Annual Financial Report

Annual Financial Report

Centrica plc

27 March 2014

Centrica plc (the Company)

Annual Report and Accounts 2013

Further to the release of the Company's preliminary results announcement on 20 February 2014, the Company announces that it has today published its Annual Report and Accounts 2013 (Annual Report 2013).

The Company also announces that it has today posted to shareholders the Notice of an Annual General Meeting to be held at 2.00 p.m. on Monday, 12 May 2014 at the Queen Elizabeth II Conference Centre, London SW1.

In accordance with Listing Rule 9.6.1, copies of the following documents have been submitted to the UK Listing Authority and will shortly be available for inspection from the National Storage Mechanism, which can be accessed at www.hemscott.com/nsm.do:

• Annual Report and Accounts 2013
• Annual Review 2013
• Notice of Annual General Meeting 2014

The above documents may be viewed online at www.centrica.com/report2013 and are also available to download at www.centrica.com/report2013downloads.

A condensed set of the Company’s financial statements and information on important events that have occurred during the financial year and their impact on the financial statements, were included in the preliminary results announcement released on 20 February 2014. That information, together with the information set out below, which is extracted from the Annual Report 2013, is provided in accordance with the Disclosure and Transparency Rule 6.3.5 which is required to be communicated to the media in full unedited text through a Regulatory Information Service. This information should be read in conjunction with the Company’s preliminary results announcement. This announcement is not a substitute for reading the full Annual Report 2013. Page and note references in the text below refer to page numbers and note numbers in the Annual Report 2013.

Principle Risks and Uncertainties

We are operating in a challenging environment where levels of trust between the UK energy sector and society have fallen steeply. To help restore that trust, and in doing so help to ensure the successful implementation of our strategic priorities, we must continue to focus on the principal risks that affect our business and make effective decisions based on our assessment of those risks.

The following risks could impact our future performance. The list is not exhaustive and items are not prioritised. The list, and the nature of the risks, may change during the year.

Commodity costs

What are the risks?

A significant proportion of our profitability and price competitiveness is dependent upon our ability to manage exposure to increasingly volatile world energy markets including wholesale commodity prices for gas, oil, coal, carbon and power.

The price of gas in the UK market is particularly important for us given that we supply a significant proportion of Britain’s gas needs. This position sets us apart from the other counterparts in the UK market; however, we produce less gas from our own resources than we require to meet the demand from the markets we serve. As the country secures an increasing proportion of gas from abroad, its price and availability will be increasingly shaped by international forces.

Shale gas has already transformed the US energy market where an immediate effect has been to lower wholesale gas prices and weaken the traditional links between gas and oil prices. The low cost of natural gas may present new risks to us as barriers to entry are lowered and margins tightened requiring cost-efficiency and the development of innovative products to support them.

Seasonal variations and, in the short to medium term, economic conditions both in Europe and globally, make it difficult to forecast future energy demand, leading to significant uncertainties around commodity prices and the potential to leave us with a surplus of gas, which would have to be sold back to the wholesale market at a loss.

Longer-term commodity price increases or decreases may require us to change the price at which we sell energy. We may not be able to pass through all increases in commodity prices to customers. If we do pass increased commodity prices on, or fail to pass on decreased commodity prices, those customers may seek to switch to competitors.

Commodity price decreases may also reduce upstream gas and oil production profits and over the longer term may make certain exploration and development projects uneconomic. In addition, investment decisions (particularly in respect of upstream assets) are based upon evaluations underpinned by forecasts of longer-term commodity price development. Assets, including goodwill, may be impaired if discounted future cash flows from such assets are insufficient to cover their cost on the balance sheet.

If we are unable to successfully manage our exposure to fluctuating commodity prices, our competitive position could be negatively impacted and our business, financial condition, reputation and results of operations could be adversely affected.

The Group also incurs liabilities and costs associated with the decommissioning of oil, gas and storage fields. Decommissioning costs could exceed the Group’s estimated costs and we may be required to provide greater security for these costs than expected, which could have a material adverse effect on our overall financial condition.

How do we manage these risks?

