[1]

Period: 2011 - 2013

Author: Adam Ariff

ACCA number: 2479994

Mentor: Kate West, MMU Business

School

Word count: 7403

Date: May 2014

OXFORD BROOKES UNIVERSITY

Research and Analysis Project Topic 8

Analysis and evaluation of the business and financial

performance of Centrica Plc.

[2]

TABLE OF CONTENTS

1) INTRODUCTION

Project objectives and overall research approach Page

1.1 Project Topic……………………………………………………………………………………………………………………4

1.2 Project Area and Company Selection………………………………………………………………………………4

1.3 Research Aims and Objectives………………………………………………………………………………………..4

1.4 Research Approach………………………………………………………………………………………………………...5

2) INFORMATION AND EVIDENCE

Information gathering and accounting/business techniques

2.1 Sources of Information………………………………………………………………………………………………..…7

2.2 Ethical Issues………………………………………………………………………………………………………………….7

2.3 Information Sources and Methods of Collection…………………………………………………………….7

2.4 Accounting Theory and Business Techniques…………………………………………………………………9

2.4.1 Ratio Analysis………………………………………………………………………………………………….9

2.4.2 Benchmarking………………………………………………………………………………………………..10

2.4.3 Financial and Non-financial Measures…………………………………………………………..10

2.4.4 Further Non-financial Measures…………………………………………………………………...11

2.4.5 SWOT Analysis…………………………………………………………………………………………….…11

2.5 Foreign Currency Exchange……………………………………………………………………………………………12

3) RESULTS & PRESENTATION

Results, analysis, conclusions and recommendations

3.1 Company Profile……………………………………………………………………………………………….13

3.2 Presentation and analysis………………………………………………………………………………..14

3.2.1 SWOT Analysis………………………………………………………………………………...14

3.2.2 Profitability and Return Ratios…………………………………………………………16

- ROE

- ROCE

- Operating Profit Margin

- Gross Profit Margin

[3]

- Operating Profit Margin

- Net Profit Margin

- Asset Turnover

3.2.3 Investor ratios………………………………………………………………………………….18

- Dividend Per Share

- Earnings Per Share

3.2.4 Liquidity ratios………………………………………………………………………………….20

- Current ratio

- Quick ratio

- Inventory turnover

3.2.5 Financial Gearing……………………………………………………………………………..21

- Interest cover

3.2.6 Financial Performance vs. Business Performance……………………………21

3.2.7 Comparison and Competition…………………………………………………………..22

- Market capitalisation

- ROCE

- Operating Profit Margin

- FTSE comparison

3.2.8 Non-financial measures……………………………………………………………………24

3.3 Critical Analysis and Evaluation of Results……………………………………………………….25

- SWOT Analysis

- Group performance

3.4 Conclusion and Recommendations………………………………………………………………….27

4) REFERENCES……………………………………30

5) BIBLIOGRAPHY……………………………….33

6) APPENDIX……………………………………….34

[4]

INTRODUCTION

(1) Project objectives and overall research approach

1.1 Project Topic

This research project is on topic 8 of the Oxford Brookes project topic areas; an analysis and

evaluation of a business over a three year period. Topic 8 requires the application of a large amount

of knowledge and understanding from the ACCA examinations and syllabus found in modules F1 to

F9. The requirement to produce detailed financial analysis and examine company accounts links in

well with topic 8.

1.2 Project Area and Company Selection

The energy sector is an ethically current topic affecting millions of people across the world. In the

UK British Gas has more company accounts than any other energy provider. British Gas is a

subsidiary of Centrica plc. and during 2013 came under intense scrutiny from the government and

the public because of their increases in energy prices. Further examination of their company

accounts could provide some interesting analysis on whether the recent price rises are justified.

Over the past three years Centrica has made a profit year on year. To put this into context; in 2009

the UK was in recession for the first time since 1991 (BBC, 2009) and many global financial systems

were in crisis which resulted in the UK government spending £50 billion to prevent the financial

system grinding to a complete stop (Weardon, 2009). Whilst many financial institutions continued to

make a loss, as did many businesses, the majority of energy companies continued to make a profit.

This report highlights the profit enabling and sustainable features of the energy industry and

companies operating in the sector, particularly focusing on Centrica plc.

1.3 Research Aims and Questions

The aim of this research project is to review Centrica's performance over three years in comparison

to their competition and from a shareholder perspective.

The report will show the overall trend and pattern of Centrica's business and financial performance

and in order to answer the main objective there have been four research questions selected:

[5]

1. What are the trends of profitability and shareholder return over three year period from

2011 to 2013?

2. How have the industry conditions in which Centrica operated in from 2011 to 2013 impacted

on their profitability, their short term solvency and liquidity?

3. What are the causes of the trends in Centrica's overall business performance and financial

performance between 2011 and 2013?

4. How do the trends in Centrica's profitability and return compared to their competition from

2011 to 2013?

By specifically answering these four research questions the overall aim of the project will be met.

1.4 Research Approach

The research conducted will provide both financial and business performance data. Financial

performance relates to the way in which companies earn, save and spend their money over a certain

length of time (Differencebetween.net, n.d.) whilst their business performance measures focus on

the business goals and progression towards those goals. These goals may be non-financial measures

such as customer satisfaction scores or product quality measures (Kellen, 2003). A wide variety of

sources have been used to collect research data for analysis and the company accounts are

predominantly the major source of financial and business performance. The accounts have been

used as a source of quantitative analysis as well as an assessment of the overall business strategy.

The company accounts are split into three sections; business performance, exceptional

items/remeasurements and financial performance. The business performance relates to how the

business performed excluding exceptional items and remeasurements whereas financial

performance takes into account exceptional items.

Industry comparative data and five additional companies have been selected as benchmark data.

Comparative data has been used because this is useful when using ratio analysis, which will form a

large part of the research project. The reason it is useful is because in isolation a ratio can be

misleading; this is because different industries are subject to different forces that influence their

ratios. Parent groups of the big six energy companies in the UK have been selected because they are

all similar in size, in the same industry and in direct competition with each other.

Research framework

Financial performance will be addressed by completing ratio analysis that covers:

Profitability and return

[6]

Short term solvency and liquidity

Efficiency (turnover ratios)

Shareholder investment

The scope of the research project will exclude long term solvency and stability because the scope of

the analysis is over three years which is a short term period of time.

In addition to financial performance the report will discuss non-financial measures such as changes

in customer accounts and employee numbers. Other non-financial measures will focus on the

Centrica's strategic priorities over the three years and this will be further analysed using a SWOT

analysis.

The research framework will cover overall performance (financial and business) looking at how

external, internal and competitive factors have influenced this performance.

[7]

(2) Information and Evidence

2.1 Sources of Information

The research completed for this report does not contain primary data sources. One of the reasons

for this is because Centrica is a publicly listed company and it is probable that information on the

company that is not confidential is available to the public. All research data and information used in

this report is from secondary data sources.

The majority of data analysed was quantitative data that related to company finances however a

small amount of qualitative data was used such as customer satisfaction surveys for energy

companies.

2.2 Ethical Issues

As a publicly listed company Centrica is bound by the rules and regulations of the stock market. One

ethical consideration around the project was the use of any confidential information. Had my

researched revealed information that was confidential that could have influenced stock market or

share prices this could have raised ethical concerns. However, all research conducted for this report

was from secondary data sources available to all members of the public and this meant there were

no ethical issues around this during information gathering and research.

It is also likely that using a broad mix of information sources have sought to limit any bias in the

report and any information within the report has been produced based on secondary data sources

or expressed as matter of opinion; any user of this report must be aware that their investment

decisions must be based solely on their own judgement and not on the basis of information within

the report should the information not be accurate.

