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22 January 2015

Centrica plc

BUY

Utilities

Upside despite dividend cut

Lawson Steele Analyst

+44 20 3207 7887 [email protected]

Andrew Fisher Analyst


Oliver Salvesen Analyst


Mehul Mahatma Analyst


Centrica plc

Utilities – Energy/Integrated

THE TEAM

Lawson Steele has now covered the utilities sector as an equity analyst for 28 years,

achieving number one rankings going back to 1992. Lawson, together with his colleague Andrew Fisher, has pioneered a different approach to covering utilities which sets them apart from the traditional coverage model and puts the investor at the hub of what they do. Lawson's previous roles covered Europe, Latin America and Global utility strategy, located in both London and New York. He also spent a year covering global telecoms. Most of his

time was spent at UBS with a shorter stint at Execution Noble where he headed up the team. Prior to that, he trained and qualified as a chartered accountant with Price Waterhouse (now Pricewaterhouse Coopers).

Andrew Fisher has 18 years' capital markets experience, the last 16 of which have been as

a utilities analyst (covering both the global and pan-European sector). He has both buy-side and sell-side experience, having previously worked at Barclays Wealth (where he was

head of equity research), Pioneer Investments and Espirito Santo. Andrew joined Berenberg in 2012 and, together with his colleague Lawson Steele, has pioneered a different approach to covering utilities which sets them apart from the traditional coverage model and puts the investor at the hub of what the team does. Andrew has an MBA from Warwick Business School.

Oliver Salvesen joined the Utilities team at Berenberg in February 2013. He previously

worked within prime brokerage at Barclays Capital. He graduated from the University of Cambridge with a first-class degree in Economics.

Mehul Mahatma joined the Utilities research team at Berenberg in December 2013.

Previously, he worked for PricewaterhouseCoopers where he trained and qualified as a chartered Accountant (ACA). He holds a first-class degree in BEng (Hons) Electromechanical Engineering from Aston University, where he was awarded two degree prizes; he has also passed the level 1 CFA exam.

For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG) and our disclaimer please see the end of this document. Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and the disclaimer at the end of this document.

Centrica plc


3

Table of contents

Upside despite dividend cut 4

Investment thesis 5

Centrica plc – investment thesis in pictures 6

Centrica plc – investment thesis 7

Key investment point 1: Oil price pressures leads to significant earnings downgrades 9

Key investment point 2: Downstream profits remain constrained by politics; common-

sense should prevail 12

Key investment point 3: Dividend cut looks likely 15

Key investment point 4: Free cash flow positive after dividends 18

Other key issues 19

Changes to numbers; Berenberg versus consensus 22

Valuation 23

Black-sky/blue-sky scenario 24

Sensitivity analysis 25

Key assumptions 26

Financials 27

Disclosures in respect of section 34b of the German Securities Trading Act

(Wertpapierhandelsgesetz – WpHG) 32

Centrica plc


Upside despite dividend cut

● This is a tough one: Sharply lower oil prices mean a significant cut to earnings estimates and a high likelihood of a dividend cut. If the dividend is to be cut, it might as well be done now (ie announced at FY 2014 results, for the 2015 dividend). In our view, the share price has already fallen to reflect this, even if consensus has not. Despite our downgrades, Centrica is still a good, cash-generative company. It is a risky call but we retain our Buy rating. Our price target falls to 300p per share.

● Decisions, decisions: The first important strategic decision, made by Centrica’s new CEO, Ian Conn, has been a 5% gas tariff cut. The second, should oil and gas prices remain where they are, is a rebasing of the dividend.

● Though damaged, the investment case is not broken: Last year, putting aside our long-running scepticism over the group’s growth aspirations and calculating that the risk of political intervention was discounted has proved painful; oil has hit us for six. Still, while the investment case has changed, it is not broken. We believe that the market is overly pessimistic on political risks. The collapse in the oil price adds a new, unwelcome, dimension. But the share price appears to have already reacted to the prospects of more downgrades and a dividend cut (a brave call, we know).

● Five things stop us from downgrading our rating: The share price has already reacted to the sharp decline in oil prices; Centrica trades at a consensus 6.5% 2015 yield, versus 4.8% for the sector, reflecting dividend cut risks; net debt/EBITDA remains healthy, in our view; the group is still FCF positive, even with lower oil prices; the prospect of a new management strategy tends to whet the market’s appetite, rather than dampen it.

● Valuation: We are reducing our target price to 300p (from 370p), based on a blended valuation. This implies upside across our measures. Our black-sky/blue-sky valuation range is 239p-361p per share.

● Consensus: On the back of lower commodity prices we have cut our earnings and dividend forecasts to the bottom end of expectations. We also believe that the market has adjusted to lower oil prices; EPS consensus must play catch-up. We are 7%/18%/6% below mean consensus for 2015/16/17E.

● Catalysts: CEO outlook (FY results, 19 February); general election (7 May); Competition and Markets Authority investigation (May/December); commodity prices.

22 January 2015

BUY

Current price

Price target

GBp 269

GBp 300 21/01/2015 London Close

Market cap (GBP m) 13,552

Reuters CNA.L

Bloomberg CNA LN

Changes made in this note

Rating: Buy (no change) Price target: GBp 300 (370)

Estimates changes

2014 2015E 2016E

old ∆ % old ∆ % old ∆ %

EBITD

A

3,350 -6.0 3,558 -13.6 3,670 -18.8

EBIT 2,051 -8.3 2,309 -19.4 2,419 -27.0

EPS 21.1 -8.1 24.2 -17.4 25.7 -28.9 Source: Berenberg estimates

Share data

Shares outstanding (m) 5,031 Enterprise value (GBP m) 18,458

Daily trading volume 6,934,450

Key data

Price/book value 2.9

Net gearing 92.0%

CAGR sales 2013-2016 2.6%

CAGR EPS 2013-2016 -2.0%

Y/E 31.12., GBPm 2012 2013 2014E 2015E 2016E

EBITDA 3,904 4,044 3,150 3,075 2,981 EBIT 2,743 2,695 1,881 1,862 1,765 EPS 26.6 26.6 19.4 20.0 18.3 DPS 16.40 17.00 17.34 14.00 14.00 FCF per share 22.3 19.0 17.4 18.8 18.8 Y/E net debt (net cash) 4,274 5,101 4,639 4,272 4,033 EBITDA Growth 16.9% 3.6% -22.1% -2.4% -3.0% EPS Growth 3.1% 0.0% -27.0% 2.9% -8.7% DPS Growth 6.5% 3.7% 2.0% -19.3% 0.0% ROCE 31.4% 29.2% 20.3% 20.1% 19.2% EV/EBITDA 4.7x 4.8x 5.9x 5.8x 6.0x P/E 10.1x 10.1x 13.9x 13.5x 14.8x Dividend Yield 6.1% 6.3% 6.4% 5.2% 5.2% FCF Yield 8.3% 7.0% 6.5% 7.0% 7.0%

Source: Company data, Berenberg

Lawson Steele Analyst +44 20 3207 7887 [email protected]

Andrew Fisher Analyst +44 20 3207 7937 [email protected]

Oliver Salvesen Analyst +44 20 3207 7818 [email protected]

Mehul Mahatma Analyst +44 20 3465 2698 [email protected]

Centrica plc


BUY

Investment thesis

22 January 2015

● The fall in oil prices means significant EPS and DPS downgrades (from 2015 onwards).

● Downstream profits remain constrained by the political

environment.

● Despite our downgrades, the group is still free cash flow positive after dividends.

● While consensus has not yet accommodated the full impact on earnings and the dividend, we believe that the share price has already (largely) adjusted.

● For us, now would be the wrong time to Sell. Of course, in many ways, this is a binary call; Hold is an unsatisfactory option. On balance, we stick with our Buy recommendation.

● Our price target is based on a blend of metrics: a DCF sum-of-the-parts, a dividend discount model and a target P/E and yield.

Current price Price target

GBp 269 GBp 300 Market cap (GBP m) 13,552

21/01/2015 London Close EV (GBP m) 18,458

Trading volume 6,934,450

Free float 99.8%

Non-institutional shareholders Share performance

N/A High 52 weeks GBp 345

Low 52 weeks GBp 261

Business description Performance relative to

Centrica is a leading integrated utility that primarily operates in the UK and North America. The company produces, generates, trades and supplies gas and electricity to a wide range of industrial, commercial and residential customers, and also provides a wide range of energy-related services.

SXXP SX6P

1mth -6.5% -2.0%

3mth -17.5% -11.4%

12mth -20.2% -26.7%

Profit and loss summary

GBPm 2012 2013 2014E 2015E 2016E

Revenues 23,942 26,571 27,311 28,239 28,695 EBITDA 3,904 4,044 3,150 3,075 2,981 EBITA 2,743 2,695 1,881 1,862 1,765 EBIT 2,743 2,695 1,881 1,862 1,765 Associates contribution 134 171 136 159 172 Net interest 209 243 272 260 254 Tax 1,171 699 516 483 472 Minorities 0 0 20 14 16 Net income adj. 1,378 1,370 977 998 911 EPS reported 24.0 18.4 18.2 18.9 17.3 EPS adjusted 26.6 26.6 19.4 20.0 18.3 Year end shares 5,183 5,150 5,031 4,991 4,991 Average shares 5,183 5,150 5,031 4,991 4,991 DPS 16.4 17.0 17.3 14.0 14.0

Cash flow summary

GBPm 2012 2013 2014E 2015E 2016E

Net income 1,378 1,370 938 959 879 Depreciation 1,161 1,349 1,283 1,237 1,240 Working capital changes 68 319 -10 -12 -6 Other non-cash items 213 -98 0 -18 -10 Operating cash flow 2,820 2,940 2,211 2,166 2,103 Capex -1,664 -1,962 -1,337 -1,227 -1,167 FCFE 1,156 978 874 939 937 Acquisitions, disposals -1,175 0 883 300 0 Other investment CF -281 389 0 0 0 Dividends paid -815 -862 -876 -872 -698 Buybacks, issuance 24 -482 -420 0 0 Change in net debt 452 -212 462 367 238 Net debt 4,274 5,101 4,639 4,272 4,033 FCF per share 22.3 19.0 17.4 18.8 18.8

