Slide 1: International Financial Reporting Standards
International Financial Reporting Standards Presentation to Analysts & Investors 4 May 2005
Slide 2: Kath Kyle, Investor Relations
Kath Kyle Investor Relations
Slide 3: Disclaimers
Disclaimers This presentation does not constitute an invitation to underwrite, subscribe for, or otherwise acquire or dispose of any Centrica shares. This presentation may contain certain forward-looking statements with respect to the financial condition, results, operations and businesses of Centri
Slide 4: Agenda
Agenda • Transition to IFRS • Standards with particular relevance to Centrica • 2004 income statement and balance sheet • 2005 opening balance sheet • Summary financials restated • 2005 dividends under IFRS • Summary • Q&As 4
Slide 5: We have adopted IFRS from 1 January 2005
We have adopted IFRS from 1 January 2005 • 2004 comparatives (excluding IAS 39 & IAS 32) • Early adopted where practical • IAS 39 & IAS 32 adopted from 1 January 2005 • 15 September 2005: 2005 interim results under IFRS 5
Slide 6: Phil Bentley, Group Finance Director
Phil Bentley Group Finance Director
Slide 7: IFRS does not impact the underlying value drivers of our business
Although IFRS changes some of our financial reporting it does not impact the underlying value drivers of our business • Changed recognition of some assets and liabilities • Consequent impact on timing of profit recognition • Business strategy is unaffected • Cash generation is unaffected & remains a
Slide 8: Changes arise from a number of standards, with four of particular relevance
Changes arise from a number of standards, with four of particular relevance to Centrica • IAS 39 Energy sales & purchase contracts • IAS 12 Petroleum Revenue Tax • IAS 17 / IFRIC 4 Humber & Spalding tolling arrangements • IAS 32 / IFRIC 2 Consumers’ Waterheater Income Fund • IAS 19 Pensions • IFRS 3
Slide 9: IFRS requires changes to the way we account for certain transactions
IFRS requires us to make changes to the way we account for certain types of transactions Type of transaction UK GAAP IFRS Proprietary trading MTM MTM – no change (Accord & N.America) Physical commodity sales & Accrual accounted a) Own use designation: accrual accounting purchases (no change) b) Hedg
Slide 10: Many physical commodity purchases and sales qualify as own use under IAS 39
Many of our physical commodity purchases and sales qualify as own use under IAS 39 Principle Accounting Application to Centrica treatment Own use Accrual Purchase contracts used purely to supply own customers or meet demand in our equity power stations. Net settlement MTM (Trading) Contracts used fo
Slide 11: Marked to market value of contracts will change with commodity prices
The marked to market value of contracts will change in line with future movements in commodity prices Commodity price move Estimated (1) UK Energy (2) annualised MTM move (3) Gas: increase by 1p/therm + £1 million Oil: increase by $1/bbl - £1 million Power: increase by £1/MWh + £11 million Notes 1)
Slide 12: PRT liabilities are accounted for as taxes, changing timing of recognition
PRT liabilities are accounted for as taxes, changing the timing of recognition • PRT moves from cost of sales to tax • Cash payments & calculation of lifetime charges unchanged • Charge was previously based on Life of Field approach with all estimated future liabilities charged at an even rate per t
Slide 13: Gas-to-power tolling arrangements brought onto the balance sheet
IFRS requires our dedicated gas-to-power tolling arrangements be brought onto the balance sheet • Under IFRS, the power tolling arrangements with Humber & Spalding are finance leases • The fixed assets and the corresponding lease liabilities are capitalised at fair value • Net benefit to operating p
Slide 14: Minority interests in the Consumers' Waterheater Income Fund
Minority interests in the Consumers’ Waterheater Income Fund can no longer be reported as non-equity minority interests • Centrica holds a 19.9% interest in the fund • Under UK GAAP (FRS 5) we fully consolidated the fund - no change under IFRS • Units in the fund have redemption rights to the fund •
Slide 15: Alisdair Cameron, Director of Financial Control
Alisdair Cameron Director of Financial Control
Slide 16: A number of the new standards affect Centrica's reported results