• We have an active hedging programme and track supplier risks through robust governance frameworks to ensure an affordable security of supply.
• Strategic investment decisions are made within a capital allocation framework designed to ensure that proposals are rigorously evaluated prior to acquisition and that they meet Board-approved financial criteria over the lifetime of the project.
• We continue to selectively invest in assets around our existing hubs, while managing costs, looking to divest non-core assets, delivering new projects and purchasing stakes in other assets.
• The gas supply relationships with Statoil and Gazprom and the new gas agreements signed with Cheniere and Qatargas to import LNG, as well as the purchase of additional assets such as the Canadian gas and oil assets from Suncor, are examples of how we continue to develop our portfolio, support North American downstream operations through contractual arrangements rather than asset ownership and make progress accessing new markets and securing new sources of gas.
• The Group’s estimates of the cost of decommissioning are reviewed periodically and are based on proven and probable reserves, price levels, the general economic performance of each asset and decommissioning technology.

Political and regulatory intervention

What are the risks?

The markets in which we operate are already subject to detailed legislation and regulation across different jurisdictions. This complex structure is continually evolving and any changes or uncertainty, or ineffective or incomplete implementation of any new obligations could adversely affect our current market operations and have adverse consequences on the viability of investment in new technologies and the development of assets. Any failure or perceived failure by us to comply with such developments or related requirements could have a negative impact on our brands, operations and reputation.

The energy industry and markets expect to be subject to increased political scrutiny in the lead-up to the 2015 UK general election. This could result in manifesto pledges that do not translate well into considered policy which in turn could result in sharp fluctuations in investor confidence, an increase in the cost of capital and a reduction in the credit worthiness of energy buyers due to the uncertainty this creates.

In the event that Scotland was to become independent following the referendum, some of our upstream assets could be subject to a new fiscal regime. Our downstream businesses could also be subject to policy and regulatory decisions of an independent Scotland. While the outcome and impact of this referendum remains uncertain, this could have impacts on our operational and financial results.

Any failure to follow our Group Business Principles of operating professionally, fairly and with integrity, or the public perception that there has been such a failure or other real or perceived failures of governance or regulatory compliance, could further undermine public trust in our business. This could lead to increased political and regulatory intervention, harm our reputation, damage our consumer brands and adversely affect investor confidence, our business, results of operations and overall financial condition.

How do we manage these risks?

• Our Group Business Principles, policy framework and corporate responsibility framework govern how we conduct our affairs.
• We proactively engage with our stakeholders, including government, legislators and regulators in order to shape proposals and manage risks.
• Our Corporate Responsibility and supply chain teams work closely with each part of our business to set and implement policy, strengthen internal processes and responsible procurement throughout our third party contracts.

Health, safety, environment and security (HSES)

What are the risks?

There are inherent hazards in our operations, in particular those relating to oil and gas exploration, production, transportation and storage and power generation. This includes non-controlled interests in organisations with which we contract. The management of these assets is also subject to various laws and regulations.

In addition, our engineers visit customer premises to undertake essential repair and maintenance work on gas and electrical installations, appliances and plumbing and drain services.

Security events such as malicious attacks, criminal or activist activity can also cause disruption to our operations.

Failure to manage risks arising from these operations could result in major injuries and/or loss of life, to staff, contractors and/or members of the public, significant disruption to production or services, damage to our reputation, environmental damage and loss of shareholder value. The cost related to the recovery, clean up and/or resultant litigation could have a material financial impact.

How do we manage these risks?

• The management of HSES risk is overseen by the Board and Executive Committee and remains one of our core priorities with a continued focus across all our assets and operations.
• We undertake regular reviews and independent assessment of the processes in place to manage these risks to ensure they remain effective and continue to develop. This includes any third parties involved in our operations, building strong relationships and supporting local communities we work within. We also continue to invest in training to ensure we maintain safe operating practices in both our upstream and downstream businesses.
• Security intelligence and operating procedures, crisis management and business continuity plans are regularly evaluated and tested to provide assurance to the Board that we are capable of responding positively to any events.

Strategic growth

What are the risks?