Growth and margins

2012 2013 2014E 2015E 2016E

Revenue growth 4.9% 11.0% 2.8% 3.4% 1.6% EBITDA growth 16.9% 3.6% -22.1% -2.4% -3.0% EBIT growth 13.6% -1.7% -30.2% -1.0% -5.2% EPS adj growth 3.1% 0.0% -27.0% 2.9% -8.7% FCF growth 11.6% -15.4% -10.6% 7.5% -0.3% EBITDA margin 16.3% 15.2% 11.5% 10.9% 10.4% EBIT margin 11.5% 10.1% 6.9% 6.6% 6.1% Net income margin 5.8% 5.2% 3.6% 3.5% 3.2% FCF margin 4.8% 3.7% 3.2% 3.3% 3.3%

Key ratios

2012 2013 2014E 2015E 2016E

Net debt / equity 72.1% 97.0% 101.5% 92.0% 83.8% Net debt / EBITDA 1.0x 1.2x 1.5x 1.4x 1.3x Avg cost of debt 5.3% 5.2% 5.6% 5.8% 6.1% Tax rate 43.8% 41.4% 35.5% 33.5% 34.9% Interest cover 13.1x 11.1x 6.9x 7.1x 6.9x Payout ratio 61.7% 63.9% 89.3% 70.0% 76.7% ROCE 31.4% 29.2% 20.3% 20.1% 19.2% Capex / sales 7.0% 7.4% 4.9% 4.3% 4.1% Capex / depreciation 143.3% 145.4% 104.2% 99.1% 94.0%

Valuation metrics

2012 2013 2014E 2015E 2016E

P / adjusted EPS 10.1x 10.1x 13.9x 13.5x 14.8x P / book value 2.4x 2.6x 3.0x 2.9x 2.8x FCF yield 8.3% 7.0% 6.5% 7.0% 7.0% Dividend yield 6.1% 6.3% 6.4% 5.2% 5.2% EV / sales 0.8x 0.7x 0.7x 0.6x 0.6x EV / EBITDA 4.7x 4.8x 5.9x 5.8x 6.0x EV / EBIT 6.7x 7.1x 9.8x 9.7x 10.1x EV / FCF 15.9x 19.7x 21.1x 19.1x 18.9x EV / cap. employed 1.2x 1.2x 1.3x 1.2x 1.2x

Key risks to our investment thesis

● Continued decline in oil and gas prices

● Political pressure to cut consumer bills, although UK bills compare well to the rest of Europe

● Threat of a dividend cut is not as well acknowledged as we think it is

● Further margin pressure from US incumbents, although this seems to be waning

● Negative outcome from the Competition and Markets Authority investigation: provisional findings May/June 2015; full report November/December 2015.

Lawson Steele Analyst +44 20 3207 7887 [email protected]

Andrew Fisher Analyst +44 20 3207 7937 [email protected]

Oliver Salvesen Analyst +44 20 3207 7818 [email protected]

Mehul Mahatma Analyst +44 20 3465 2698 [email protected]

Centrica plc


6

Centrica plc – investment thesis in pictures

Chart Chart Chart Chart 1111: : : : International Gas EBIT has fallen with the oil priceInternational Gas EBIT has fallen with the oil priceInternational Gas EBIT has fallen with the oil priceInternational Gas EBIT has fallen with the oil price Chart Chart Chart Chart 2222: : : : But is it still FCF positiveBut is it still FCF positiveBut is it still FCF positiveBut is it still FCF positive (£m)(£m)(£m)(£m)

Source: Berenberg estimates Source: Berenberg estimates

Chart 3: 2016 old vChart 3: 2016 old vChart 3: 2016 old vChart 3: 2016 old versusersusersusersus new net income estimatesnew net income estimatesnew net income estimatesnew net income estimates (£m)(£m)(£m)(£m) Chart Chart Chart Chart 3333: Centrica’s : Centrica’s : Centrica’s : Centrica’s net debt/EBITDAnet debt/EBITDAnet debt/EBITDAnet debt/EBITDA remains one of the best in remains one of the best in remains one of the best in remains one of the best in the sectorthe sectorthe sectorthe sector

Source: YouGov Source: Berenberg estimates

Chart Chart Chart Chart 4444: : : : We assume a dividend cut in 2015We assume a dividend cut in 2015We assume a dividend cut in 2015We assume a dividend cut in 2015 (£ per share)(£ per share)(£ per share)(£ per share) Chart Chart Chart Chart 5555: : : : FCF covers future dividend paymentsFCF covers future dividend paymentsFCF covers future dividend paymentsFCF covers future dividend payments (£ per share )(£ per share )(£ per share )(£ per share )

Source: Berenberg estimates, Bloomberg Source: Berenberg estimates

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2012A 2013A 2014E 2015E 2016E 2017E 2018E

International Gas EBITDA (£ m) Achieved oil price (£/boe)

Lifiting cost per barrel (£/boe) (800)

(600)

(400)

(200)

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2012A 2013A 2014E 2015E 2016E 2017E 2018E

International gas FCF

1,289

911

14

289

44

(58)

(598) (19)

(49)

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Net income

previous: 2016

British Gas Upstream Storage International

Downstream

Interest Group tax Other Net income

new: 2016

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0.5x

1.0x

1.5x

2.0x

2.5x

3.0x

3.5x

4.0x

2012A 2013A 2014E 2015E 2016E 2017E 2018E

Economic Net Debt/EBITDA Integrated Utilities Net Debt/EBITDA

-

0.05

0.10

0.15

0.20

0.25

-

0.05

0.10

0.15

0.20

0.25

2004A 2005A 2006A 2007A 2008A 2009A 2010A 2011A 2012A 2013A 2014E 2015E 2016E 2017E 2018E

DPS (Reported) DPS (Forecast) Cons High Cons Low Cons Avg

£0.27 £0.19 £0.20 £0.18 £0.22£0.19 £0.35 £0.25 £0.19 £0.22

£0.170 £0.173

£0.140 £0.140 £0.142

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2013A 2014E 2015E 2016E 2017E

Pe

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ha

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EPS (Berenberg) FCF pre-Div per share DPS

Centrica plc


7

Centrica plc – investment thesis

What’s new: In short, lower oil and gas prices will have a severe impact on profits from International Gas and, to a lesser extent, Power Generation. We downgrade our earnings and dividend forecasts towards the bottom end of the consensus range. The oil price decline has been sharp; so too has the correction in Centrica’s shares.

On the face of it, the headlines of our key investment points are generally bearish, but we highly recommend each section is read. The bottom line is that Centrica faces a number of headwinds but the market has already adjusted, in our view.

TwoTwoTwoTwo----minute summaryminute summaryminute summaryminute summary

The decline in the oil price has certainly put paid to our (and Centrica’s) view that earnings would return to growth this year and (for us) that we were approaching the bottom of the downgrade cycle.

Less than a month into his role as Centrica’s new CEO, Iain Conn and his new (interim) CFO, Jeff Bell, face a crucial decision over the group’s dividend – a dividend which, to date, the group has expressed confidence in being able to grow in real terms.

We believe that the most sensible move for the group is to cut the payment to a more sustainable level. And, while consensus has yet to fully reflect the impact of the fall in oil prices and is yet to fully incorporate the prospects of a dividend cut, we believe the market has already rebased its expectations.

It is a brave call to say things are priced in, especially given the dramatic turnaround in the group’s fortunes over the last 12 months or so. It is even braver to talk about something as important as a dividend cut being priced in but any of the three possible recommendations can be challenged:

● Buy: Oil prices have further to fall; yes the stock trades on a premium yield but the dividend cut is not priced in at all; the only reason to hold Centrica is for its dividend; Labour or the Competition and Markets Authority (CMA) are likely to hammer the group (previous supply-probes were misguided); it is profit warning after profit warning – why should that change?

● Hold: Not really an option given the uncertainty surrounding this company and its end-markets. The dividend cut is either largely discounted (as we suspect) or it is not. The oil price recovers or it stays low/falls further. Supply intervention is either avoided or supply profits take a hit (even if they stay in the middle ground at £400m, the valuation is attractive).

● Sell: The shares have already reacted; consensus is slow to adjust (which it often is, especially on the back of sharp movements in forecasts such as this), the yield already shows that a dividend cut is likely; oil prices will bounce back (optimistic); net debt/EBITDA remains satisfactory and the group is still FCF positive; the new management will cut costs or invoke more dramatic restructuring.

Basically, the recommendation is on a knife edge We have to take a view, though, and, as we highlight above, Hold is not really an option. Below are the reasons why we do not downgrade and maintain our Buy recommendation.

● The share price has reacted, even if consensus has not: The shares have fallen over 10% since the oil price collapse accelerated through November and December 2014, directly or indirectly acknowledging that upstream profits are under pressure.

● The yield: Centrica trades on a 6.5% 2015 yield (based on current consensus forecasts). That, in our view, already reflects the prospects of a dividend cut. To reinforce this view, a 20% dividend cut would mean a yield of c.5%, which puts the group back in line with the sector.

● Balance sheet: Yes, there is pressure from the rating agencies but Centrica’s basic net debt/EBITDA ratio still look satisfactory, especially compared to its European peers.

● Still FCF positive: Despite our downgrades, the group remains free cash flow positive after dividends. Pre-dividends, the group’s free cash flow yield in our forecast EPS trough-year (2016) is 7.1% versus the sector on 4.7%.

Centrica plc


8

● New management: The prospect of a new management team’s strategy generally whets, rather than dampens, the market’s appetite.