2.3 Information Sources and Methods of Collection

The following information sources have been used and selected carefully because they support the

overall research requirements needed to achieve the research questions.

Company Accounts and Annual Report

Centrica's company accounts and annual reports were analysed in detail and provided a major

source of financial and non-financial data. One benefit of their use as a source of data because they

[8]

are required to comply with international accounting standards that made them understandable. In

addition to this they were useful for comparison to other company accounts of competitors. All

company accounts were accessed online.

Stock Exchange Analysis

Centrica is a FTSE 100 company (Yahoo, 2014) that any investors can trade shares in on the stock

market. Pension funds and private investors all invest by buying and selling shares in Centrica daily.

Technical information about ratios and performance existed online and has been used as source of

quantitative data for use in my research. Use of this data is likely to support the view of shareholders

because analysts use this data to support their buy or sell investment decisions.

Published literature and books

MMU Business School Library provided a wealth of literature to support research on ratio analysis in

particular. One advantage of using the library to find sources of information is that they contain

large quantities of literature both historic and current. The ability to cross reference theories and

applications of theories reduced the chance of bias or error when applying techniques such as ratio

analysis.

Regulating bodies

In the UK, British Gas is regulated by Ofgem that have stipulations on the information energy

companies must provide. As an independent regulator the likelihood of research being impartial

should increase and it was used as an independent source of information in supporting claims within

Centrica's annual reports.

Accounting standards

All company accounts were produced in accordance with accounting standards. Detailed research

into the notes of the accounts could be supported through research of international reporting

standards which are set by accounting bodies. As an independent organisation the data approved on

accounting standards used to support financial measurements is likely to be a good source of

objective research.

Published learning media

A lot of published learning media by BPP and Kaplan has content approved by the global professional

body, ACCA. In addition to text books from the library the BPP and Kaplan study guides were

[9]

considered to be high quality information and were a source of practical research and theoretical

research. The reason the information was considered to be high quality is that because it is

approved by industry regulators to meet internationally acclaimed academic benchmarks.

Further information sources

In addition to the above sources the following sources were used; reviewed published literature,

journals, news and media via smartphones and company websites. The use of multiple data sources

was to increases the validity of the data thereby limiting bias in the research.

2.4 Accounting Theory and Business Techniques

2.4.1 Ratio Analysis

Ratio analysis as a technique has been used for analysing the company performance because it can

be used in trend analysis to measure year on year performance and also as a comparison across

companies. Investors still use ratios as a source of information for their investment decisions and

financial institutions use ratios to make decisions about the amount companies can borrow. It is

likely that many investors and institutions use ratios because they believe can be a reliable indicator

of company performance. One advantage of using ratio analysis in this report is that all the

necessary information is available to compute the ratios.

Use of specific ratios

Ratios and comparatives that have been selected in the report are those that are generally accepted

as meaningful indictors for each category (BPP, 2011b). Additionally, generally accepted ratios that

are used by analyst have been calculated. These indicators are used to provide investors with

information to make decisions on investments and it is therefore more likely that this systematic

approach would align itself to the overall project aim of reviewing performance from a shareholder

perspective.

Limitations of ratio analysis

Due to changes published by the IASB to IAS 19 that came into effective from 1st January 2013

(Deloitte, n.d.), there has been a material impact on the financial statements for 2012 that has been

retrospectively corrected in the annual account comparative statements for 2013. Where analysis

has been conducted using data from 2012 and the restated results make a material impact on the

findings this has been reflected in the narrative of this report.

[10]

Further recognition of the limitations of ratio analysis is that it merely identifies the trend. The

speculation and cause behind the movement in the trend requires further research and some

speculation.

2.4.2 Benchmarking

Ratio analysis has been used to compare Centrica to both the industry and their competitors. There

are a lot of strong arguments when used isolation ratios do not offer much value. The benefit of

being able to use ratio analysis in this report against competitors is that all the competitors are

mandated to produce company accounts. This means that all the information is available to draw

comparison of ratios. Furthermore data from analyst that produce industry specific ratios can be

used for comparison. Research of these ratios, coupled with competitor ratios is useful in

established a standard range to benchmark deviations between performance.

Limitations of benchmarking

Different financing policies and degrees of diversification (BPP, 2011b) can impair the accuracy of

results. Furthermore degrees of diversification can seriously impair the accuracy of benchmarking

against sector specific ratios. Currency exchange is of particular relevance when using comparatives

in the energy sector because some of the research was completed on company accounts that were

produced in Euros rather than British Pounds (see 2.5).

2.4.3 Financial and non-financial measures

The comparatives selected have been chosen because they cover a broad range of areas across all

major parts of the business. Use of multiple comparatives also increases the reliability; this is

because many figures derived from the financial statements, although conforming to the relevant

GAAP, may be subject to different accounting techniques that can lead to different final figures for

profit or net book value of assets. This has been considered when looking at operating profit in

particular. Use of cash flow statements eliminates any variations due to accounting techniques

because it removes any non-cash flow elements, such as depreciation and amortisation when

computing the statement.

Comparison of Centrica's competitors based on company group accounts will be critical in providing

an accurate analysis of their performance. There are a number measures that can be used to

compare businesses. The report will look at the following:

Financial measures: market capitalisation, turnover/revenue, profit and return, company assets and

debt, liquidity

[11]

Non-financial measures: number of employees, UK and global coverage/structure

Non-financial measures have been used because the coverage and complexity of an organisation can

be linked to performance. One example of this could be an increase in employees linked to an

increase in demand or production a product or reduction in employees could be due to

redundancies as a result of cost cutting or poor cash flow.

2.4.4 Further non-financial measures

Centrica products are a mix of tangible and intangible products. For example, British Gas supply

boilers to the homes of their customers (tangible) however the supply of electricity and servicing of

these boilers (intangible) is one of their products/services. Delivering energy to over 12 million

customers in the UK, British Gas supplies a considerably higher proportion of customers than its next

biggest competitor SSE with 9.6 million customers (SSE, n.d.). Despite having the largest customer

base British Gas ranked 16 out of 17 in Which Customer Satisfaction Survey 2014 (Which, 2013).

Intangible assets such as the 'British Gas' brand can create loyalty that offsets poor satisfaction rates.

2.4.5 SWOT Analysis

A SWOT analysis provides a framework to evaluate four elements; strengths, weaknesses,

opportunities and threats of a business. A SWOT analysis has been chosen because the analysis links

in well with the research questions. The framework of a SWOT analysis encompasses internal and

external factors across all elements, both of which are considerations in the research questions. The

SWOT analysis also can be used in an omnipresent manner incorporating either historical, present or

future factors into each element. Finally the SWOT analysis recognises competitive factors through

identifying opportunities and threats; this could be useful in addressing the research question

around Centrica's market positioning and performance against their competition. Other analysis

considered was a PEST analysis that also evaluates four elements: political, economic, social and

technological. This analysis focuses more on market conditions and would probably have less

relevance than a SWOT analysis based on the research questions.

Limitations of a SWOT analysis

As with all research methods, the SWOT analysis has some limitations that should be considered

when using it as an assessment tool. A SWOT analysis is a subjective method of analysis; this means

that the factors within each element (strengths, weaknesses, opportunities, threats) are created

with degree of speculation. One example of this is that a factor may be identified as a threat e.g. the

impact on a company of a change in government; this could however be considered an opportunity

[12]

based on what that change in government is. Where there is cross over due to the subjective nature

of the analysis this has been recognised.

2.5 Foreign Currency Exchange

All company accounts published in Euros were converted at the Bank of England exchange rate at

date of publication.