Despite positive signs of recovery in the US and the UK, uncertainty remains in the global economy and economic and market headwinds impact many parts of our business.

In the US, rising consumer confidence is tempered by concerns about the Federal Government debt ceiling. Tightening conditions in our retail markets are also putting pressure on energy margins and, in a low and less volatile price environment, the successful delivery of sales targets will be challenging. Growth in our North American downstream business will also be dependent in part on the successful integration of the Hess Energy Marketing business.

In the UK, signs of economic recovery notwithstanding, levels of disposable income continue to decline and our markets face potential pressures in the run-up to the next general election.

Recent announcements across UK political parties have exacerbated significant uncertainty in the UK energy landscape across power generation, gas storage and energy supply. This could impact future power, storage and upstream investment and targets, reduce the attractiveness of the UK energy supply business and impede the economic viability of proposed initiatives.

A number of emerging technologies and innovations have the potential to be disruptive to our business. In our upstream business, we face competition in developing and applying new technology to maximise recovery. We have to make unconventional sources of oil and gas economic as well as generating power through low carbon solutions.

Downstream, UK gas demand is forecast to continue to decline over the next decade with the emergence of smart and connected home solutions. Electricity demand is forecast to decline by a smaller amount or remain flat. The retail energy environment, reflecting higher commodity and non-commodity costs, is highly competitive across residential and business segments as well as energy services, including new business areas, such as smart enabled applications.

As digital media, the internet and mobile devices play a greater role in the retail energy business sector, we could see heightened competitive pressures resulting from falling barriers to market entry and swiftly changing customer loyalties as existing energy and other service providers, such as insurance companies, telecom companies, supermarkets and other large retail companies enter the services market and seek to strengthen their positions.

Climate change, new technologies and global economic conditions may be subject to circumstances beyond our control resulting in an adverse impact on our strategic growth and investment. All such effects could fail to create shareholder value, meet shareholder expectations and ultimately lead to a loss of investor confidence and a decline in the share price.

How do we manage these risks?

• We continue to pursue a range of investment options across the energy chain and in different geographies to both deepen our customer relationships and secure the Group’s future energy requirements.
• We face competition in each of our businesses and therefore seek to grow demand for our offerings and differentiate our propositions accordingly.
• We continue to seek cost-efficiency through innovation and investment in systems, positioning ourselves to deliver targets whilst maintaining a stable platform for investment.
• Smart meters, personalised customer energy usage reports, smart tariffs and applications for remote heating control in UK residential and business markets, alongside the acquisition of a leading internet-based digital platform in our North American services offering, has allowed us to create greater visibility and control over energy use through continued development of smart and connected home solutions.

Trust and perception

What are the risks?

The energy sector in the UK is currently the subject of unprecedented public and political debate and scrutiny against a backdrop of declining disposable income for many customers. This is not only raising concern for our customers but also damaging investor confidence, increasing the prospect of potential further government or regulatory intervention in our operating markets at a time when substantial investment is required to secure supplies of energy for the UK in the long term.

The positions taken by political parties and the media in the run-up to the 2015 UK general election could also lead to further uncertainty, as the consensus that existed between them over key questions of energy policy has broken down.

Hydraulic fracturing in the UK could cause further adverse publicity as we explore opportunities for unconventional energy supply and generation as part of our business strategy.

Customers could also leave if they experience unacceptable customer service levels or if it is perceived that we are failing to maintain service quality. This risk could be exacerbated in the current environment where trust in the industry is at an all-time low.

The increased use of social media allows customers and consumer groups to engage in direct action and other campaigns more readily than before. Any failure to restore trust in the energy industry and markets could lead to campaigns for corporate change through specific resolutions to direct the Company in a particular manner.

How do we manage these risks?

• We are working to deliver a fair, simplified and transparent deal to consumers and protect the most vulnerable, fuel-poor households through initiatives to improve energy efficiency or with financial advice and aid.
• We engage with NGOs, consumer and customer groups, political parties, regulators and other stakeholders to understand their views and concerns, working together to identify solutions, help minimise the impact of higher costs on bills and improve transparency to help restore trust in the industry.
• We actively manage our reputation with a number of different stakeholders including customers, investors, opinion-formers, employees, the media, governments and government agencies, other political parties and regulatory and trade union bodies.