Snapshot of the Centrica investment case

Key investment point 1: Oil price pressures leads to significant earnings Key investment point 1: Oil price pressures leads to significant earnings Key investment point 1: Oil price pressures leads to significant earnings Key investment point 1: Oil price pressures leads to significant earnings

downgradesdowngradesdowngradesdowngrades

● Counter measures can help a little from 2015

● International gas would still be free cash flow positive

● Production tax cut is unlikely, especially before the general election

● Other business is improving but cannot make-up the shortfall

● Significant downgrade to earnings estimates

Key investment point 2: Downstream profits remain constrained by politics; Key investment point 2: Downstream profits remain constrained by politics; Key investment point 2: Downstream profits remain constrained by politics; Key investment point 2: Downstream profits remain constrained by politics;

commoncommoncommoncommon----sense should prevailsense should prevailsense should prevailsense should prevail

● Our central scenario is still supply EBIT of c£400m pa

● Extensive and expensive intervention is not a given; common sense should prevail

Key investment point 3: A dividend cut looks highly likelyKey investment point 3: A dividend cut looks highly likelyKey investment point 3: A dividend cut looks highly likelyKey investment point 3: A dividend cut looks highly likely

● Dividend could be sustained out of cash flow but not earnings

● The rating agencies would prefer a cut

● Cut pre- or post-election?

● We assume a 20% cut to the 2015 dividend, announced at February’s FY 2014 results.

● Is a cut already expected? Maybe not by consensus but seemingly by investors

Key investment point 4: Free cash flow positive Key investment point 4: Free cash flow positive Key investment point 4: Free cash flow positive Key investment point 4: Free cash flow positive after dividendsafter dividendsafter dividendsafter dividends

Other key investment points:Other key investment points:Other key investment points:Other key investment points:

● What else will the new management do? Exit North America; cut upstream investment; more disposals?

● Credit downgrade is not the end of the world

● Bord Gáis – incremental EBIT in 2015

● UK generation outlook remains tight

● Outcome of the first UK capacity auction was disappointing

Centrica plc


9

Key investment point 1: Oil price pressures leads to significant earnings downgrades

Oil price evolution ($/bbl)Oil price evolution ($/bbl)Oil price evolution ($/bbl)Oil price evolution ($/bbl) International gas EBIT has fallen with the oil price. International gas EBIT has fallen with the oil price. International gas EBIT has fallen with the oil price. International gas EBIT has fallen with the oil price.

Source: Berenberg Estimates, Bloomberg Source: Berenberg Estimates

Counter measures can help a little from 2015Counter measures can help a little from 2015Counter measures can help a little from 2015Counter measures can help a little from 2015

We have assumed that the group takes some measures to help mitigate the effects of lower revenues. First, we assume some decline in lifting costs, partly as a function of lower energy costs but also as a result of efficiency measures (see chart above). In a 2013 study of the global oil and gas sector, PwC highlighted that in the years immediately following the start of the global financial crisis, when oil prices fell from $145/bbl (June 2008) to $40/bbl (February 2009), there was a “renewed and rapid shift in focus to operating excellence and cost efficiency”. For the following two years, producers were able to bring their per barrel operating costs down.

Additionally, we assume that Centrica will trim back capex (cash flow) and exploration and appraisal costs (P&L and cash flow). Our 2014 forecast capex for “upstream” is £918m (including power generation). By 2016, we expect that to decline to £748m. If oil prices stay at current levels, it could go lower still. We forecast £160m of exploration and appraisal costs for 2014. By 2016, we assume that falls to £120m pa. There will be much less incentive to find new developments; the group may even decide to allow production volumes to erode. However, there may well be more M&A opportunities which allow the group to buy, rather than find, new reserves.

There is a third mitigating effect: the high taxes on oil and gas production mean that the EBIT impact is more pronounced than the impact on net income.

Despite these factors, net income will still be significantly lower as a consequence of lower wholesale prices.

International gas would still be free cash flow positiveInternational gas would still be free cash flow positiveInternational gas would still be free cash flow positiveInternational gas would still be free cash flow positive

With oil and gas capex likely to fall to below £800m a year, the International Gas division would still be FCF positive (see chart below). We expect divisional EBIT to trough at £300m in 2016 as hedges unwind and the full impact of lower prices takes hold; depreciation is roughly £900m a year.

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Jan-12 Jul-12 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15

Brent Oil ($/bbl)

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International Gas EBITDA (£ m) Achieved oil price (£/boe)

Lifiting cost per barrel (£/boe)

Centrica plc


10

InternatInternatInternatInternational gas is still FCF positiveional gas is still FCF positiveional gas is still FCF positiveional gas is still FCF positive

Source: Berenberg estimates

Production tax cut is unlikely, especially before the general electionProduction tax cut is unlikely, especially before the general electionProduction tax cut is unlikely, especially before the general electionProduction tax cut is unlikely, especially before the general election

As producers globally feel the pinch from lower oil prices there have been calls for governments to lower production taxes. The North Sea, where most of Centrica’s production is located, is one of the most highly taxed regions in the world.

However, given the current politics surrounding energy prices in the UK and the looming general election, it is hard to see why the current UK government would want to announce a cut to North Sea production taxes. Giving money back to the production companies at a time when they are being heavily criticised for not passing through falling wholesale prices quickly enough would certainly not be a vote-winner.

Even post-election, with UK energy policy still up in the air, the CMA supply probe ongoing, public finances tight and oil tax revenues down due to lower prices, it is difficult to see political justification for a tax cut. Falling North Sea investment and threats of closures may not be enough.

We are talking a cut to the overall level of production taxes, here, rather than the measures announced in the Chancellor’s Autumn Statement.

Other business is improving but cannot make up the shortfallOther business is improving but cannot make up the shortfallOther business is improving but cannot make up the shortfallOther business is improving but cannot make up the shortfall

Outside upstream and British Gas Residential (Supply), the outlook for Centrica’s other divisions is improving. The exception is storage, which has been in the doldrums for a while. However, storage only makes a minimal contribution to group operating profits.

● British Gas Services and British Gas Business (BGB) should both start to improve with the economy. BGB should also benefit from the investment in a new CRM system.

● Power generation should see profits grow as the UK generation reserve margin continues to decline.

● North America: First, costs of the polar-vortex will drop out of 2015 numbers. Second, recent acquisitions will add further impetus to growth. For us, in the medium term, the jury is still out on the group’s North American strategy. In the short term, though, its forecast increased contribution is welcome.

● Bord Gáis should start to contribute to EBIT from this year.

These businesses alone, though, cannot make up for the expected fall in upstream profits (see chart below). The businesses would have to deliver unrealistic growth to bridge the void.

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2012A 2013A 2014E 2015E 2016E 2017E 2018E

International gas FCF

Centrica plc


11

Extra EBIT required by other divisions toExtra EBIT required by other divisions toExtra EBIT required by other divisions toExtra EBIT required by other divisions to make up the upstream shortfallmake up the upstream shortfallmake up the upstream shortfallmake up the upstream shortfall

Source: Berenberg Estimates

Significant downgrade to earnings estimatesSignificant downgrade to earnings estimatesSignificant downgrade to earnings estimatesSignificant downgrade to earnings estimates

2016 old versus2016 old versus2016 old versus2016 old versus new net income estimates (£m)new net income estimates (£m)new net income estimates (£m)new net income estimates (£m) Berenberg versus consensus EPS (£ per share)Berenberg versus consensus EPS (£ per share)Berenberg versus consensus EPS (£ per share)Berenberg versus consensus EPS (£ per share)

Source: Berenberg Estimates, Bloomberg Source: Berenberg Estimates

Lower oil and gas production forecasts are the principal driver of our earnings downgrades (see bridge chart above). Note that electricity forecasts also come down as a consequence of lower commodity price assumptions and a reduction in spreads. As a consequence, we reduce our earnings forecasts to the bottom end of the consensus range (see above). We are 7%/18%/6% below average EPS forecasts for 2015/16/17.

€ 230 € 296€ 463 € 538

BGR Supply, € 388

Upstream, € 551

Other, € 825

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2016 EBIT 80% Payout 80% Payout + 2% DPSgrowth

70% Payout 70% Payout + 2% DPSgrowth

Extra EBIT required from other divisions (ex BGR Supply) to compensate for fall in Upstream, underdifferent dividend payouts and dividend growth rates

(2013 DPS base: £0.17)

€€ €€mm mm

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911

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Centrica plc


12

Key investment point 2: Downstream profits remain constrained by politics; common-sense should

prevail

The sharp decline in oil and gas prices puts significant pressure on upstream earnings at a time when downstream profits are constrained due to the high-profile political debate over the UK’s energy supply market; an issue which is intensified by the impending general election in May. The energy tariff debate is unlikely to go away; the cost of living and tackling high energy prices in particular are central to Labour’s election strategy.

Our central scenario is still supply EBIT of c£400m paOur central scenario is still supply EBIT of c£400m paOur central scenario is still supply EBIT of c£400m paOur central scenario is still supply EBIT of c£400m pa

We think that the market remains overly pessimistic in terms of the potential outcome of either the election or the CMA referral. We see the risks to supply profits as being balanced, rather than asymmetric. Therefore, we stick with our central scenario:

● Supply profits will remain constrained by politics and below historical levels. As a base case we forecast c£400m supply EBIT pa, versus the pre-“Labour price-freeze pledge” guidance of £600m pa (and a range of £500m-£700m pa). In other words, a one third cut to margin, with no recovery in future years.

● Our blue-sky scenario is a return to £600m supply EBIT pa. In other words, there is no intervention or remedies imposed are more functional (to facilitate competition) than financial.

Our black-sky scenario is a two thirds cut to pre-“Labour price-freeze pledge” guidance; ie £200m supply EBIT pa.

Note: 2015 supply profits may be above £400m (we forecast £441m) principally due to the normalisation of weather conditions.

Extensive and expensive intervention is notExtensive and expensive intervention is notExtensive and expensive intervention is notExtensive and expensive intervention is not a given; common sense should prevaila given; common sense should prevaila given; common sense should prevaila given; common sense should prevail

We have written in detail on the UK energy debate in previous notes. Rather than cover every inch of old ground (see On a firmer footing, 10 March 2014), we have summarised the key points underpinning our view below.

● The potency of Labour’s end-2013 energy tariff freeze pledge has been diluted somewhat by the referral of the industry to the CMA, companies’ decisions to initially announce their own tariff freezes and, most recently, cut tariffs (E.ON gas -3.5%; Centrica gas -5%; and Scottish Power gas -4.8% - we expect the remaining three of the big six to follow suit).