[13]

(3) Results, analysis, conclusions and recommendations

3.1 Company Profile

The Centrica Group is comprised of four separate businesses that operate through North America,

UK and Europe along with Trinidad and Tobago. Two of these businesses form part of the

international downstream operations of the businesses; these are British Gas and Direct Energy.

Centrica energy forms part of the international upstream operations of the group whilst Centrica

Storage operates offshore gas storage facilities (Centrica, 2014a). Investopedia (n.d.a) defines

upstream activities as, 'Operations stages in the oil and gas industry that involve exploration and

production.' Downstream activities are described as, 'The oil and gas operations that take place after

the production phase, through to the point of sale.' (Investopedia, n.d.b).

Centrica owns a large energy provider in the UK that operates under British Gas and they supply

energy to millions of customers and businesses across the UK. Direct Energy is part of Centrica and

performs a similar operation across North America. In the UK, British Gas is one of six major energy

companies and they are structured as part of a larger parent group in a similar structure to many of

the large six UK energy companies.

Unlike EDF group that predominately buy gas on the wholesale markets (EDF, n.d.), Centrica

subsidiary Centrica Energy, in addition to trading oil and gas, sources and generates oil and gas

which it subsequently supplies to British Gas. The involvement of Centrica in this initial stage to the

end results in customers' homes will be discussed in further details later when analysing the

importance of company structure in the business performance and its relative success.

In the early nineteen-nineties the government controlled the energy industry before privatisation

encouraged a more competitive environment further compounded by ease of switching that was

facilitated by technology, in particular the use of the internet (British Gas, 2013). In June 2000

Centrica announced the acquisition of Direct Energy (Centrica, 2000) which gave Centrica further

opportunity to expand their global operations and remain largely influential in the European energy

market through British Gas and Centrica's other subsidiaries. Today there are 6 major energy

companies classified by Ofgem as the 'big six'; British Gas (Centrica), EDF energy (EDF group), Eon,

npower (RWE), SSE, Scottish Power (Iberdrola). In addition to competing with smaller energy

companies they are continually competing for market share for both residential and business

customers.

[14]

3.2 PRESENTATION AND ANALYSIS

3.2.1 SWOT Analysis

As a large multinational corporation in the energy sector Centrica's performance is largely influenced

by macro-economic and environmental factors. A SWOT analysis of the conditions over the past

three years shows a summary of these major factors. The following SWOT analysis aims to highlight

factors that have influenced the results shown later in this section.

Strengths

Seasonal variations in temperature can

influence the energy use of residential and

business customers. This is out of Centrica's

control. A key strength of the performance

in 2012 and parts of 2013 was high levels of

revenue; this was a result of cooler

temperatures in first part of 2013 and

throughout 2012 resulted in higher

consumption

The political landscape in North America

meant that energy companies including

Centrica had surplus supplies of shale gas in

The increase in supply in North America

currently kept and continues to keep gas

prices low resulting in higher profits

Weaknesses

In contrast to the cooler temperatures that

benefited Centrica in 2012 the warmer

weather last quarter 2011 reduced demand

for energy that resulted in lower profits

despite higher prices

Loss of consumer confidence due to prices

rises influenced by global events out of

Centrica's control (Syria crisis)

Centrica was unable to proceed with long

term Baird and Caythorpe gas projects

despite having a high value of committed

costs

[15]

Opportunities

Electrical market reform and carbon price

reforms promoting environmentally friendly

energy sources

Use of technology, Hive ©, to gain back

consumer trust through cheaper bills and

more efficient energy usage

UK Election 2015 and political reform could

promote the use of shale gas and drive down

costs which should increase profit

UK gas declining with over half imported

means that Centrica could increase revenue

in Centrica Energy if they are able to produce

more gas

Threats

Risk of political intervention and possible

energy cap in response to lack of public trust

which could reduce investor confidence

UK Election 2015 and political reform could

introduced an energy cap that diminishes

shareholder confidence and dramatically

impacts profits

UK gas declining with over half imported

means that Centrica's multi-utility company

British Gas may be exposed to higher

commodity costs

In March 2011 there was a Japanese nuclear

power disaster that affected wholesale

energy prices. This threat is on-going as the

ramifications are still present today.

Changes to accept accounting practices

impact on performance ratios and final profit

figures.

[16]

3.2.2 Profitability and Return Ratios

ROE and ROCE

The trend in ROE shows growth of 3.8% and 5.27% in 2012 and 2013 respectively. This is a positive

signal because it shows the management are delivering better value for money for shareholders year

on year and delivering a higher return. This has occurred as a result of either higher operating profit

in 2012 or as a result of a reduction in equity in 2013. In 2013 operating profit was in fact lower than

in 2012 but the drop in shareholder equity more than offset the required drop in operating profit

and this resulted in an improvement in ROE. A contributing factor in 2013 to the drop in ROE was

largely as a result of the deduction of £500 million in the purchase of treasury shares along with

deductions of £179 actuarial losses. The impact of IAS 19 adjustment had a non-material

restatement of equity deduction of £20 million. It is unlikely that this will present a risk to the

business. Any readjustment through losses in the reserve has been offset have by retained earnings

adjustments. Additionally the £500 million of treasury shares should not impact on overall business

performance but were repurchased as equity instruments of the company under the share

repurchase programme.

The impact of long term debt can be analysed by comparing the ROCE and the ROE. ROCE employed

remained relatively flat from 2011 to 2012 dropping by only 0.03 % points, however continued to

drop again by a further 0.4% point by 2013. The reduction in ROCE is bad because investors want to

see higher levels of return on capital and not lower returns however the amount in which the ROCE

has been reduced by is unlikely to be significant to investors or lenders in the short term. The growth

in capital employed from 2011 to 2012 was 16% of which 5% can be accounted for in equity and 11%

accounted for by additional financing/debt. In 2012 the increase in long term debt was offset by a

2011 2012 2013

ROE 39.43% 43.23% 48.50%

ROCE 16.60% 16.57% 16.17%

Operating profit 9.67% 10.70% 9.48%

0.00%5.00%

10.00%15.00%20.00%25.00%30.00%35.00%40.00%45.00%50.00%55.00%60.00%

ROE vs ROCE

[17]

16% rise in PBIT producing only a small net reduction in ROCE of 0.03%. In relative terms this could

be considered to have remained flat and therefore a within a reasonable variation, however the lack

of growth in operating profit in 2013 combined with a 12% decrease in equity and a significant rise in

company debt has led to a decline in ROCE. A continuing trend could potentially raise the cost of

capital and damage the share price and this is likely to be a contributing factor to the proposed £100

million cost saving exercise in British Gas and $100 million cost saving in Direct energy by 2015. The

movement in ROCE could be attributed partly to Centrica's recent strategy for growth through

acquisition over 2012 to 2013 particularly in North American downstream operations. The increase

in levels of debt may have also prompted Centrica to undertake the £500 million cost reduction

programme successfully implemented over the course of the last 3 years that was completed in

2013 (Centrica, 2014).

Profit margins and asset turnover

Operating profit margins according to Morningstar data (See Appendix) shows average market

specific operating margins of is 12.2 % and Centrica is lagging behind this sector specific margin by

1.5 % to 2.72 %. This is probably not concerning for shareholders because the shortfall against

industry average is not relatively large and Centrica's margins have been consistent over the last

three years. This could actually be a result of the Centrica's position in the market and not having

realised the full profit potential of their recent acquisitions after the expansion of its North American

division.

