downstream we are benefiting from operational efficiencies and the Gateway and Clockwork acquisitions are beginning to contribute.

We continue to make good progress on capital investment projects. At the Lincs offshore wind farm, the onshore substation is largely complete and the first foundations are now in place. First power is expected in 2012. In gas production, our Ensign field in the Southern North Sea is expected to produce first gas towards the end of 2011, and we have approved the development of the York and Rhyl gas fields with first gas from both developments expected in late 2012. For the full year we now expect to spend around £1.3 billion on organic capital expenditure, with reduced spend on UK upstream projects and a decision to slow down preconstruction spend on new nuclear.

Business performance

Health and safety is critical to the success of the Group. We were therefore pleased that our lost time incident rate (LTIR) fell once again in the first half of the year, to 0.35 per 100,000 hours worked. We were also pleased that, for the first time, all three of our UK business units, British Gas, Centrica Energy and Centrica Storage won places in the ‘Top 100 Companies to Work For’ list, published in the Sunday Times, with British Gas having gained a top 25 position in each of the last three years.

In residential energy, the combination of higher commodity prices and significantly lower consumption resulted in operating profit being less than half the level recorded in the corresponding period last year. Average residential gas consumption fell by 18% in the first six months of the year, and electricity consumption was 3% lower, reflecting the milder weather conditions together with underlying energy efficiency improvements.

We added 159,000 customer accounts in the first half of the year, and have now made 100,000 sales through the Sainsbury’s affinity relationship. We are also pleased to have recorded over 3 million customer registrations under the Nectar loyalty programme. In the first half, over 10 million customer transactions were carried out online, more than double the number in the first half of 2010. Customer service levels also continue to improve, and we once again achieved an increase in our Net Promoter Score (NPS).

As a result of the increase in worldwide gas prices, together with the increase in non-commodity costs faced across the industry, earlier this month we announced a tariff price increase of 18% for gas and 16% for electricity, which will take effect in August. We recognise the impact that higher energy costs have on household bills, and continue to offer our customers a number of ways to help offset the rise through improved energy efficiency. We are now offering free loft and cavity wall insulation, and a further 300,000 customers have signed up to our EnergySmart product, which is designed to help households monitor their consumption.

Overall, we expect margins in the residential energy business in the full year to be in line with market expectations, subject to the weather conditions in the second half of the year, and below the levels recorded in 2010.

In residential services, we continue to make good operational progress, and are seeing the benefits of the agreement reached last year with our service and repair engineers, which enables us to offer a more flexible, high quality service to our customers. Trading conditions remain difficult however, with the weak economic environment creating an adverse climate for discretionary consumer purchases, especially impacting growth in central heating installations. While we continue to expect further year on year profit growth in services in 2011, the result for the first half of the year was only slightly higher compared to the first half of 2010.

Business energy supply and services continues to perform well, but the first half of 2011 did not benefit from the higher weather driven consumption seen in the corresponding period of 2010. Overall we expect growth in full year operating profit for 2011, supported by continued high levels of customer service and our volume to value strategy, however in the current economic climate contract renewal margins are coming under pressure. Over time our enhanced capabilities in business services, following the Connaught acquisition, will become increasingly important.

In our Upstream UK business, the operational performance of our assets was strong. Gas production volumes from our North Sea and Trinidad and Tobago assets increased by 16% and oil and condensate volumes increased by 15%. This largely offset lower production at Morecambe, as the field did not produce for most of May and June due to planned maintenance and the decision to keep the field shut-in to maximise value. The increase in wholesale prices resulted in higher operating profit for the period, although this was offset by the impact of higher gas and oil tax rates, announced in the UK Government’s Budget in March. For the full year, we expect production volumes to be around 50 million barrels of oil equivalent, subject to the running patterns of our gas and oil fields. As announced in February, we signed a memorandum of understanding leading to a three year contract with Qatargas to bring 2.4 million tonnes of LNG per annum to the UK, and we took delivery of the first contracted cargo in June.

In power generation, the nuclear fleet achieved high levels of availability, with output up 25% compared to last year and output from our joint venture wind farms also improved, with these assets all benefiting from higher power prices. However spark spreads remained low during the period, and as a result our CCGTs generated 40% less power in the first half than in the corresponding period in 2010.

In gas storage, seasonal spreads remain at very low levels. Consequently, operating profit from our storage business fell by 60%. With the forward curve showing weak spreads into the 2012/13 storage year, our priority remains to maintain a safe, reliable operation while reducing costs in the business where possible.