● An outright Labour victory in the election, or a Labour-Lib Dem coalition, presents the biggest risk for the supply companies as both of these potential governments may well try to act before the CMA investigation completes. In the meantime, the Labour Party will continue to put energy at the top of the pre-election debate list.

● In our view, a tariff freeze would be unworkable and, actually, reduce competition (see On a firmer footing, 10 March 2014). Therefore, it is unclear whether the Labour Party could devise a workable plan, in particular, ahead of the CMA publishing its findings (due in November/December 2015).

● The Labour Party may not win the next election (see poll charts below). Political intervention may not, therefore, be as extensive or as direct as the market fears.

http://www.berenberg.de/cgi-bin/content/content.cgi?rm=show_doc&ial=1&sb_userid=0&sb_eventid=0&doc_id=48188


Centrica plc


13

Labour’s lead falling in YouGov pollsLabour’s lead falling in YouGov pollsLabour’s lead falling in YouGov pollsLabour’s lead falling in YouGov polls

Source: Berenberg estimates, YouGov

● We expect common sense to prevail when the CMA report is published. In our previous reports (see On a firmer footing, 10 March 2014) we highlighted that numerous previous reviews (by Ofgem) have found the market may be in need of a helping hand, but is not deliberately smothering competition. Meanwhile, UK energy tariffs actually compare quite well with the rest of Europe. Finally, the bigger picture must also encompass the UK’s need for significant investment in energy infrastructure in the coming years (generation in particular). The companies at the forefront of this investment are the big six energy suppliers. At the same time, too much intervention is likely to put off potential new entrants. At some stage, the current hiatus in investment needs to be broken; a compromise must be found.

ElectrElectrElectrElectricity tariffs: UK versus Europeicity tariffs: UK versus Europeicity tariffs: UK versus Europeicity tariffs: UK versus Europe Gas tariffs: UK versus EuropeGas tariffs: UK versus EuropeGas tariffs: UK versus EuropeGas tariffs: UK versus Europe

Source: Berenberg, VaasaETT Source: Berenberg, VaasaETT

● As with previous supply market reviews, we believe the most likely outcome is a bill of health that reads: “Competition is generally okay, but could do better”.

● The industry has been accused of being non-competitive and even in collusion. This is because firms tend to change energy tariffs within the same windows and by similar magnitudes. For us, this does not reflect a lack of competition. Instead, it reflects the fact that tariffs are driven by powerful common factors; mainly wholesale energy prices and government policy (ie renewable subsidies, green levies and, in the future, capacity payments). These forces are the same for all firms.

● The industry has also been accused of being slow to pass on falling wholesale costs (eg gas and electricity; note the headlines over the last two weeks). This is, in part, due to hedging and, in part, due to the wholesale energy costs only making up part of the total bill (others include network charges, supplier costs and environmental charges). It is also because the companies, historically, have tried to recover lost margin incurred

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Centrica plc


14

during periods when prices have been rising. In other, words, there are numerous other explanations for this beyond anti-competitive behaviour.

● If either the Labour Party or the CMA were to impose harsh sanctions on the industry, and they were of such a magnitude that the margin of the UK’s largest supplier British Gas (Centrica) was cut to zero (or, for that matter, by two thirds), numerous other suppliers (large and small) would struggle to make a profit. They may well leave the industry and competition would take a step backwards.

Centrica plc


15

Key investment point 3: Dividend cut looks likely

The first major act for Centrica’s new CEO Iain Conn (formerly BP Downstream CEO; started 1 January 2015) has been to cut gas tariffs. The next important decision is likely to be over the dividend.

A cut looks highly likely. In fact, it seems inevitable if oil and gas prices do not recover. Consequently, at present, it seems to be more a question of when, rather than if. We assume a 20% cut to 2015 DPS. We also believe there is a reasonable chance that the cut is pre-announced in February’s upcoming FY 2014 results (ie before the general election).

Dividend could be sustainDividend could be sustainDividend could be sustainDividend could be sustained out of cash flow but not earnings ed out of cash flow but not earnings ed out of cash flow but not earnings ed out of cash flow but not earnings

To date, Centrica has maintained its commitment to real dividend growth. It said as such in its November IMS. This can still be achieved for the FY 2014 dividend, with some sacrifice to the payout ratio, which will rise to 89%. However, once the full force of the oil price shock feeds its way into 2015 and 2016 numbers, to sustain the dividend, the group would need to accommodate a payout ratio of close to 100%. At that point, from a shareholder’s perspective at least, you may as well cut anyway, since the market would, more than likely, demand a yield premium to reflect the risk that future dividends will be lower. Just as it is now.

Centrica’s cash fCentrica’s cash fCentrica’s cash fCentrica’s cash flow with a sustained dividendlow with a sustained dividendlow with a sustained dividendlow with a sustained dividend


The rating agencies The rating agencies The rating agencies The rating agencies would prefer a cutwould prefer a cutwould prefer a cutwould prefer a cut

Prior to the oil price collapse, the rating agencies were already demanding action from Centrica to protect its credit rating. The group responded with plans for £1bn of non-core disposals.

The table below summarises the rating agencies’ current view.

Moody’sMoody’sMoody’sMoody’s Standard & Poor’sStandard & Poor’sStandard & Poor’sStandard & Poor’s FitchFitchFitchFitch

Long term ratingLong term ratingLong term ratingLong term rating A3 (negative) A- (negative) A- (stable)

Short term ratingShort term ratingShort term ratingShort term rating P-2 (stable) A-2 (stable) F2 (stable)

With the fall in oil prices that pressure is likely to have increased. Therefore, sustaining the dividend out of free cash flow, even if possible, seems unlikely. Nevertheless, despite downgrades to our estimates, the group’s gearing ratios do not seem particularly bad (see chart below). Compared with the broader European integrated utilities, where average net debt/EBITDA is around 3.2x and the long term target is 3.0x we still believe that the ratio is satisfactory. Of course net debt/EBITDA is a slightly generous measure given the high rates of tax on North Sea oil (then again, that impact is a lot lower in the current low oil price environment).

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DPS Cash Flow (pre dividends)

Centrica plc


16

Centrica’s Centrica’s Centrica’s Centrica’s net debt/EBITDA rationet debt/EBITDA rationet debt/EBITDA rationet debt/EBITDA ratio remainremainremainremains one of the best in the sectors one of the best in the sectors one of the best in the sectors one of the best in the sector


Cut pre or postCut pre or postCut pre or postCut pre or post----election?election?election?election?

A cut to the 2014 dividend (ie before the general election) is not necessary. The group can fulfil the previous management’s (and November’s IMS) pre-oil collapse pledge to deliver real dividend growth from 2014’s results (due on 19 February 2015). From 2015 onward, the impact of lower oil prices will take its toll, though.

So, Centrica can hold on. It can deliver on its previous dividend guidance and keep its fingers crossed that oil and gas prices pick up, Labour does not gain power and intervene in the market and/or the CMA finds the supply market is actually in reasonably good health.

Alternatively, it can send a clear signal. It can remove some of the uncertainty that is haunting this stock. It can communicate that it is feeling the pinch from lower commodity prices and it can rebase its dividend to a level that investors feel is sustainable in the current environment.

In our view, there are a variety of things that Centrica and, for that matter, its peers would want the market, the public and politicians to take notice of, notably that:

● energy companies and their shareholders are facing a squeeze on profits, not windfalls;

● finances and, therefore, investment capacity is limited due to balance sheet constraints, despite the UK’s need for more investment; and

● politics does impact investment

Our verdict: The group would be better to clear the decks and cut the dividend now; set it at a level that looks sustainable even if commodities stay depressed and supply profits remain low forever.

We assume a 20% cut to the 2015 dividend, announced at FebruaryWe assume a 20% cut to the 2015 dividend, announced at FebruaryWe assume a 20% cut to the 2015 dividend, announced at FebruaryWe assume a 20% cut to the 2015 dividend, announced at February’’’’ssss FY 2014 resultsFY 2014 resultsFY 2014 resultsFY 2014 results

Unsurprisingly, in tandem with our EPS cuts, we have also reduced our dividend forecasts to the bottom end of expectations (see chart below). In our view, a new broom should sweep clean. We think that the new management should take the initiative and cut the 2015 dividend sooner rather than later. Better to build a buffer into future dividends, giving the group some headroom were commodities to fall further.

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2012A 2013A 2014E 2015E 2016E 2017E 2018E

Economic Net Debt/EBITDA Integrated Utilities Net Debt/EBITDA

Centrica plc


17

BerenbeBerenbeBerenbeBerenberg DPS forecasts versusrg DPS forecasts versusrg DPS forecasts versusrg DPS forecasts versus consensusconsensusconsensusconsensus


Is a cut already expected? Maybe not by consensus but Is a cut already expected? Maybe not by consensus but Is a cut already expected? Maybe not by consensus but Is a cut already expected? Maybe not by consensus but seeminglyseeminglyseeminglyseemingly by investorsby investorsby investorsby investors

This is the key question. Overall, consensus does not currently reflect a cut, although, the bottom end of forecasts does already assume a cut in 2015.

Nevertheless, we believe that the share price is ahead of the game; well, ahead of consensus at least. Centrica trades on a 6.5% 2015E yield (based on current consensus forecasts). That, in our view, already reflects the prospects of a dividend cut. To reinforce that view, a 20% dividend cut would mean a yield of 5%, which puts the group back in line with the sector.

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Centrica plc


18

Key investment point 4: Free cash flow positive after dividends

This is the most “straightforward” aspect of the investment case. Despite our commodity-based downgrades and the accommodation of a sustained hit to supply profits, we forecast that the group will still be free cash flow positive, post-dividends, even through the 2016 low-point in forecast earnings.

FCF easily covers dividend payments FCF easily covers dividend payments FCF easily covers dividend payments FCF easily covers dividend payments (£ per share)(£ per share)(£ per share)(£ per share)


£0.27 £0.19 £0.20 £0.18 £0.22£0.19 £0.35 £0.25 £0.19 £0.22

£0.170 £0.173

£0.140 £0.140 £0.142

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2013A 2014E 2015E 2016E 2017E

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EPS (Berenberg) FCF pre-Div per share DPS

Centrica plc


19

Other key issues

What else will the new management do? Exit North America; cut upstream What else will the new management do? Exit North America; cut upstream What else will the new management do? Exit North America; cut upstream What else will the new management do? Exit North America; cut upstream

investment; more disposalsinvestment; more disposalsinvestment; more disposalsinvestment; more disposals????