21.30%

9.67%

5.54%

21.99%

10.70%

5.64%

19.22%

9.48%

5.02%

Gross profit margin Operating profit Net profit

Profit Margins in Centrica 2011 - 2013

2011 2012 2013

[18]

Centrica achieved the highest margins in 2012 and their lowest in 2013. However the trend in ROCE

is not consistent with the trend in operating margins, for example, the operating margins increases

in 2012 but the ROCE drops. This inconsistency may be viewed by shareholders as poor

management. Palepu and Healey (2013) explain how margins are influence by 2 main factors, these

being price premium a firm commands in the market for its products or services and the efficiency of

the procurement and production process. Analysis of the company's balance sheet reveals that

margins doe change but improvements in margins are often offset by a reduction in asset turnover.

Year 2011 2012 2013

Asset turnover (ratio) 1.72 1.55 1.71

Sales(i)/capital employed 22824/13299 23942/15460 26571/15568

Profit margin x Asset turnover = ROCE

2011 9.67% x 1.72 = 16.6%

2012 10.7% x 1.55 = 16.58% *

2013 9.48% x 1.71 = 16.21% *

*small difference in results is due to rounding

Indicates an increase in value from previous year

Indicates a decrease in value from previous year

In 2012 Centrica's increase in operating margin is offset by a reduction in asset turnover and in 2013

an increase in asset turnover is offset by a decrease in margin. It could be possible that the volatility

of the energy sector margins are heavily influence by the economy and global commodity costs and

variations in the weather may play a significant role in rate at which Centrica turnover their assets.

3.2.3 Investor Ratios

The year 2012 marked the thirteenth year in succession that Centrica was able to pay a full year

dividend rate at or above the rate of inflation (Centrica, 2013). Over three years from 2011 to 2013

Centrica has increase their dividend per share (DPS) year on year from 15.4p to 16.4p and 17p for

2011, 2012 and 2013 respectively and this is considered a positive signal by shareholders. Centrica's

[19]

earnings per share (EPS) increase in 2012 and decreased in 2013 but it is likely that the dilution in

earnings per share is viewed as bad news by shareholders. The increase in DPS does not match the

earnings made by Centrica year on year or the share price of Centrica stock over that three year

period. Possible reasons could be due to Centrica's requirement to attract investors and the impact

of paying a lower dividend on their cost of capital. Centrica is owned by the shareholders but

controlled by the management team who have a fiduciary duty to govern the business in an ethical

and responsible manner with a view towards making a profit. The importance of generating profit is

significant for a FTSE 30 company such as Centrica because they need to be able to make a profit

consistently in order to pay a sustainable dividend. Centrica is owned by over 700,000 individual

shareholders and numerous pension fund investors (Centrica, 2014a). The importance of

shareholder funds and subsequent share price of Centrica can therefore directly impact the pension

funds of millions of individuals and investor confidence will be heavily influenced by both Centrica's

profit and their ability to pay a sustained dividend.

Further analysis of investor ratios show that Centrica's performance between 2011 and 2013 was

mixed with basic EPS peaking at 24.6p in 2012 and dropping to a low of 8.2p in 2011. It is of

significant to shareholders that DPS has increased despite the basic EPS not increasing every year.

Basic earnings are simply a representation of the earnings generated by the company but may not

necessarily be attributed the overall aim of maximising shareholder wealth (Kaplan, 2012). Investors

are interested in the income earned by the company for them and their return on investment

(Kaplan, 2012). Shareholders will be concerned with financial performance in addition to business

performance. This is because the financial performance is ultimately the basis of which Centrica can

pay a dividend. Whilst EPS shows a spikey profile over the three year period the DPS shows a steady

2011 2012 2013

Basic EPS 8.2 24.6 18.4

DPS (pence) 15.4 16.4 17

0

5

10

15

20

25

30

Pen

ce

Centrica EPS against DPS from 2011 to 2013

[20]

and consistent increase over the period. It is likely that the steady growth on DPS reflects the

necessity of Centrica to maintain investor confidence and any decrease in DPS is often regarded as a

form of information about the company's performance (Kaplan, 2012). This would also explain the

lack of a significantly higher dividend payment in 2012 despite making a significantly larger profit

than the year before. A large pay out in 2012 may have affected Centrica's ability to maintain a slow

and steady DPS in 2013 which in turn may have affected shareholder confidence.

3.2.4 Liquidity Ratios

In 2012 Centrica's current ratio increased from 0.893 to 0.946 reflecting Centrica's increase in assets

being greater in proportion than the increase in their liabilities. In 2013 the current ratio remained

relatively flat with 2012 showing the proportion of current assets remained consistent with the

proportion of current liabilities. The analysis shows between 2011 and 2012 the current ratio and

quick both increased however in 2013 the current ratio decreases and the quick ratio increases. The

quick ratio gives an indication of the ability of the company to meets its debt from all current assets

less inventory so the improvement in the quick ratio is likely to be viewed as positive because

Centrica is less reliant on inventory to meet their debt obligations. In 2012 Centrica considerably

increased their inventory levels by 23% from 2011. This movement is as a result of increased gas in

storage and transportation (Centrica, 2014a) and storage of a higher volume of other raw materials

and consumables. Higher levels of inventory are likely to have contributed to higher profit levels

which in turn reduced Centrica's reliance on inventory meet their debt obligation. An increase in

inventory turnover from 8.98 2011 to 10.65 in 2012 along with additional inventory investment most

likely played a significant role in improving final profit.

2011 2012 2013

Current ratio 0.893 0.946 0.940

Acid ratio 0.822 0.862 0.872

0.750

0.800

0.850

0.900

0.950

1.000

Rat

io

Centrica's current ratio vs quick ratio from 2011 to 2013

[21]

Factors that may influence the movement in both these ratios include the political agendas and

seasonal gas prices spread which contributed to increased storage in Centrica Storage. The existing

quick ratio is significantly higher than the average energy sector current ratio of 0.33 according to S

& P 500 data (CSI Market, n.d.) which is good and could be as a result of high levels of trade

receivables due from the British Gas. The level of receivables is affected by seasonal variation in the

weather and the number of British Gas and Direct Energy's customer and business accounts year on

year.

3.2.5 Financial Gearing

Centrica's interest cover has increased from 6.17 to 8.48 in 2011 and 2013 respectively. In 2012

Centrica saw a reduction in their interest cover to 6.07 but the presentation of their restated results

in 2013 showed a significantly different figure of 9.79 (9.79 restated 2012). This is due to an

amendment to IAS 19 regarding employee benefits and the measurement of certain interest costs.

3.2.6 Business Performance vs. Financial Performance

Based exclusively on profit and margins Centrica achieved their best results in 2012 (2012 restated

results show business performance highest in 2013 due to adjustments made in accordance with IAS

19). Overall business performance remained relatively flat over the three years from 2011 to 2013.

This is a large contrast to Centrica overall financial performance. These results will provide

shareholders with confidence about the ability of the business to perform but because dividends and

earning are calculated based on financial performance they may have concerns. In 2010 Centrica

outlined its strategy to:

2011 2012 2013

Businessperformance

1252 1350 1333

Financialperformance

442 1273 950

0

200

400

600

800

1000

1200

1400

1600

Fmill

ion

Business peformance vs Financial Peformance

[22]

(i) Grow British Gas

(ii) Deliver value from our growing upstream business

(iii) Build an integrated North America Business and

(iv) Drive superior financial returns

(Centrica, 2012)

The impact of this strategy, point (iv), could have had a significant on the financial returns achieved

by Centrica. Porter (1985) describes 3 generic competitive strategies, one of which is overall cost

leadership. Similarities of this strategic style can be drawn to the aggressive three year cost

reduction programme to save £500 million. In 2011 exceptional items in relation to this strategy of

£154 million restructuring charge, £333 million adjustment to final pensionable salaries and decision

to move out of the German wholesale business leading to £111 million loss to the business all

affected overall financial performance. Furthermore despite relatively strong performance in 2013

the change in their strategic priority and desire to increase returns through capital discipline may

have influenced the decisions to downgrade resources across the UK and North America that

resulted in £699 million in impairment losses. Further political pressures ruling out gas storage

incentivisation from the government impacted a further £240 million in impairment losses.