In North America, we continue to make good progress, despite the impact of the low commodity price environment on our upstream operations, and are beginning to see the positive impact of the Wildcat Hills, Clockwork and Gateway acquisitions. In Texas, churn remains at historically low levels, our prepaid product is having a positive impact on customer numbers, we now have a consolidated billing platform and our operating costs are much reduced. In Ontario, the introduction of the Energy Consumer Protection Act has made it substantially more difficult to acquire and retain customers and as expected our customer base has fallen. However our US North East customer base increased organically as market restructuring continues and including the impact of the Gateway acquisition we now have 800,000 customer accounts in this important growth region. Overall, North American operating profit was up 25%, with continued growth in Direct Energy Business and improved financial performance in upstream and wholesale. The business is well placed to continue to grow, building on our existing platform through a combination of organic growth and acquisition.

Dividend

The Board is proposing an interim dividend of 4.29 pence per share to be paid on 16 November 2011 to shareholders on the register on 30 September 2011, in line with our established practice of paying an interim dividend of 30% of the prior year full year dividend.

2011 Outlook

Overall, we expect to deliver year on year earnings growth in 2011, subject to the usual variables of weather patterns and commodity price movements, building on the strong result achieved in 2010. Whereas the 2010 financial results were heavily weighted towards the first half of the year, we expect a more even split in 2011. However, the mix of profits will show a marked shift from the downstream to the upstream, with strong growth at the operating profit level largely offset by higher taxes. Our ability to deliver growth in this highly volatile commodity environment demonstrates the resilience of the Centrica business model.

Strong operational performance, both upstream and downstream, has made a valuable contribution in the first half of the year and leaves us well placed for the remainder of the year. Against a weak economic backdrop, maintaining a competitive position in each line of business remains critical. We will focus closely on cost reduction and disciplined capital deployment across the asset base, while delivering a high level of service for our customers and maintaining the highest levels of safety.

The future

The performance of the business in the first half of the year has confirmed the value of vertical integration. However as a result of the economic and competitive environments and the headwinds these create, significant management action will be required to ensure that the Group remains competitive.

Downstream, we will continue to build on the operational progress we have made over the past year, maintaining a high level of service, attractive customer propositions and a close focus on cost control. We also note the proposals raised by Ofgem in its review of the retail gas and electricity market. While we welcome proposals to improve the transparency of reporting in the industry, it is also important to ensure that measures designed to simplify the tariff structure are in the best interests of consumers.

Upstream, we are seeing the benefit of higher gas and oil prices coming through, although the contribution at an earnings level is eroded by higher upstream taxes. We see opportunities to invest across our portfolio and will deploy capital where we see value, taking into account the stability of the fiscal and regulatory environment.

The Government’s White Paper on Electricity Market Reform was published in July, setting out the changes that will be necessary to deliver decarbonisation and security of supply for the UK. There remains much detail to be resolved so that investors can have confidence that the fiscal and regulatory environment makes the UK energy sector a good place to invest. However we are well placed to be able to target investment to those areas offering the most attractive returns.

The interim report from the Office for Nuclear Regulation on the implications of the Japanese earthquake for the UK nuclear industry reinforces our confidence that new nuclear can be built in the UK effectively and safely. However it is clear that new nuclear build will be delivered later than we had originally hoped and we expect clarity on the revised timetable towards the end of the year. Nuclear will be an important part of the generation mix if the UK is to have secure, affordable, low carbon energy. New nuclear build is an important option for us. However we will only invest if we are satisfied that the returns represent good value for our shareholders, set against the commercial risks.

In North America, we are identifying further opportunities for consolidation of our operations and operational efficiency across the business. We will continue to look for opportunities to increase our scale in energy supply through organic growth and acquisitions, offsetting the expected decline in Ontario. In services, our franchise model is well positioned to exploit substantial market opportunity as we look to add scale and capability. We will also continue to look for further opportunities in gas production, where investment is delivering appropriate returns, but in power generation, while vertical integration remains desirable, weaker near term returns in regions without capacity payments could restrict the number of opportunities available to us.

Overall, Centrica’s strategy remains robust and our strategic priorities are unchanged. However we will drive further operational improvements and reduce costs in order to maintain our competitive position. We are well positioned to take advantage of higher commodity prices upstream, with a distinctive, well balanced portfolio of assets. And with a range of investment options across the Group we will continue to invest where we see value, to drive long-term shareholder returns.

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Source: Centrica, July 28, 2011;