Beyond the dividend and in the current environment, it is too early to say what Centrica’s future strategy will be. However, below are three areas that we believe at least warrant review.

North America: For us, this is an obvious question mark. Progress has been slow and, at times, problematic. We remain long-term sceptics of the growth that can be achieved in the region, given the fragmented nature of the business and the diverse direction and pace of liberalisation across territories. The division’s saving grace is that the limited opportunities that exist in upstream, the North Sea in particular, and the unfriendly political climate in the UK means that further expansion (rather than divestment) in North America may appeal to management. The bottom line is that any strategic review of North American operations will be contingent on the CMA investigation.

Upstream development: Centrica has already been reining in upstream growth recently. Lower oil and gas prices, combined with high North Sea taxation and the more-hostile political climate, are likely to exacerbate this. Lower capex means that production of 80mboe could be the peak for a group that, at one point, was looking at medium-term targets of 100mboe plus. This is not necessarily a bad thing. E&P attracts lower multiples and in the past investors have expressed concerns that the group’s upstream ambitions would damage its valuation. Further divestments of wind and gas assets are also possible depending on how the new management views the political climate and the requirements to defend the current credit rating.

Further disposals: These are very possible in the light of the forecast decline in profits and the spectre of a downgrade to the group’s credit rating.

Still, despite our musings, beyond the dividend we feel that it is unlikely that we will find out about any changes to strategy until later next year. The new management team has a great deal to weigh up first.

Credit downgrade not the end of the worldCredit downgrade not the end of the worldCredit downgrade not the end of the worldCredit downgrade not the end of the world

Centrica’s basic debt metrics do not look too bad and we forecast that it will still be free cash flow positive after dividends, despite our downgrades.

However, the rating agencies have become increasingly concerned about the evolution of political risk in the UK energy market. Consequently, there is increased pressure on Centrica to shore up its credit metrics to maintain its A3/A- rating. This is difficult given the impact of lower commodity prices on the upstream business.

Former CFO Nick Luff commented last year that a one-notch downgrade in itself would not be that significant, although the group would need to post more collateral on some of its trading activities and decommissioning obligations.

Bord GBord GBord GBord Gááááis is is is –––– incremental EBITincremental EBITincremental EBITincremental EBIT

The acquisition of Bord Gáis was completed in June 2014. There will be a small positive impact in H2 2014. Management believes that Bord Gáis will have a positive €40m effect on EBITDA in 2015, resulting in a €30m increase in group EBIT.

UK generation outlook remains tightUK generation outlook remains tightUK generation outlook remains tightUK generation outlook remains tight

A lack of spare generation capacity looks set to remain a feature of the UK market for the foreseeable future. The chart below outlines three different scenarios. In each case, the reserve margin for generation falls below the symbolic 15% threshold this year. The implication of this is that power prices in a normal demand environment should rise.

Below are brief summaries of the three scenarios.

● Reserve base: Capacity is de-rated to reflect intermittency of supply (eg renewables) and new capacity is adjusted for the probability that it will be built (ie dependent on its stage of development).

Centrica plc


20

● Reserve low: This shows operational capacity only, also de-rated for intermittency of supply. It represents the outlook for capacity if no new assets are added to the system. It is useful in the light of the current hiatus in investment created by the political climate.

● Reserve no renew (Op): This is a black-sky scenario. It shows the amount of spare operational capacity in the system, assuming that there is zero availability from renewables. We also assume no new construction. It shows just how much pressure the system might face in the event that the sun does not shine, the wind does not blow and no one invests.

Tightening UK electricity reserve marginTightening UK electricity reserve marginTightening UK electricity reserve marginTightening UK electricity reserve margin

Source: Berenberg estimates, Platts, Bloomberg, industry sources.

Reserve Base assumes plants in operation and under construction (probability weighted). Reserve Low assumes

no new build and de-rates capacity. Reserve No Renew assumes no wind or solar availability and no new build.

Outcome of the first UK capacity auction was disappointingOutcome of the first UK capacity auction was disappointingOutcome of the first UK capacity auction was disappointingOutcome of the first UK capacity auction was disappointing

There are no two ways about it: the outcome of the first UK capacity auction in December 2014 was disappointing. The government procured 49GW of capacity at a clearing price of £19.4/kW, well below market expectations (and our low-end forecast of £25/kW). Of that, only 2.6GW of qualifying capacity was new-build. Not only that, these plants will receive a capacity price well below the £25/kW maximum price for existing plants.

In a way, the result confirmed our suspicions that, for all the detailed analysis that can be done to try to second guess exactly what each marginal plant will require to stay economic, the primary goal is to make sure that capacity exits. In other words, bid low (we have seen similar things in other capacity markets, such as Brazil in the past).

We also believe that the result is symptomatic of the current investment hiatus in the UK caused by the political environment enveloping the power sector. Keep old plants running and do not commit to new investment.

As an aside, Centrica was able to secure capacity payments for one year, from October 2018, for Langage and Humber CCGT plants (both existing). Both plants are up for sale. The attached capacity payment is a bit like selling a house with a new bathroom and kitchen; it should help.

(5%)

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Centrica plc


21

Result of the Result of the Result of the Result of the firstfirstfirstfirst UK cUK cUK cUK capacity auction (December 2014)apacity auction (December 2014)apacity auction (December 2014)apacity auction (December 2014)

Source: DECC

Centrica plc


22

Changes to numbers; Berenberg versus consensus

We have downgraded earnings by 8%/17%/29%/22% for 2014/15/16/17E. From 2015 onwards, the main driver is the impact of lower gas and oil prices on the upstream businesses. For 2014, the drivers are milder weather (downstream and upstream), the economic backdrop (services and business gas), outages at the British Energy fleet and competition (North America).

Estimate changes

Source: Bloomberg

Berenberg versus consensus

Source: Berenberg estimates, Bloomberg

Estimate ChangesEstimate ChangesEstimate ChangesEstimate Changes 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E

EBITDA (New - as reported; £ m)EBITDA (New - as reported; £ m)EBITDA (New - as reported; £ m)EBITDA (New - as reported; £ m) 4,0444,0444,0444,044 3,1503,1503,1503,150 3,0753,0753,0753,075 2,9812,9812,9812,981 3,2713,2713,2713,271

EBITDA (Old - as reported; £ m) 4,044 3,350 3,558 3,670 3,804

Change +0% -6% -14% -19% -14%

EBIT (New - as reported; £ m)EBIT (New - as reported; £ m)EBIT (New - as reported; £ m)EBIT (New - as reported; £ m) 2,6952,6952,6952,695 1,8811,8811,8811,881 1,8621,8621,8621,862 1,7651,7651,7651,765 2,0492,0492,0492,049

EBIT (Old - as reported; £ m) 2,695 2,051 2,309 2,419 2,544

Change +0% -8% -19% -27% -19%

EPS (New - as reported; £)EPS (New - as reported; £)EPS (New - as reported; £)EPS (New - as reported; £) 0.266 0.194 0.200 0.183 0.22

EPS (Old - as reported; £) 0.266 0.211 0.242 0.257 0.280

Change +0% -8% -17% -29% -22%

DPS (New - as reported; £)DPS (New - as reported; £)DPS (New - as reported; £)DPS (New - as reported; £) 0.170 0.173 0.140 0.140 0.14

DPS (Old - as reported; £) 0.170 0.175 0.180 0.186 0.191

Change +0% -1% -22% -25% -26%

Berenberg Forecasts vs ConsensusBerenberg Forecasts vs ConsensusBerenberg Forecasts vs ConsensusBerenberg Forecasts vs Consensus 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E

EBITDA* (£ m)EBITDA* (£ m)EBITDA* (£ m)EBITDA* (£ m) 4,0444,0444,0444,044 3,1503,1503,1503,150 3,0753,0753,0753,075 2,9812,9812,9812,981 3,2713,2713,2713,271

Consensus (Average) 3,965 3,116 3,144 3,254 3,389

Berenberg +/- vs Cons +2% +1% -2% -8% -3%

EBIT* (£ m)EBIT* (£ m)EBIT* (£ m)EBIT* (£ m) 2,6952,6952,6952,695 1,8811,8811,8811,881 1,8621,8621,8621,862 1,7651,7651,7651,765 2,0492,0492,0492,049


Berenberg +/- vs Cons +4% +1% -5% -12% -1%

Net Income* (£ m)Net Income* (£ m)Net Income* (£ m)Net Income* (£ m) 1,3701,3701,3701,370 977977977977 998998998998 911911911911 1,0881,0881,0881,088


Berenberg +/- vs Cons +1% -2% -7% -19% -6%

EPS* (£)EPS* (£)EPS* (£)EPS* (£) 0.266 0.194 0.200 0.183 0.218

Consensus (Average) 0.267 0.199 0.214 0.224 0.231

Berenberg +/- vs Cons -0% -2% -7% -18% -6%

DPS (£)DPS (£)DPS (£)DPS (£) 0.170 0.173 0.140 0.140 0.142

Consensus (Average) 0.172 0.176 0.175 0.180 0.185

Berenberg +/- vs Cons -1% -1% -20% -22% -23%

* Based on company's definition of metric

Centrica plc


23

Valuation

● We value Centrica using a blend of metrics: DCF-based sum-of-the-parts, dividend discount model, target yield and target P/E.

● Our blended price target is 300p/share (12% upside). This offers a total shareholder return of over 17%.