A number of the new standards affect Centrica’s reported results • IAS 39 Energy sales & purchase contracts • IAS 12 Petroleum Revenue Tax • IAS 17 / IFRIC 4 Humber & Spalding tolling arrangements • IAS 32 / IFRIC 2 Consumers’ Waterheater Income Fund • IAS 19 Pensions • IFRS 3 Goodwill • IFRS 2 Shar
Slide 17: Under UK GAAP 2004 earnings were £839m and net assets £2,571m
Under UK GAAP our 2004 earnings* were £839m and net assets at 31 December 2004 were £2,571m £m 2004 earnings* Net assets at 31 December 2004 £m 800 2,500 2,000 600 1,500 839 2,571 400 1,000 200 500 0 0 UK GAAP PRT leases pensions UK GAAP PRT leases pensions * pre-exceptionals & goodwill 17
Slide 18: Deferred PRT calculation takes £48m off 2004 earnings
The change to the calculation of deferred PRT takes £48m off earnings in 2004 and has a small impact on net assets £m £m (48) 19 800 2,500 Higher operating profit £209m 2,000 600 Higher tax charge (£257m) 1,500 839 2,571 400 1,000 200 500 0 0 UK GAAP PRT leases pensions UK GAAP PRT leases pensions 2
Slide 19: Humber & Spalding onto the balance sheet has a small net impact
Bringing Humber & Spalding onto the balance sheet has a small net impact on earnings and the balance sheet £m £m 4 12 800 2,500 Higher operating profit £87m Increased assets £810m 2,000 600 Higher interest (£83m) Increased liabilities (£798m) 1,500 839 2,571 400 1,000 200 500 0 0 UK GAAP PRT leases
Slide 20: Moving to IAS 19 for pensions
We have previously accounted for pensions under SSAP 24. Moving to IAS 19 is in line with previous FRS 17 disclosures £m £m (41) (559) 800 2,500 2,000 600 Increased assets £154m 1,500 Increased liabilities (£713m) 839 2,571 400 1,000 200 500 0 0 UK GAAP PRT leases pensions UK GAAP PRT leases pension
Slide 21: Other impacts on 2004 earnings are minor
The other impacts on 2004 earnings* are minor, giving an overall net impact of £81m (10%) £m (48) 800 4 (41) 4 600 IFRS 5 – discontinued operations £4m IAS 12 – deferred tax £1m IFRS 2 – share schemes (£1m) 839 758 400 200 0 UK GAAP PRT leases pensions other IFRS * pre-exceptionals & goodwill 21
Slide 22: Statutory earnings increase due to goodwill reversal and AA disposal profit
Statutory earnings* increase due to the reversal of previously amortised goodwill and higher IFRS profit on the AA disposal £m 171 1,500 (48) 119 4 (41) 4 1,000 1,382 1,591 500 0 UK GAAP PRT leases pensions other goodwill profit on AA IFRS disposal * post-exceptionals and goodwill 22
Slide 23: Net assets at 31 Dec 2004 reduce by £263m
Net assets at 31 Dec 2004 reduce by £263m mainly as a result of pensions liabilities coming onto the balance sheet 3,000 £m (528) 2,500 230 1 82 (48) 2,000 1,500 2,308 2,571 1,000 500 0 UK GAAP PRT, leases & goodwill other IAS 12 dividend other IFRS pensions recognition 23
Slide 24: Adopting IAS 39 and IAS 32 from 1 January 2005
We are adopting IAS 39 and IAS 32 from 1 January 2005 with an overall impact on net assets of £343m 2,500 £m (79) (11) (9) (244) 2,000 1,500 2,308 1,965 1,000 500 0 UK energy N.America Other IAS 39 Income Fund 24
Slide 25: At 1 January 2005 net cash turns into net debt
At 1 January 2005 the inclusion of liabilities for Humber & Spalding and the Income Fund turns net cash into net debt £m 200 296 (804) 79 0 (217) -200 (513) -400 (974) -600 (5) (244) (461) -800 -1,000 UK GAAP leases other Income Fund IFRS Consumers’ Waterheater Income Fund debt 25
Slide 26: Phil Bentley
Phil Bentley
Slide 27: Summary impact
Summary impact UK GAAP IFRS Full year 2004 (exc. IAS39) Operating profit £1,227m £1,365m Statutory EPS 33.0p 38.0p Adjusted EPS 20.0p 18.1p At 1 Jan 05 Shareholders’ funds £2,352m £1,910m Net cash/(debt) £79m (£974m) - excluding Income Fund £296m (£513m) - Income Fund debt (£217m) (£461m) 27
Slide 28: 2005 dividend under IFRS
2005 dividend under IFRS • Commitment to 50% dividend payout ratio made under UK GAAP • 2005 dividend will honour that commitment based on a combination of: • increase in payout ratio • increase in earnings from 2004 to 2005 • Proposed 2005 dividend per share will be confirmed with our 2005 results
Slide 29: Summary
Summary • IFRS changes some reporting treatments, with impact on: • Asset & liability recognition • Timing of profit recognition • Cash generation unaffected • No impact on business strategy or underlying economics 29
Slide 30: Questions & Answers
Questions & Answers