3.2.7 Comparison and Competition

Based on the market capitalisation of the parent groups owned by the top six energy companies

Centrica ranks as the fourth largest. Centrica's recent strategic priorities to innovate and drive

growth and service excellence along with integrating their natural gas business linked to their core

markets could be linked to their growth strategy and the need to maintain their competitive position

against companies with a much larger market capitalisation.

[23]

0.00%

5.00%

10.00%

15.00%

2011 2012 2013

Top 6 UK energy company (parent group) operating margin

Centrica plc

EDF Group

Eon

RWE

SSE

Iberdrola

Analysis of the financial performance show market capitalisation has little correlation to the ROCE

however it does show that the levels of return of Centrica are far higher than the results of the other

five major UK energy suppliers parent group. Generally speaking market capitalisation can be used

as a reasonable measure of risk and rewards with smaller cap company's having larger potential for

growth with higher risk and as such may be seen as a less conservative investment (Standards &

Poor's, n.d.). As all of the companies market capitalisations are above £10 billion they all fall into the

same category of large-cap companies and could therefore be considered to be low risk investment

(Standards & Poor's, n.d.). In contrast to Standards & Poor's publication (Standards & Poor's, n.d.)

the results show both the fourth and fifth ranked groups (Centrica and SSE) have returns on capital

as high as 17.75%, over 3 times more than the average ROCE of some of the large market capped

companies. This could be a result of Centrica and SSE's heavy involvement in downstream activities.

The top 3 companies, EDF group, EON and Iberdrola consistently deliver higher levels of profit than

the other groups but equally employ more capital. If managed well, higher levels of capital should

result in higher profits however the top three companies have a lower proportionate return overall.

The charts below show a comparison of the capital employed, the operating margin and ROCE of the

big six energy parents companies supporting the above narrative.

16.88

43.79

22.48

13.43

14.40

25.91

0.00 10.00 20.00 30.00 40.00 50.00

Maket cap (£bn)

£ bn

Top 6 UK energy company (parent group) market capitlisation (Exchange at 0.826EUR to GBP based on BoE exchange

rate at 26/04/2014)

Iberdrola

SSE

RWE

Eon

EDF Group

Centrica plc

[24]

[25]

3.2.8 Non-financial measures

Centrica operates a strong upstream operation and employs in the UK alone nearly as many

employees as Iberdrola do globally. Furthermore Centrica employ 174,000 employees compared to

156,168 working for the EDF group. This is a staggering amount considering the EDF group over

twice the size of Centrica by market cap. Additionally there is a dramatic difference between the

smallest of the six large groups which is SSE at 20,000 employees. The large differences could reflect

the more complex and technical operations around exploration and production that Centrica are

more heavily involved with.

Centrica's 2013 annual accounts depict a clear strategy that emphasises the necessity to respond to

the competitive market through improving key metrics like Net Promoter Score and leading the

market in Green Deals and on political change. The growth in the use of technology such as Hive

Energy coupled with an increase in pre-payment services and offering of additional services such as

home warranty in the US reflects Centrica's ambition to both empower customers and drive down

the cost for the customer. The strong emphasis Centrica has placed on leading the market on

modernisation is likely to ensure that any political or macro-economic pressures will not adversely

influence their margins, share price and overall return.

3.3 Critical Analysis and Evaluation of Results

Overall profit has been shown to peak in 2012 along with ROE, however ROCE remained relatively

flat and then dropped in 2013. Centrica's annual reports' link temperature to residential and

household energy use stating that cold temperatures result in higher bills and warm temperatures

result in lower bills and revenue. Data according to the Met office shows 2011 had the second

warmest year since records began. 2012 and 2013 has equally cool temperatures and these were

ranked in the top three of the coolest in the last sixteen years (Met Office, 2011). Whilst

performance cannot exclusively be attributed to the weather, there does appear to be some

correlation and the overall performance in 2011 and 2012 appear to be indicative of the mean

temperature pattern. The impact of the weather is cited in 2013 annual reports as a contributing

factor to poorer performance in downstream operations. Whilst a late winter may have delayed cold

temperatures this should have been offset by an exceptionally cold spring (Met Office, 2014),

indicating that the presence of additional factors in the poorer performance in downstream

activities and overall group performance; these factors could relate to government political agendas

influencing demand.

[26]

42%

42%

3% 13%

Group operating in 2011 profit split by subsidiaries in

£m

British Gas

CentricaEnergy

CentricaStorage

DirectEnergy

40%

45%

3% 12%

Group operating in 2012 profit split by subsidiaries in £m

British Gas

CentricaEnergy

CentricaStorage

DirectEnergy

38%

49%

3% 10%

Group operating in 2013 profit split by subsidiaries in £m

British Gas

CentricaEnergy

CentricaStorage

DirectEnergy

Group Performance

This table shows the operating profits from 2011 to 2013 against their competition.

2011 2012 2013

Centrica plc. 1,414 2,625 1,892

EDF Group 6,981 6,810 -

Eon (757) 4,667 5,165

RWE 3,410 3,175 105

SSE 2,368 534 800

Iberdrola 3,720 3,614 2,010

Furthermore analysis of the Centrica's overall results from the above table support a view that

Centrica's ability to support profit and drive efficiencies within the group by delivering both

upstream and downstream activities may have stabilised their profits. At a time when energy and

wholesale costs were increasing in 2012 and 2013 Centrica was able to offset the loss in their

downstream activities particularly across British Gas with a higher proportion of profit derived from

upstream activities in Centrica Energy as detailed below.

[27]

Unlike Centrica, EDF Trading (a subsidiary of EDF group) manages a portfolio of assets to source,

supply, and transport (EDF, n.d.) in addition to other activities across the value chain. Trading in gas

does not eliminate the risk of a decrease in downstream activities because they are unable to offset

against upstream activities and EDF are not significantly involved at the very beginning of the value

chain in the exploration and production process. RWE delivers the second highest return and based

on and are involved in projects in upstream gas supply through the Breagh offshore gas field (RWE,

n.d.). As drilling work only began in 2012 further analysis in future years would be able to determine

whether the combination of upstream activities and downstream activities does influence the

overall ROCE.

Other influences

EDF has in recent months experienced a surge in investor confidence and a rise in their share price

as a result of political decisions made by the French government to allow an increase in regulated

electricity prices (Young Alice, 2013) and reflect the potential impact governments can play in

influencing investor confidence.

3.4 Conclusion and Recommendations

The project aim was to review Centrica's performance over three years in comparison to

their competition and from a shareholder perspective; this is addressed by answering four research

questions as detailed in section 1.3. The research questions focused around financial performance

and measured Centrica's business performance against their strategic priorities. Additionally the

report draws comparison of Centrica's performance benchmarked against their competition and

industry averages.

Profitability, return and investment

From 2011 to 2013 the results have been mixed with Centrica having their best results (based on

profit) in 2012. The variations in profitability over the three years is most likely as a result of changes

in Centrica's operating margins and their asset turnover, with each offsetting changes in the other

across the three years. It is likely that an increase in Centrica's investments, particularly acquisitions

in North America may have caused an impact on profit but more importantly may have impacted on

a decrease in the return on capital employed.

The return for the shareholders is not necessarily indicative of performance. Shareholders have

continued to receive a consistent rise in the dividend payments based on their shareholdings despite

overall earnings per share dropping. One likely reason for this is to ensure higher levels of investor

[28]

confidence and the keep cost of capital down whilst waiting until longer term investments through

recent acquisitions can be realised.