Blended price target (€/share) DCF EV Split (€m)

Source: Berenberg estimates Source: Berenberg estimates using three-year forward EPS CAGR

P/E and EPS CAGR Dividend yield and DPS CAGR

Source: Berenberg estimates using three-year forward EPS CAGR Source: Berenberg estimates using three-year forward DPS CAGR

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SOTP DDM PE Yield

Series1 Price FV

Value £/Share

2015 EV/

EBITDA Method

British Gas 9,463 1.90 9.7 DCF

Upstream 5,275 1.06 3.1 DCF

Storage 433 0.09 7.0 DCF

International Downstream 4,858 0.97 12.0 DCF

Other (196) (0.04) 3.4 DCF

Enterprise Value 19,832 3.97 6.4

Debt (4,474) (0.90) (1.5) 2015E

Provisions - - - 2015E

Other 202 0.04 0.1 2015E

Minorities (65) (0.01) (0.0) 2015E

Liabilities (4,337) (0.87) (1.4)

Equity 15,495 3.10

NOSH 4,991 2015E

Equity per Share 3.10

DPS -

Sum of the Parts 3.10

2015

2016

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2018

2019

2015

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2017

20182019

8.0

9.0

10.0

11.0

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0.0% 5.0% 10.0% 15.0%

Sector Company

20152016

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2019

2015 2016 2017

2018

2019

4.0%

4.5%

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5.5%

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6.5%

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Sector Company

Centrica plc


24

Black-sky/blue-sky scenario

Our black-sky/blue-sky price target range is 239p-361p/share. Our blue-sky valuation gives 34% upside and our black-sky valuation gives 12% downside. Below, we highlight the drivers of our blue-/black-sky scenarios. We consider the impact of UK politics, a change in the UK power price, growth in North America and a change in the gas price.

Price target black-sky/blue-sky scenario (€/share)

Source: Berenberg estimates

-29p

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29p

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269p

300p

361p

239p

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300.0

320.0

340.0

360.0

380.0

Current price Fair Value No PoliticalImpact

+/- 5 £/MWhUK PowerPrice

+/- 5 % NorthAmericanGrowth

+/- 10p /therm Gas

Price

Blue & BlackSky

Centrica plc


25

Sensitivity analysis

The following table highlights Centrica’s key sensitivities.

Sensitivity analysis

Source: Berenberg

SensitivitiesSensitivitiesSensitivitiesSensitivities 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E

EBITDA Sensitivity* toEBITDA Sensitivity* toEBITDA Sensitivity* toEBITDA Sensitivity* to

+/- 1 % British Gas Supply Margin 3.5% 3.7% 4.0% 4.1% 3.7%

+/- 5 % British Gas Services Growth 0.4% 0.4% 0.5% 0.5% 0.5%

+/- 5 £/MWh UK Thermal Spreads 1.1% 0.6% 0.3% 0.3% 0.5%

+/- 5 £/MWh UK Power Price 2.7% 2.5% 2.4% 2.5% 2.5%

+/- 5 p/therm UK Gas Price on N.Sea production 3.2% 3.7% 3.8% 3.9% 3.6%

+/- 5 % North American Growth 0.4% 0.5% 0.7% 0.7% 0.8%

Net Income Sensitivity* toNet Income Sensitivity* toNet Income Sensitivity* toNet Income Sensitivity* to

+/- 1 % British Gas Supply Margin 5.4% 6.2% 6.4% 7.0% 5.8%

+/- 5 % British Gas Services Growth 0.6% 0.7% 0.7% 0.9% 0.8%

+/- 5 £/MWh UK Thermal Spreads 1.7% 1.0% 0.5% 0.5% 0.8%

+/- 5 £/MWh UK Power Price 4.1% 4.3% 3.9% 4.2% 3.9%

+/- 5 p/therm UK Gas Price on N.Sea production 4.5% 5.0% 5.2% 5.5% 4.7%

+/- 5 % North American Growth 0.9% 1.0% 1.3% 1.6% 1.5%

* Ceteris Paribus; e.g. does not take account of hedged positions.

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26

Key assumptions

Key assumptions

Source: Berenberg

Power Price ForecastsPower Price ForecastsPower Price ForecastsPower Price Forecasts 2012A2012A2012A2012A 2013A2013A2013A2013A 2014A2014A2014A2014A 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E 2018E2018E2018E2018E

CountryCountryCountryCountry UnitUnitUnitUnit

UK (Local) £/MWh 45.3 48.0 47.0 48.9 51.0 52.4 55.7

UK (EUR) EUR/MWh 55.0 58.4 58.5 62.6 64.8 66.3 70.4

Germany EUR/MWh 48.4 38.4 35.0 32.2 36.2 42.0 41.9

Nordic EUR/MWh 38.1 39.0 33.1 30.3 32.1 36.4 36.4

Italy EUR/MWh 72.6 65.5 52.9 52.1 45.8 48.2 52.5

Benelux EUR/MWh 48.4 42.4 47.0 42.2 44.0 51.4 51.3

France EUR/MWh 48.4 42.4 47.0 42.2 44.0 51.4 51.3

Spain/Portugal EUR/MWh 52.8 50.0 47.0 46.0 51.1 59.1 59.1

Fuel Price ForecastsFuel Price ForecastsFuel Price ForecastsFuel Price Forecasts 2012A2012A2012A2012A 2013A2013A2013A2013A 2014A2014A2014A2014A 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E 2018E2018E2018E2018E

FuelFuelFuelFuel UnitUnitUnitUnit

Oil (Brent) $/bbl 109.9 107.4 101.9 47.2 62.0 66.6 66.6

Coal $/t 100.5 87.3 78.3 58.0 65.4 75.0 75.0

Gas (Europe LTC) EUR/MWh 28.7 28.1 26.4 26.4 26.4 26.4 26.4

Gas (Italy) EUR/MWh 34.0 28.1 23.2 22.1 22.1 22.1 22.1

Gas (UK) £ £/MWh 20.4 21.5 16.6 15.9 15.4 15.6 16.7

Carbon UK floor £/t 6.2 8.8 14.3 20.0 22.0 24.0 26.0

US Gas Henry Hub $/MWh 9.6 12.8 14.7 10.6 11.6 12.5 13.0

Uranium EUR/MWh 8.5 8.5 8.5 8.5 8.5 8.5 8.5

Carbon EUR/t 7.5 4.8 6.0 8.3 10.0 15.0 15.0

Year end currency ratesYear end currency ratesYear end currency ratesYear end currency rates 2012A2012A2012A2012A 2013A2013A2013A2013A 2014A2014A2014A2014A 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E 2018E2018E2018E2018E

EURGBP 0.81 0.83 0.78 0.78 0.79 0.79 0.79

EURTRY 2.36 2.95 2.83 2.88 3.11 3.11 3.11

EURSEK 8.67 8.85 9.44 9.46 9.48 9.48 9.48

EURUSD 1.33 1.38 1.21 1.18 1.20 1.20 1.20

EURRUB 40.83 45.30 73.50 91.39 102.91 102.91 102.91

EURMXN 16.88 17.92 17.84 17.74 18.42 18.42 18.42

USDBRL 2.08 2.36 2.66 2.94 3.20 3.20 3.20

InflationInflationInflationInflation 2012A2012A2012A2012A 2013A2013A2013A2013A 2014A2014A2014A2014A 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E 2018E2018E2018E2018E

Central Europe 2.6% 2.1% 0.8% 0.2% 1.2% 2.0% 2.0%

Eastern Europe 3.0% 3.0% 3.0% 3.0% 3.0% 3.0% 3.0%

UK 2.8% 2.2% 1.5% 0.7% 1.6% 1.6% 1.6%

Nordic 2.0% 2.0% 0.5% 0.8% 1.3% 1.3% 1.3%

Spain/Portugal 2.4% 2.7% -0.2% -0.7% 0.5% 2.0% 2.0%

US 2.0% 2.0% 1.6% 0.7% 1.7% 1.7% 1.7%

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27

Financials

Income statement

Source: Berenberg

Income Statement (£ m)Income Statement (£ m)Income Statement (£ m)Income Statement (£ m) 2012A2012A2012A2012A 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E

Revenue 23,942 26,571 27,311 28,239 28,695 29,946

Reported EBITDAReported EBITDAReported EBITDAReported EBITDA 3,9043,9043,9043,904 4,0444,0444,0444,044 3,1503,1503,1503,150 3,0753,0753,0753,075 2,9812,9812,9812,981 3,2713,2713,2713,271

Change +17% +4% -22% -2% -3% +10%

Margin +16% +15% +12% +11% +10% +11%

Depreciation (1,161) (1,349) (1,283) (1,237) (1,240) (1,245)

Other OPEX - - 13 24 24 24

Reported EBITReported EBITReported EBITReported EBIT 2,7432,7432,7432,743 2,6952,6952,6952,695 1,8811,8811,8811,881 1,8621,8621,8621,862 1,7651,7651,7651,765 2,0492,0492,0492,049

Change +14% -2% -30% -1% -5% +16%

Margin +11% +10% +7% +7% +6% +7%

Net Financial Expenses (209) (243) (272) (260) (254) (241)

Tax (1,171) (699) (516) (483) (472) (587)

Other 15 (383) (96) (106) (111) (116)

Minorities - - (20) (14) (16) (17)

Reported Net IncomeReported Net IncomeReported Net IncomeReported Net Income 1,3781,3781,3781,378 1,3701,3701,3701,370 977977977977 998998998998 911911911911 1,0881,0881,0881,088

Change +3% -1% -29% +2% -9% +19%

Margin +6% +5% +4% +4% +3% +4%

Number of Shares 5,183 5,150 5,031 4,991 4,991 4,991

Per Share:Per Share:Per Share:Per Share:

Basic EPS 0.240 0.184 0.182 0.189 0.173 0.209

Change +193% -23% -1% +4% -9% +21%

Reported EPSReported EPSReported EPSReported EPS 0.2660.2660.2660.266 0.2660.2660.2660.266 0.1940.1940.1940.194 0.2000.2000.2000.200 0.1830.1830.1830.183 0.2180.2180.2180.218

Change +3% +0% -27% +3% -9% +19%

DPSDPSDPSDPS 0.1640.1640.1640.164 0.1700.1700.1700.170 0.1730.1730.1730.173 0.1400.1400.1400.140 0.1400.1400.1400.140 0.1420.1420.1420.142