People

What are the risks?

Cultural and behavioural transformation, ambitious technical-change programmes, changes to our current structure (including the departure of senior Group personnel) and inadequate trade union relations could all have adverse consequences, including an impact on employee engagement. This may drive issues with attraction and retention not only for key roles but also in the wider operational workforce, as well as the threat of industrial action in our upstream business operations and engineering workforce in both the UK and North America.

Any failure in high calibre attraction, retention and succession planning for key roles could cause business disruption and damage investor confidence, which could impact the delivery of the Group’s strategy and growth aspirations. Insufficient capability, capacity and strategy in this area could limit our ability to exploit opportunities and/or realise the full value of investments, erode shareholder value, impact the effectiveness of merger and acquisition integration and harm the employer brand impacting our ability to attract and retain key staff.

How do we manage these risks?

• We continue to evolve a clearly defined people strategy based on culture and engagement, talent development, training and reward and recognition, for the ongoing success of our business through regular reviews of organisational capability, critical business areas, reward strategies for key skills, talent management and learning, development programmes and external benchmarking. We also have processes in place during merger and acquisition integration activity to ensure the retention of key roles and complementary talent.
• We engage with trade unions on restructuring and issues that could impact terms and conditions with clear and open processes to promote an environment of trust and honesty. Additionally, we provide channels for employees to discuss concerns and regularly review the procedures in place to support and encourage whistleblowing.

Information security

What are the risks?

Our business operations rely on effective and secure information systems containing a high degree of confidentiality, integrity and availability.

Corporate, governmental and other organisations are targets for malicious and unauthorised attempts to access information systems. Our business could be compromised by an incident resulting in the accidental or deliberate exposure of sensitive data, viral effect of social media channels, inadvertent or deliberate changes to information we are dependent on, disruptions to business continuity and an online attack that results in loss or exposure of confidential data, intellectual property or control systems.

Such events could seriously affect our reputation, lead to legal action and/or outages that could cause financial and operational loss. The US and EU data privacy proposals increase the implications of such risks materialising, due to requirements around public notification of any data breach and the scale of associated fines for non-compliance.

How do we manage these risks?

• We seek to detect and investigate all incidents, aiming to prevent any repetition and regularly interrogate the adequacy of our infrastructure, IT security controls and data-recovery processes.
• Our information security strategy seeks to integrate information, personnel and physical aspects overseen by a risk group from across our business. Collaborative working groups are also in place across the industry and wider. These measures allow for controls and responses to be put in place that are both effective and proportionate, whilst recognising the evolving environment they are situated within.

Change management

What are the risks?

The successful delivery of business change is fundamental to our future success and includes organisational, cultural and technical transformation.

Any failure to manage change successfully can adversely affect operational objectives, strategic growth, investor confidence and cause financial loss.

The delivery of certain technical change programmes is large and complex.

Trying to deliver too much change could result in a stretch on resources, undermine system integrity and threaten business continuity, cost more or take longer than estimated to implement. Change programmes could also suffer from quality and safety issues and/or the planned benefits might not be realised.

The scale of change in our International Downstream business could adversely affect our operations, reputation and financial position if not successfully delivered. Changes to billing systems and the implementation of smart and connected home targets in the UK and the successful integration of the Hess Energy Marketing business in North America all need to be managed correctly if we are to achieve expected synergies, continue to improve our customer service levels and engage in new markets.

As we grow, structures are regularly reviewed to ensure that activities are organised in an effective and efficient way, to keep our cost base as low as possible. These changes can involve difficult decisions for our employees and there is a risk that industrial relations could worsen.

How do we manage these risks?

• Change activity is managed through a combination of project/programme boards and regular review at both a business unit and executive level. We will be increasingly selective in our investments, directing capital towards the projects offering the most attractive returns with the lowest political risk. We also have a dedicated project management directorate to improve governance of large capital change programmes undertaken in our upstream business.
• We continue to focus on attracting and retaining talented employees to ensure the successful delivery of our objectives.