Liquidity and solvency

Centrica has strengthened their liquidity and solvency ratios by turning over a higher level of

inventory and increasing their assets in greater proportion to their liabilities over the three year

period from 2011 to 2013. Despite having greater levels of debt they have been able to improve

their overall position to meet their interest charges, although this is in part due to a change in

accounting standard IAS 19. They have been able to do this against a changing political landscape,

fluctuating commodity prices and increasing competition particularly in the UK. Centrica appear to

have benefited from their cost saving programme of £500 million over the three year period.

Influence on results

Centrica's group structure has most likely been crucial to Centrica's performance and market

position over the past three years. As their margins and profits are squeezed in downstream

activities they have been able to absorb the reduction by higher margins in upstream activities. With

an exploration and production history dating back to 1985 (Centrica, n.d.a) Centrica has been able to

capitalise on growth of up to 50% (Centrica n.d.b) in production of gas and oil in recent year.

Furthermore Centrica have recognised the need to expand their repertoire of products in both the

UK and North America downstream operations to assert a point of differentiation and are planning

to increase consumer confidence by utilising recent smart technology such as their Hive system.

Recommendations

The energy industry is likely to be put under increasing pressure to operate ethically in terms of their

impact on the environment and their product pricing for customers. Upstream and downstream

activities across the Centrica group are relatively equally split accounting for half of the profit of the

group each. One method of improving the levels of return despite increasing levels of debt could be

by placing emphasis on saving costs in addition to increasing revenue from recent acquisitions.

Political awareness is essential, especially in light of the election in the UK in 2015. The UK may

benefit from low wholesale energy prices as seen in North America if the UK government agree to

further exploration of shale gas in the UK. By increasing their product and services Centrica's

downstream operations could benefit from higher consumer confidence and lower energy prices

which may result in British Gas reclaiming some of their lost business and residential accounts in

recent years. Their performance over the coming years will be largely influenced by their ability to

[29]

maintain high levels of revenue across all four segments of the group and if achieved could align

their earnings growth with the demanded for growth by both private and commercial investors.

[30]

4) References

BBC (2009). UK in recession as economy slides. Available at

http://news.bbc.co.uk/1/hi/business/7846266.stm (Accessed 06 March 2014)

BPP (2011a). FIA, FAM Accountant in Business, ACCA, Paper F1, Accountant in Business.

(2011). First Edition. London.

BPP (2011b). FIA, FFA Accountant in Business, ACCA, Paper F3, Accountant in Business.

(2011). First Edition. London.

British Gas (2013). The history of energy. [Online]. Available at

http://www.britishgas.co.uk/blog/articles/the-history-of-energy (Accessed 26 April 2014)

Centrica (2000). News. Available at

http://www.centrica.com/index.asp?pageid=151&newsid=7 (Accessed 26 April 2014)

Centrica (2012). Annual Report and Accounts 2011. Available at

https://www.centrica.com/files/reports/2011ar/files/pdf/centrica_annual_report_2011.pdf

(Accessed 02 April 2014)

Centrica (2013). Annual Report and Accounts 2012. Available at

http://www.centrica.com/files/reports/2012ar/index.asp#ref_report2012 (Accessed 02

February 2014)

Centrica (2014). Annual Report and Accounts 2013. Available at

http://www.centrica.com/files/reports/2013ar/index.asp#ref_annualreport2013 (Accessed

02 April 2014)

Centrica (n.d.a). Our History. Available at

http://www.centricaenergy.com/explorationproduction/our-history (Accessed 03 May

2014)

Centrica (n.d.b). Our Exploration and Production Business. Available at

http://www.centrica.com/index.asp?pageid=1149 Accessed 03 May 2014)

CSI Market (n.d.). Financial Strength Information & Trends. Available at

http://csimarket.com/Industry/industry_Financial_Strength_Ratios.php?s=600 (Accessed 20

April 2014)

[31]

Deloitte (n.d.). Effective date of amended IAS 19. Available at

http://www.iasplus.com/en/events/effective-dates/2013/effective-date-of-amended-ias-19

(Accessed 16 April 2014)

Differencebetween.net (n.d.). Difference Between Business and Finance. Available at

http://www.differencebetween.net/business/finance-business-2/difference-between-

business-and-finance (Accessed 27 February 2014)

EDF (n.d.). Available at http://www.edftrading.com/ (Accessed 30 April 2014).

Investopedia (n.d.a). http://www.investopedia.com/terms/u/upstream.asp (Accessed 08

March 2014)

Investopedia (n.d.b). Available at http://www.investopedia.com/terms/d/downstream.asp

(Accessed 08 March 2014)

Kaplan (2012). ACCA Paper F9 Financial Management (FM): complete text - 1st January6

2013 to 31 August 2014. Great Britain.

Kellen, V. (2003). At the Crossroads of Strategy, Decision-Making. [Online]. Available at

http://www.kellen.net/bpm.htm (Accessed 30 March 2014)

Kokemuller, N. (n.d.). What is a firm's value chain? [Online]. Available at

http://smallbusiness.chron.com/firms-value-chain-24085.html (Accessed 17 March 2014)

Met Office (2011). Average December finishes a warm 2011. [Online]. Available at

http://www.metoffice.gov.uk/news/releases/archive/2011/december-and-annual-statistics

(Accessed 23 April 2014)

Met Office (2014). Annual 2013. [Online]. Available at

http://www.metoffice.gov.uk/climate/uk/summaries/2013/annual (Accessed 23 April 2014)

Palepu, K. G. and Healy, P. M. (2013). Business Analysis and Valuation: using financial

statements. 5th Edition. United States.

Pashigian, P. B., (1995). Price Theory and Applications. Chicago.

Porter, M. E. (1980). Competitive Strategy: Techniques for analysing industries and

competitors. New introduction 1998 Edition. New York.

Porter, M. E. (1985). Competitive Advantage: Creating and Sustaining Superior Performance.

First Free Press Export Edition 2004. New York.

[32]

RWE (n.d.). Available at http://www.rwe.com/web/cms/en/2079012/rwe-dea/operations-

worldwide/operations/united-kingdom/breagh/ (Accessed 30 April 2014)

Standards & Poor's (n.d.). Company Size - Why Market Capitalization Matters. Available at

http://fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&site

Content=8086 (Accessed 26 April 2014)

SSE (n.d.). Energy Supply. Available at http://sse.com/Investors/EnergySupply/ (Accessed 13

March 2014)

Weardon, G. (2009). Government to spend £50 billion to part-nationalise UK's banks.

[Online]. Available at

http://www.theguardian.com/business/2008/oct/08/creditcrunch.banking (Accessed 06

March 2014)

Which (2013). Energy Companies Rated. Available at

http://www.which.co.uk/switch/energy-suppliers/energy-companies-rated (Accessed 13

March 2014)

Young A. (2013). EDF Share Price Soars as France Grants Tariff Rise. [Online]. Available at

http://invezz.com/news/equities/3809-edf-share-price-soars-as-france-grants-tariff-rise/

(Accessed 30 April 2014)

Yahoo (2014). Centrica PLC. Available at http://uk.finance.yahoo.com/q?s=CNA.L (Accessed

02 March 2014)

[33]

5) Bibliography

Accounting Simplified (n.d.). Dividend Coverage Ratio. Available at http://accounting-

simplified.com/financial/ratio-analysis/dividend-coverage.html (Accessed 23 February 2014)

Burn-Murdoch, J. (2013). Centrica profits up after price rise - how does it compare with

competitors? [Online]. Available at http://www.theguardian.com/politics/reality-

check/2013/feb/27/centrica-profits-price-rise-industry-comparison (Accessed 23 February

2014)

Clark, K. (2009). What is the difference between return on equity and return on capital? [Online].