Change +6% +4% +2% -19% +0% +1%

Payout 62% 64% 89% 70% 77% 65%

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28

Divisional EBITDA

Source: Berenberg

British Gas (£ m)British Gas (£ m)British Gas (£ m)British Gas (£ m) 2012A2012A2012A2012A 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E

RevenueRevenueRevenueRevenue 13,85713,85713,85713,857 14,22614,22614,22614,226 11,67811,67811,67811,678 12,37212,37212,37212,372 12,22912,22912,22912,229 12,16312,16312,16312,163

Change +12% +3% -18% +6% -1% -1%

% Group +58% +54% +43% +44% +43% +41%

EBITDAEBITDAEBITDAEBITDA 1,1711,1711,1711,171 1,1341,1341,1341,134 909909909909 972972972972 952952952952 981981981981

Change +10% -3% -20% +7% -2% +3%

Margin +8% +8% +8% +8% +8% +8%

% Group +30% +28% +29% +32% +32% +30%

EBITEBITEBITEBIT 1,0931,0931,0931,093 1,0301,0301,0301,030 804804804804 867867867867 846846846846 874874874874

Change +9% -6% -22% +8% -2% +3%

Margin +8% +7% +7% +7% +7% +7%

% Group +40% +38% +43% +47% +48% +43%

Upstream (£ m)Upstream (£ m)Upstream (£ m)Upstream (£ m) 2012A2012A2012A2012A 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E


Change -1% +17% -6% -9% -6% +6%

% Group +21% +23% +20% +18% +17% +17%

EBITDAEBITDAEBITDAEBITDA 2,2022,2022,2022,202 2,4202,4202,4202,420 1,9221,9221,9221,922 1,6921,6921,6921,692 1,5741,5741,5741,574 1,7711,7711,7711,771

Change +30% +10% -21% -12% -7% +13%

Margin +43% +40% +34% +33% +33% +35%

% Group +56% +60% +61% +55% +53% +54%

EBITEBITEBITEBIT 1,2511,2511,2511,251 1,3261,3261,3261,326 879879879879 669669669669 551551551551 746746746746

Change +22% +6% -34% -24% -18% +35%

Margin +24% +22% +16% +13% +11% +15%

% Group +46% +49% +47% +36% +31% +36%

Storage (£ m)Storage (£ m)Storage (£ m)Storage (£ m) 2012A2012A2012A2012A 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E

RevenueRevenueRevenueRevenue 202202202202 188188188188 146146146146 157157157157 161161161161 165165165165

Change +10% -7% -22% +7% +2% +2%

% Group +1% +1% +1% +1% +1% +1%

EBITDAEBITDAEBITDAEBITDA 119119119119 93939393 51515151 62626262 66666666 70707070

Change +13% -22% -45% +21% +6% +6%

Margin +59% +49% +35% +39% +41% +42%

% Group +3% +2% +2% +2% +2% +2%

EBITEBITEBITEBIT 89898989 63636363 21212121 32323232 35353535 39393939

Change +19% -29% -67% +51% +12% +10%

Margin +44% +34% +14% +20% +22% +24%

% Group +3% +2% +1% +2% +2% +2%

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29

Divisional EBITDA (continued)

Source: Berenberg

North America (£ m)North America (£ m)North America (£ m)North America (£ m) 2012A2012A2012A2012A 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E


Change -7% +29% +52% +7% +8% +8%

% Group +24% +28% +41% +42% +45% +47%

EBITDAEBITDAEBITDAEBITDA 371371371371 362362362362 300300300300 406406406406 446446446446 506506506506

Change -14% -2% -17% +35% +10% +13%

Margin +7% +5% +3% +3% +3% +4%

% Group +10% +9% +10% +13% +15% +15%

EBITEBITEBITEBIT 310310310310 276276276276 195195195195 327327327327 366366366366 424424424424

Change -1% -11% -29% +67% +12% +16%

Margin +5% +4% +2% +3% +3% +3%

% Group +11% +10% +10% +18% +21% +21%

Other* (£ m)Other* (£ m)Other* (£ m)Other* (£ m) 2012A2012A2012A2012A 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E

EBITDAEBITDAEBITDAEBITDA 41414141 35353535 (32)(32)(32)(32) (57)(57)(57)(57) (57)(57)(57)(57) (57)(57)(57)(57)

o/w Unallocated Cost Savings - - - - - -

o/w Unallocated Aqn / Disp - - (32) (57) (57) (57)

% Group +1% +1% -1% -2% -2% -2%

EBITEBITEBITEBIT ---- ---- (19)(19)(19)(19) (33)(33)(33)(33) (33)(33)(33)(33) (33)(33)(33)(33)

o/w Unallocated Cost Savings - - - - - -

o/w Unallocated Aqn / Disp - - (19) (33) (33) (33)

% Group +0% +0% -1% -2% -2% -2%

* Includes, if applicable, other group income/costs and unallocated cost savings, CAPEX returns and acquisitions and disposals

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Cash flow statement

Source: Berenberg

Cash Flow (£ m)Cash Flow (£ m)Cash Flow (£ m)Cash Flow (£ m) 2012A2012A2012A2012A 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E

Net Income 1,378 1,370 938 959 879 1,061

Depreciation 1,161 1,349 1,283 1,237 1,240 1,245

Working Capital 68 319 (10) (12) (6) (16)

Other Operating Cash Flow 213 (98) - (18) (10) (12)

Operating Cash FlowOperating Cash FlowOperating Cash FlowOperating Cash Flow 2,8202,8202,8202,820 2,9402,9402,9402,940 2,2112,2112,2112,211 2,1662,1662,1662,166 2,1032,1032,1032,103 2,2782,2782,2782,278

CAPEX (1,664) (1,962) (1,337) (1,227) (1,167) (1,167)

FCF (Post CAPEX)FCF (Post CAPEX)FCF (Post CAPEX)FCF (Post CAPEX) 1,1561,1561,1561,156 978978978978 874874874874 939939939939 937937937937 1,1121,1121,1121,112

Acquisitions and Disposals (1,175) - 883 300 - -

FCF (p. CAPEX, Aq&D)FCF (p. CAPEX, Aq&D)FCF (p. CAPEX, Aq&D)FCF (p. CAPEX, Aq&D) (19)(19)(19)(19) 978978978978 1,7581,7581,7581,758 1,2391,2391,2391,239 937937937937 1,1121,1121,1121,112

Other Investment Cash Flow 281 (389) - - - -

Dividends (815) (862) (876) (872) (698) (698)

FCF (p. CAPEX, Aq&D, Divs)FCF (p. CAPEX, Aq&D, Divs)FCF (p. CAPEX, Aq&D, Divs)FCF (p. CAPEX, Aq&D, Divs) (553)(553)(553)(553) (273)(273)(273)(273) 882882882882 367367367367 238238238238 413413413413

Buybacks and Equity Issuance 24 (482) (420) - - -

Borrowings 1,196 809 - - - -

Other Financing, Disc and FX (215) (266) - - - -

Net Change in Group CashNet Change in Group CashNet Change in Group CashNet Change in Group Cash 452452452452 (212)(212)(212)(212) 462462462462 367367367367 238238238238 413413413413

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Balance sheet statement

Source: Berenberg

Balance Sheet (£ m)Balance Sheet (£ m)Balance Sheet (£ m)Balance Sheet (£ m) 2012A2012A2012A2012A 2013A2013A2013A2013A 2014E2014E2014E2014E 2015E2015E2015E2015E 2016E2016E2016E2016E 2017E2017E2017E2017E

Intangible Fixed Assets 4,122 4,724 4,724 4,724 4,724 4,724

PP&E 7,965 7,446 6,492 6,181 6,107 6,028

Other Non-Current Assets 3,725 3,547 3,547 3,547 3,547 3,547

Total Non-Current AssetsTotal Non-Current AssetsTotal Non-Current AssetsTotal Non-Current Assets 15,81215,81215,81215,812 15,71715,71715,71715,717 14,76314,76314,76314,763 14,45214,45214,45214,452 14,37814,37814,37814,378 14,29914,29914,29914,299

Inventories and Receivables 4,880 5,976 6,142 6,351 6,454 6,735

Cash 931 719 1,181 1,548 1,787 2,200

Other Liquid Assets 7 9 9 9 9 9

Other Current Assets 322 724 724 724 724 724

Assets Held for Sale - 301 - - - -

Total Current AssetsTotal Current AssetsTotal Current AssetsTotal Current Assets 6,1406,1406,1406,140 7,7297,7297,7297,729 8,0578,0578,0578,057 8,6328,6328,6328,632 8,9738,9738,9738,973 9,6689,6689,6689,668

Total AssetsTotal AssetsTotal AssetsTotal Assets 21,95221,95221,95221,952 23,44623,44623,44623,446 22,81922,81922,81922,819 23,08423,08423,08423,084 23,35123,35123,35123,351 23,96723,96723,96723,967

Short-Term Debt (566) (859) (859) (859) (859) (859)

Payables (4,545) (5,630) (5,787) (5,983) (6,080) (6,345)

Provisions (266) (258) (258) (258) (258) (258)

o/w Nuclear Liabilities - - - - - -

o/w Pensions - - - - - -

o/w Other Provisions (266) (258) (258) (258) (258) (258)

Other Current Liabilities (1,209) (1,151) (1,151) (1,151) (1,151) (1,151)

Liabilities of Businesses Held for Sale - (99) - - - -

Total Current LiabilitiesTotal Current LiabilitiesTotal Current LiabilitiesTotal Current Liabilities (6,586)(6,586)(6,586)(6,586) (7,997)(7,997)(7,997)(7,997) (8,055)(8,055)(8,055)(8,055) (8,251)(8,251)(8,251)(8,251) (8,348)(8,348)(8,348)(8,348) (8,613)(8,613)(8,613)(8,613)

Long-Term Debt (4,762) (5,172) (5,172) (5,172) (5,172) (5,172)

Provisions (2,646) (3,099) (3,099) (3,099) (3,099) (3,099)

o/w Nuclear Liabilities - - - - - -

o/w Pensions (83) - - - - -

o/w Other Provisions (2,563) (3,099) (3,099) (3,099) (3,099) (3,099)