Related Party Transactions

The Group’s principal related parties include its investments in wind farms and the existing UK nuclear fleet.

During the year, the Group entered into the following arms length transactions with related parties who are not members of the Group, and had the following associated balances:

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2013

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2012

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Sale of goods and services £m

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Purchase of goods and services £m

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Amounts owed from £m

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Amounts owed to £m

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Sale of goods and services £m

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Purchase of goods and services £m

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Amounts owed from £m

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Amounts owed to £m

Joint ventures:

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Wind farms (as defined in note 6)

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23

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110

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475

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69

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27

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78

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459

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47

Associates:

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Nuclear (as defined in note 6)

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27

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639

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–

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62

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157

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598

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8

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73

Other

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2

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7

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21

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–

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4

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–

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18

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–

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52

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756

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496

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131

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188

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676

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485

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120

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Investment and funding transactions for joint ventures and associates are disclosed in note 14. The terms of the outstanding balances related to trade receivables from related parties are typically 30 to 120 days. The balances are unsecured and will be settled in cash. A provision against amounts receivable from related parties was recognised during the year resulting in an Income Statement charge of £21 million (2012: £nil). The balance of the provision at 31 December 2013 was £21 million (2012: £nil).

Key management personnel comprise members of the Board and Executive Committee, a total of 16 individuals at 31 December 2013 (2012: 14).

Remuneration of key management personnel	Â	Â	Â	Â
31 December	Â	2013	Â	2012
Â	Â	£m	Â	£m
Short-term benefits	Â	8	Â	8
Post-employment benefits	Â	2	Â	2
Share-based payments	Â	6	Â	6
Â	Â	16	Â	16
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Remuneration of the Directors of Centrica plc	Â	Â	Â	Â
31 December	Â	2013	Â	2012
Â	Â	£m	Â	£m
Total emoluments (i)	Â	7	Â	8
Gains made by Directors on the exercise of share options	Â	0.3	Â	0.2
Amounts receivable under long-term incentive schemes	Â	–	Â	10
Contributions into money purchase pension schemes	Â	1	Â	1

(i) These emoluments were paid for services performed on behalf of the Group. No emoluments related specifically to services performed for the Company.

Directors’ Responsibility Statement

This statement is repeated here solely for the purposes of complying with Disclosure and Transparency Rule 6.3.5. This statement relates to and is extracted from the Annual Report 2013. It is not connected to the extracted information presented in this announcement or the preliminary results announcement released on 20 February 2014.

The Directors, who are named on pages 50 and 51, are responsible for preparing the Annual Report, the Directors’ Remuneration Report, the Strategic Report and the Financial Statements in accordance with applicable law and regulations.

Company law requires the Directors to prepare Financial Statements for each financial year. Accordingly, the Directors have prepared the Group Financial Statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU) and the parent company Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice (United

Kingdom Accounting Standards and applicable law). Under company law the Directors must not approve the Financial Statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and the Company and of the profit or loss of the Group for that period. In preparing these Financial Statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether IFRS as adopted by the EU and applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the Group and parent company Financial Statements respectively; and
• prepare the Financial Statements on the going concern basis unless it is inappropriate to presume that the Company will continue in business.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the Financial Statements and the Directors’ Remuneration Report comply with the Act and, as regards the Group Financial Statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

Furthermore, the Directors are responsible for the maintenance and integrity of the Company’s website. Legislation in the UK governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.

The Directors consider that the Annual Report and Accounts 2013, when taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy.

Each of the Directors, whose names and functions are listed on pages 50 and 51 confirm that to the best of their knowledge:

• the Group Financial Statements, which have been prepared in accordance with IFRS as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group;
• the Strategic Report contained on pages 6 to 48 together with the Directors’ Report on pages 63 and 64, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties that it faces;
• as outlined on page 57, there is no relevant audit information of which PwC are unaware; and
• they have taken all the steps that they ought to have taken as a Director in order to make themselves aware of any relevant audit information and to establish that the Company’s auditors are aware of that information.

Enquiries:

Centrica Investor Relations: [phone]

Centrica Media Relations: [phone]