Available at http://www.investopedia.com/ask/answers/09/return-on-equity-vs-return-on-

capital.asp (Accessed 28 March 2014)

Das, S. (2011) Marketing and Strategy. [Online]. Available at

http://suranjanmktg.blogspot.co.uk/2011_10_03_archive.html (Accessed 12 March 2014)

Difference Between (2011). Difference Between Gearing and Leverage. Admin. Available at

http://www.differencebetween.com/difference-between-gearing-and-vs-leverage/

Elmerraji, J. (2007). Industries vs. Sectors: What's the Difference? [Online]. Available at

http://www.thestreet.com/story/10354349/1/industries-vs-sectors-whats-the-difference.html

Equity Master (2011). Basic EPS vs. Diluted EPS. Available at

http://www.equitymaster.com/detail.asp?date=03/10/2011&story=1&title=Basic-EPS-vs-Diluted-

EPS

Iberdrola (n.d.). Iberdrola announces sale of New York unregulated retail companies to direct energy

for $110.2 million. Available at http://www.iberdrola.es/press-room/press-releases/national-

international/2012/detail/press-release/120712_NP_01_DirectEnergy.html

Langager, C. (2009). What is the difference between an industry and a sector? [Online]. Available at

http://www.investopedia.com/ask/answers/05/industrysector.asp

Temple, P. (2011). Understanding EBITDA. [Online]. Available at http://www.iii.co.uk/tools-

research/knowledge-centre/understanding-ebitda (Accessed 23 February 2014)

Vicente, W. (2013). Pinoy Economic Vision: Jack of All Trades – Master of None. [Online].

Available at http://antipinoy.com/pinoy-economic-vision-jack-of-all-trades-master-of-none/

(Accessed 17 March 2014)

Wikipedia (2014). Big Six Energy Suppliers (UK). Available at

http://en.wikipedia.org/wiki/Big_Six_Energy_Suppliers_%28UK%29 (Accessed 20 April 2014)

[34]

6) Appendix

Morningstar UK Ltd. ratio data

[35]

Consolidated statement of financial position

Year ended 31st December Business performance £m Exceptional items and certain

remeasurements Results for the year £m

2013 2012 2011 2013 2012 2011 2013 2012 2011

Group Revenue 26,571 23,942 22,824 - - - 26,571 23,942 22,824

Cost of sales before exceptional items and certain remeasurements (21,464) (18,676) (17,959) - - - 21,464 18,676 17,595

Exceptional items - - - (125) (89) (221) (125) (89) (221)

Remeasurements of energy contracts - - - 413 603 (437) 413 603 (437)

Cost of sales (21,464) (18,676) (17,959) 288 514 (658) (21,176) (18,162) (18,617)

Gross Profit 5,107 5,266 4,865 288 514 (658) 5,107 5,780 4,207 Operating cost before exceptional items (2,735) (2,844) (2,750) - - - (2,753) 2,844 (2,750)

Exceptional items - - - (939) (445) (110) (939) (445) (110)

Operating costs (2,735) (2,844) (2,750) (939) (445) (110) (3,674) (3,829) (2,860)

Share of profits/(losses) of joint ventures and associates, net of interest and taxation 146 140 93 25 (6) (26) 171 134 67

Group operating profit 2,518 2,562 2,208 (626) 63 (794) 1,892 2,625 1,414

Financing costs/interest expense (297) (437) (358) - - - (297) (437) (358)

Investment income/interest income 54 254 212 - - - 54 254 212

Net finance costs/interest expenses (243) (183) (146) - - - (243) (183) (146)

Profit before taxation (continued operations) 2,275 2,379 2,062 (626) 63 (794) 1,649 2,422 1,268

Taxation on profit (continued operations) (942) (1,029) (810) 243 (140) (16) (699) (1,169) (826)

Profit from continuing operations after taxation 1,333 1,350 1,252 (383) (77) (810) 950 1,273 442

Profit from discontinued operations - - 13 - - 22 - - 35 Loss on disposal of continued operations - - - - - (56) - - (56)

[36]

Discontinued operations - - 13 - - (34) - - (21)

Profit for the year 1,333 1,350 1,265 (383) (77) (844) 950 1,273 421

Attributable to:

Owners of the parent 1,333 Not available Not available (383) Not available Not available 950 Not available Not available

Earnings per share

Pence Pence Pence

Basic 18.4 24.6 8.6

Diluted

18.3 24.4 8.5 Interim dividend paid per ordinary share

4.92 4.62 4.29

Final dividend proposed per ordinary share

12.08 11.78 11.11

[37]

Centrica balance sheet

31st December 2013 2012* 2012 2011

Non-current assets

Property, plant and equipment 7,446 7,965 7,965 6,412

Interest in joint ventures and associates 2,658 2,721 2,721 2,620

Other intangible assets 1,905 1,579 1,579 1,221

Goodwill 2,819 2,543 2,543 2,518

Deferred tax assets 105 183 183 235

Trade and other receivables 150 55 55 74

Derivative financial instruments 227 313 313 290

Retirement benefit assets 205 254 254 413

Securities 202 199 199 190

15,717 15,812 15,812 13,973

Current assets

Trade and other receivables 5,446 4,335 4,335 4,212

Inventories 530 545 545 442

Derivative financial instruments 573 268 268 315

Current tax assets 151 54 54 81

Securities 9 7 7 28

Cash and cash equivalents 719 931 931 518

7,428 6,140 6,140 5,596

Assets of disposal groups classified as held for sale 301 - - -

Total assets 23,446 21,952 21,952 19,569

Current liabilities

Derivative financial instruments (506) (615) (615) (1,140)

Trade and other payables (5,630) (4,545) (4,545) (4,094)

Current tax liabilities (645) (594) (594) (226)

Provisions for other liabilities and charges (258) (266) (266) (308)

Bank overdraft, loans and other borrowing (859) (566) (472) (502)

(7,898) (6,586) (6,492) (6,270)

Net current liabilities (470) (446) (352) (674)

Non-current liabilities

Deferred tax liabilities (1,426) (1,678) (1,678) (1,506)

Derivative financial instruments (431) (327) (327) (505)

Trade and other payables (64) (26) (26) (33)

Provisions for other liabilities and charges (2,394) (2,480) (2,480) (1,903)

Retirement benefit obligation (165) (166) (166) (83) Bank overdrafts , loans and other borrowing (5,172) (4,762) (4,856) (3,669)

(10,192) (9,439) (9,533) (7,699)

Liabilities of disposal groups classified as held for sale (99) - - -

[38]

Net assets 5,257 5,927 5,927 5,600

Share capital 321 321 321 319

Share premium 931 929 929 874

Retained earnings 4,255 4,186 4,511 4,043

Accumulated other comprehensive loss - - (434) (238)

Other equity (315) 491 600 602

Total shareholders' equity 5,192 5,927 5,927 5,600

Non-controlling interest 65 - -

Total shareholders' equity and non-controlling interests 5,257 5,927 5,927 5,600

Calculations and Formulas

Sector ratios (CSI market/Centrica analysis) 2011

2012 (restated) 2012 2013

Gross profit margin & 32% 21.30% 22.35% 21.99% 19.22%

Gross profit/revenue 4865/22842 5102/22824 5266/23942 5107/26571

Operating profit margin% 27.60% 9.67% 10.70% 10.70% 9.48%

Operating profit/revenue 2208/22842 2562/23942 2562/23942 2518/26571

Net profit margin % 7.54% 5.54% 5.52% 5.64% 5.02%

Net profit/revenue 1265/22824 1322/23942 1350/23942 1333/26571

Asset turnover (ratio) 0.92 1.72 1.56 1.55 1.71

Sales(i)/capital employed 22824/13299 23942/15366 23942/15460 26571/15568

Return on capital employed 15.40% 16.60% 16.67% 16.57% 16.17%

PBIT/capital employed 2208/13299 2562/15366 2562/15460 2518/15568

ROE 39.43% 43.23% 43.23% 48.50%

2208/5600 2562/5927 2562/5927 2518/5192

PBIT (operating profit) 2208 2562 2562 2518

Capital Employed 13299 15366 15460 15568

Total asset - current liabilities

(19569-6270)