Other Non-Current Liabilities (2,031) (1,921) (1,921) (1,921) (1,921) (1,921)

Total Non-Current LiabilitiesTotal Non-Current LiabilitiesTotal Non-Current LiabilitiesTotal Non-Current Liabilities (9,439)(9,439)(9,439)(9,439) (10,192)(10,192)(10,192)(10,192) (10,192)(10,192)(10,192)(10,192) (10,192)(10,192)(10,192)(10,192) (10,192)(10,192)(10,192)(10,192) (10,192)(10,192)(10,192)(10,192)

Shareholders' Equity (5,927) (5,192) (4,507) (4,576) (4,746) (5,097)

Minorities - (65) (65) (65) (65) (65)

Total EquityTotal EquityTotal EquityTotal Equity (5,927)(5,927)(5,927)(5,927) (5,257)(5,257)(5,257)(5,257) (4,572)(4,572)(4,572)(4,572) (4,641)(4,641)(4,641)(4,641) (4,811)(4,811)(4,811)(4,811) (5,162)(5,162)(5,162)(5,162)

Total Liabilities and EquityTotal Liabilities and EquityTotal Liabilities and EquityTotal Liabilities and Equity (21,952)(21,952)(21,952)(21,952) (23,446)(23,446)(23,446)(23,446) (22,819)(22,819)(22,819)(22,819) (23,084)(23,084)(23,084)(23,084) (23,351)(23,351)(23,351)(23,351) (23,967)(23,967)(23,967)(23,967)

Net Debt (As Reported) 4,047 5,049 4,587 4,220 3,981 3,568

Economic Net Debt 4,274 5,101 4,639 4,272 4,033 3,620

Net Debt / EBITDA (As Reported) 1.0 1.2 1.5 1.4 1.3 1.1

Economic Net Debt / EBITDA 1.1 1.3 1.5 1.4 1.4 1.1

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Please note that the use of this research report is subject to the conditions and restrictions set forth in the “General invePlease note that the use of this research report is subject to the conditions and restrictions set forth in the “General invePlease note that the use of this research report is subject to the conditions and restrictions set forth in the “General invePlease note that the use of this research report is subject to the conditions and restrictions set forth in the “General investmentstmentstmentstment----related related related related disclosures” and the “Legal disclaimer” at the end of this document. disclosures” and the “Legal disclaimer” at the end of this document. disclosures” and the “Legal disclaimer” at the end of this document. disclosures” and the “Legal disclaimer” at the end of this document.

For analyst certification and remarks regardinFor analyst certification and remarks regardinFor analyst certification and remarks regardinFor analyst certification and remarks regarding foreign investors and countryg foreign investors and countryg foreign investors and countryg foreign investors and country----specific disclosures, please refer to the respective specific disclosures, please refer to the respective specific disclosures, please refer to the respective specific disclosures, please refer to the respective paragraph at the end of this document.paragraph at the end of this document.paragraph at the end of this document.paragraph at the end of this document.

Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz ––––

WpHG)WpHG)WpHG)WpHG)

CompanyCompanyCompanyCompany DisclosuresDisclosuresDisclosuresDisclosures Centrica plc no disclosures (1) Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) and/or its affiliate(s) was Lead Manager or Co-

Lead Manager over the previous 12 months of a public offering of this company. (2) The Bank acts as Designated Sponsor for this company. (3) Over the previous 12 months, the Bank and/or its affiliate(s) has effected an agreement with this company for investment

banking services or received compensation or a promise to pay from this company for investment banking services. (4) The Bank and/or its affiliate(s) holds 5% or more of the share capital of this company. (5) The Bank holds a trading position in shares of this company. Historical price target and rating changes for Centrica plc in the last 12 montHistorical price target and rating changes for Centrica plc in the last 12 montHistorical price target and rating changes for Centrica plc in the last 12 montHistorical price target and rating changes for Centrica plc in the last 12 months (full coverage)hs (full coverage)hs (full coverage)hs (full coverage) DateDateDateDate Price target Price target Price target Price target ---- GBpGBpGBpGBp RatingRatingRatingRating Initiation of coverageInitiation of coverageInitiation of coverageInitiation of coverage

10 March 14 365.00 Buy 05 December 11

18 August 14 370.00 Buy

22 January 15 300.00 Buy Berenberg Equity Research ratings distribution and in proportion to investment banking services, Berenberg Equity Research ratings distribution and in proportion to investment banking services, Berenberg Equity Research ratings distribution and in proportion to investment banking services, Berenberg Equity Research ratings distribution and in proportion to investment banking services, as of 1 October 2014as of 1 October 2014as of 1 October 2014as of 1 October 2014 Buy 46.82 % 69.23 % Sell 14.78 % 3.85 % Hold 38.40 % 26.92 %

Valuation basis/rating keyValuation basis/rating keyValuation basis/rating keyValuation basis/rating key The recommendations for companies analysed by Berenberg’s Equity Research department are made on an absolute basis for which the following three-step rating key is applicable:

Buy:Buy:Buy:Buy: Sustainable upside potential of more than 15% to the current share price within 12 months;

Sell:Sell:Sell:Sell: Sustainable downside potential of more than 15% to the current share price within 12 months;

Hold:Hold:Hold:Hold: Upside/downside potential regarding the current share price limited; no immediate catalyst visible.

NB: During periods of high market, sector, or stock volatility, or in special situations, the recommendation system criteria may be breached temporarily.

Competent supervisory authorityCompetent supervisory authorityCompetent supervisory authorityCompetent supervisory authority

Bundesanstalt für Finanzdienstleistungsaufsicht -BaFin- (Federal Financial Supervisory Authority),

Graurheindorfer Straße 108, 53117 Bonn and Marie-Curie-Str. 24-28, 60439 Frankfurt am Main, Germany.

General investmentGeneral investmentGeneral investmentGeneral investment----related disclosuresrelated disclosuresrelated disclosuresrelated disclosures Joh. Berenberg, Gossler & Co. KG (hereinafter referred to as “the Bank”) has made every effort to carefully research all information contained in this financial analysis. The information on which the financial analysis is based has been obtained from sources which we believe to be reliable such as, for example, Thomson Reuters, Bloomberg and the relevant specialised press as well as the company which is the subject of this financial analysis.

Only that part of the research note is made available to the issuer (who is the subject of this analysis) which is necessary to properly reconcile with the facts. Should this result in considerable changes a reference is made in the research note.

Opinions expressed in this financial analysis are our current opinions as of the issuing date indicated on this document. The

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companies analysed by the Bank are divided into two groups: those under “full coverage” (regular updates provided); and those under “screening coverage” (updates provided as and when required at irregular intervals).

The functional job title of the person/s responsible for the recommendations contained in this report is “Equity Research Analyst” unless otherwise stated on the cover.

The following internet link provides further remarks on our financial analyses:The following internet link provides further remarks on our financial analyses:The following internet link provides further remarks on our financial analyses:The following internet link provides further remarks on our financial analyses: http://www.berenberg.de/research.html?&L=1&no_cache=1http://www.berenberg.de/research.html?&L=1&no_cache=1http://www.berenberg.de/research.html?&L=1&no_cache=1http://www.berenberg.de/research.html?&L=1&no_cache=1

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On no account should the document be regarded as a substitute for the recipient procuring information for himself/herself or exercising his/her own judgements.

The document has been produced for information purposes for institutional clients or market professionals.

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Analyst certificationAnalyst certificationAnalyst certificationAnalyst certification I, Lawson Steele, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein.

In addition, I hereby certify that no part of my compensation was, is, or will be, directly or indirectly related to the specific recommendations or views expressed in this research report, nor is it tied to any specific investment banking transaction performed by the Bank or its affiliates.

I, Andrew Fisher, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein.


I, Oliver Salvesen, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein.


I, Mehul Mahatma, hereby certify that all of the views expressed in this report accurately reflect my personal views about any and all of the subject securities or issuers discussed herein.


Remarks regarding foreign inveRemarks regarding foreign inveRemarks regarding foreign inveRemarks regarding foreign investorsstorsstorsstors The preparation of this document is subject to regulation by German law. The distribution of this document in other jurisdictions may be restricted by law, and persons into whose possession this document comes should inform themselves about, and observe, any such restrictions.

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Centrica plc


34

United StUnited StUnited StUnited States of Americaates of Americaates of Americaates of America This document has been prepared exclusively by the Bank. Although Berenberg Capital Markets LLC, an affiliate of the Bank and registered US broker-dealer, distributes this document to certain customers, Berenberg Capital Markets LLC does not provide input into its contents, nor does this document constitute research of Berenberg Capital Markets LLC. In addition, this document is meant exclusively for institutional investors and market professionals, but not for private customers. It is not for distribution to or the use of private investors or private customers.

This document is classified as objective for the purposes of FINRA rules. Please contact Berenberg Capital Markets LLC (+1 617 292 8200) if you require additional information.

ThirdThirdThirdThird----party research disclosures party research disclosures party research disclosures party research disclosures CompanyCompanyCompanyCompany DisclosuresDisclosuresDisclosuresDisclosures Centrica plc no disclosures (1) Berenberg Capital Markets LLC owned 1% or more of the outstanding shares of any class of the subject company by the end

of the prior month.* (2) Over the previous 12 months, Berenberg Capital Markets LLC has managed or co-managed any public offering for the subject

company.* (3) Berenberg Capital Markets LLC is making a market in the subject securities at the time of the report. (4) Berenberg Capital Markets LLC received compensation for investment banking services in the past 12 months, or expects to

receive such compensation in the next 3 months.* (5) There is another potential conflict of interest of the analyst or Berenberg Capital Markets LLC, of which the analyst knows

or has reason to know at the time of publication of this research report.

* For disclosures regarding affiliates of Berenberg Capital Markets LLC please refer to the ‘Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz – WpHG)’ section above.

CopyrightCopyrightCopyrightCopyright The Bank reserves all the rights in this document. No part of the document or its content may be rewritten, copied, photocopied or duplicated in any form by any means or redistributed without the Bank’s prior written consent.

© May 2013 Joh. Berenberg, Gossler & Co. KG

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