(21952 - 6586)

(21952-6492)

(23466 - 7898)

[39]

Liquidity Industry average 2013 2012* 2012 2011

Current ratio 0.940 0.932 0.946 0.893

Current assets/current liabilities 7428/7898 6140/6586 6140/6492 5596/6270

Acid ratio 0.3 0.872 0.850 0.862 0.822

Current assets less inventory/current liabilities (7420-530)/7898 (6140-545)/6586 (6140-545)/6492 (5596-442)/6270

Solvency

Total gearing 240% 67.8% 61.4% 61.7% 57.9%

Total long term debt(NCL)/(shareholder equity + long term debt) 10912/(5192+10912) 9439/(5927+9439) 9533/(5927+9533) 7699/(5600+7699)

Interest cover(i) 37.52 8.48 9.79 6.07 6.17

PBIT/interest charges 2518/297 2652/271 2652/437 2208/358

Interest cover 37.52 9.36 10.25 10.25 11.32

PBIT/interest charges (only bond/banks loans/od/finance leases) 2518/269 2562/250 2652/250 2208/195

Debt ratio 66.70% 60.49% 60.49% 60.08%

Total debts/total assets C28/C26

PBIT (operating profit) 2518 2562 2562 2208

Long term debt 7258 6959 7053 5826

[40]

excludes provisions 1426+431+64+5172+165

1678+327+26+4762+166

1678+327+26+4856+166

1506+505+33+3699+83

Total assets (NCA + CA) 23145 21952 21952 19569

Total debt (excluding provisions) 15438 13279 13279 11758

Industry average 2013

2012 (restated) 2012 2011

Diluted EPS 18.3 23.9 24.4 8.5

Taken from financial statements

Basic EPS (p) 18.4 24 24.6 8.2

Taken from financial statements

P/E ratio 25.2 18.52 - 12.07 38.74

Share price/ Basic EPS 340.8/18.4 - 297/24.6 333.2/8.6

Dividend cover 1.08 - 1.5 0.56

EPS/DPS 18.4/17 - 24.6/16.4 8.6/15.4

Dividend yield 5.21 4.99% 5.52% 4.62%

DPS/Market price per share

DPS (pence) 17 - 16.4 15.4

Taken from financial statements

Share price 344 start of 340.8 - 297 333.2

[41]

2014

At beginning of year

Total dividend paid £m 816 762 668

Dividend payout ratio 0.86 0.60 1.59

cash dividend paid/net income 816/950 792/1273 668/421

Industry average 2013 2012* 2012 2013

Inventory turnover 9.01 10.56 10.65 8.98

Inventory/cos x 365 530/21462*365 545/18840*365 545/18676*365 442/17959*365

Trade receivable days 74.81 66.09 66.09 67.36

Trade receivable days/revenue (replace credit sales) x 365 5446/26571 4335/23942 4335/23942 4212/22824

Trade payable days 95.75 88.05 88.83 83.21

Trade payable/cos x365 5630/21462*365 4545/18840*365 4545/18676*365 4094/17959*365

[42]

Competitor Analysis

Capital Employed 2011 2012 2013

Centrica plc. 13299 15460 15568

EDF Group 149,472 158,425 not available

Eon 88,168 103,847 97,439

RWE 50,776 52,809 48,932

SSE 13,340 12,689 12,646

Iberdrola 68588 67615 66548

UK Energy Company

Parent Company Market cap (£bn)

British Gas Centrica plc. 16.88

EDF energy EDF Group 43.79

Eon Eon 22.48

npower RWE 13.43

SSE SSE 14.40

Scottish Power Iberdrola 25.91

Operating profit margin 2011 2012 2013

Centrica plc. 9.67% 10.70% 9.48%

EDF Group 11.62% 8.65%

Eon 0.00% 4.22% 5.03%

RWE 7.99% 8.43% 0.23%

SSE 8.36% 1.68% 2.83%

Iberdrola 14.23% 12.79% 7.50%

Revenue 2011 2012 2013

[43]

Centrica plc. 9.67% 10.70% 9.48%

EDF Group 60,074 53,943 na

Eon 95,001 110,681 102,600

RWE 42,692 43,965 44,661

SSE 28,334 31,723 28,304

Iberdrola 26,141 28,250 27,098

[44]

Centrica cash flow statements

Year ended 31 December 2013 2012 2011 Group operating profit including share of results of joint ventures

and associates 1,892 2,625 3,299 Cash generated from continuing operations

Less share of profit of joint ventures and associates (171) (134) (262) Petroleum revenue tax paid

Group operating profit before share of results of joint ventures and associates 1,721 2,491 20 Interest received

Add back/(deduct)

(3) Interest paid

Depreciation, amortisation, write-downs and impairments 2,319 1,507 (194) Payments relating to exceptional charges

Profits on disposals (21) (38) (430) Income tax paid

Increase in provisions 162 201 - Defined benefit pension service cost and contributions (87) (52) - Employee share scheme costs 43 43 - Unrealised gains arising from remeasurement of energy contracts (400) (610) - Operating cash flow before movement in working capital 3,737 3,542 -

Decrease/(increase) in inventories 78 (88) - Increase in trade and other receivables (456) (205) - Increase in trade and other payables 697 361 - Operating cash flow before payments relating to taxes, interest and

exceptional charges 4,056 3,610 2,360 Cash flow from continuing operations

Taxes paid (892) (524) - Payments relating to exceptional charges (224) (266) (23) Cash flow from discontinued operations

Net cash flow from operating activities 2,940 2,820 2,337

Purchases of businesses (1,115) (155) (394)

Sale of businesses 140 30 78 Purchased on intangible assets and property, plant and equipment (1,615) (2,367) (299) Purchased of intangible assets

Sale of property, plant and equipment and intangible assets 17 14 6 Investment in joint ventures of associates (51) (291) (236)

[45]

Dividends received in joint ventures and associates 193 110 147 Repayments of loans to, and disposal of investments in, joint

ventures and associates 59 42 10

- - (765) Purchase of plant, property and equipment

Interest received 29 33 6 (Purchased)/sale of securities (8) 26 48 New cash flow from investing activities (2,351) (2,558) (1,399)

Issue and surrender of ordinary share capital and share awards 20 24 23 Issue of ordinary share capital

Purchase of treasury shares under share repurchased programme (502) - (6) Purchase of own shares

Distribution paid to NCI (8) - 9 Financing interest received

Financing interest repaid (248) (215) (202) Repayments of borrowings (400) (516) 59 Cash flow from increase in debt

Cash received from borrowings 1,209 1,712 (28) Foreign exchange loss on cash settlement of derivative contracts

Equity dividends paid (862) (815) (762) Net cash flow from financing activities (791) 190 (907)

Net (decrease)/increases in cash and cash equivalents (202) 452 30

Cash and cash equivalents at 1 January 931 479 451 Effect of foreign exchange rate changes (10) - (2) Cash and cash equivalents at 31 December 719 931 479

Included in the following line of the group balance sheet:

Cash and cash equivalents 719 931 518 Bank overdraft loans and other borrowing - - (39) 719 931 479