Annual Financial Report

Annual Financial Report

Centrica plc

16 March 2016

Centrica plc (the Company)

Annual Report and Accounts 2015

Further to the release of the Company's preliminary results announcement on 18 February 2016, the Company announces that it has today published its Annual Report and Accounts 2015 (Annual Report 2015).

The Company also announces that on 14 March 2016 it posted to shareholders the Notice of Annual General Meeting to be held at 11.00a.m. on Monday, 18 April 2016 at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London, SW1P 3EE.

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:

• Annual Report and Accounts 2015
• Annual Review 2015
• Notice of Annual General Meeting 2016

The above documents are also available at centrica.com/ar15.

This information should be read in conjunction with the Company’s preliminary results announcement. 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 18 February 2016. That information, together with the information set out below, which is extracted from the Annual Report 2015, is provided in accordance with the Disclosure and Transparency Rule 6.3.5, which requires it to be communicated to the media in full unedited text through a Regulatory Information Service. This announcement is not a substitute for reading the full Annual Report 2015. Page and note references in the text below refer to page numbers and note numbers in the Annual Report 2015.

Our Principal Risks and Uncertainties

A summary of our principal risks and uncertainties which may impact the delivery of our strategic priorities is shown below.

In 2015, we reviewed the design of our risk universe to ensure a more consistent and comprehensive approach to risk identification. This provides an overarching framework, which includes processes for identifying, achieving and managing principal risks to the achievement of our strategic priorities.

These processes are reinforced through regular performance management and are subject to internal and external review.

Principal risks and uncertainties

1 Strategy delivery

Description: Failure to deliver Centrica strategy.

Potential impact: The Group is being reorganised to achieve the strategic objectives announced in 2015. The delivery of this strategy creates additional uncertainties, including in relation to growth of new businesses, the achievement of disposals and the realisation of substantial cost efficiencies.

Controls and mitigating activities:

• Delivery of the strategy is the primary objective of the Board and Executive who are directly engaged in regular progress reviews.
• The Board approves the Group annual plan setting the strategic direction.
• We have a clear financial framework to ensure capital is allocated in line with strategy and towards projects best able to deliver expected business benefits.
• Where necessary, experienced leaders have been identified and appointed to ensure the delivery of the critical strategic goals.
• Strategic definition is provided through clear delegated targets embedded in business plans.

2 External market environment

Description: Changes and events in the external market or environment that could impact delivery of Centrica’s strategy.

Potential impact: Customer behaviour, downstream competitive positions and upstream operational results are impacted by: improved energy efficiency, competitor activity, climate change, commodity price movement, long-term weather patterns and the general economic outlook.

Controls and mitigating activities:

• Regular analysis undertaken on commodity price fundamentals and their potential impact on business plans and expectations.
• Strategic discussions focused in 2015 on a broad range of external scenarios and sensitivities to underpin the viability of the strategic review.
• Clarity provided during 2015 on the strategic desire for an integrated business operating across the value chain, providing a balanced risk portfolio.
• Investments in businesses such as Connected Home in response to changing external trends and requirements.
• We support climate change targets set at a national and international level by driving down carbon emissions across our business as well as giving customers greater control over their energy through innovative and energy efficient products and services.

3 Political and regulatory intervention

Description: Changes, intervention or a failure to influence change to the political or regulatory landscape.

Potential impact: We are subject to oversight by a range of political and regulatory bodies. UK regulators continue to impose significant obligations to implement carbon reduction measures and energy affordability. We await the final outcome of the CMA investigation into the energy markets in the UK and the implications for our businesses.

Controls and mitigating activities:

• Constructive and regular engagement with regulatory bodies such as the CMA, with a clear commitment to an open, transparent and competitive UK energy market that provides choice for consumers.
• The Safety, Health, Environment, Security and Ethics Committee (SHESEC) has oversight of regulatory risk, in addition to the discussions within the Board.
• Work with regulators to find a better approach to intervention that agrees clear targets against which we can demonstrate progress.
• Consistent engagement with political parties to bring about agreement on critical areas in energy policy.

4 Brand, trust and perception

Description: Competitive positioning and protection of the Centrica and subsidiary brands.

Potential impact: Our customers are critical to our business and are at the heart of our strategy. To grow and evolve our business we must protect and develop our brand, building trust across a wide range of stakeholders.

Controls and mitigating activities:

• NPS and other customer service and brand metrics regularly reviewed by Executive Committee and the Board.
• Focus on providing affordable energy and excellent service through a fair and simplified transparent offering.
• Seek to protect the most vulnerable households through financial advice and aid.
• Engage with stakeholders to understand their views and identify solutions to help reduce bills and improve transparency.

5 Business planning, forecasting and performance

Description: Business planning, forecasting, risk management and achievement of anticipated benefits.

Potential impact: We prioritise how we use our resources based on our business plans and forecasts. Failure to accurately plan and forecast could result in suboptimal decisions and may impact expected benefits.

Controls and mitigating activities:

• Planning processes revised to underpin the strategic objectives for 2016 and beyond, as well as to support the shape of the future operating model.
• Board and Executive Committee directly engaged in constructive challenge of the planning, forecasting and risk management processes.
• Direct interaction between the strategy, fundamentals, planning and finance teams in arriving at forecasts and plans.
• Performance review process designed to provide challenge and a forum for discussion of critical uncertainties in the business planning processes.

6 Customer service

Description: Failure to provide good quality customer service.

Potential impact: The delivery of high quality customer service is central to our business strategy. With the entry of new competitors to the market, customers are increasingly likely to switch supplier if they face an unacceptable customer experience. We must remain at the forefront of technological development to provide choice and efficiency.

Controls and mitigating activities:

• Providing the optimal service to our customers is discussed regularly at both Board and Executive Committee meetings.
• Where we are known to have experienced issues, such as the service to our British Gas Business customers, we have ensured a full and focused response.
• Commitment to continually strengthen our controls for customer service and complaints management.
• Increased investment in Connected Home to give customers greater visibility, control and engagement over their energy usage.

7 People

Description: Attraction, retention, and succession of the right people with the right skills in the right role at the right time.

Potential impact: The change in our business model means attracting and retaining the right skills to meet evolving priorities is critical. Similarly, maintaining industrial relations across our businesses becomes more challenging, given our announced level of job losses. Insufficient capability and capacity in senior management and key skills will limit our ability to grow and execute our strategy at the speed required.

Controls and mitigating activities:

• People Committee established at the executive level to provide focus on the key talent challenges.
• Board level consideration of values, culture and succession matters.
• Clearly defined people strategy, based on organisational capability and requirements, culture and engagement, equality and wellbeing, talent development, training and reward and recognition.
• Active engagement 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.
• Annual employee engagement survey to identify what we are doing well and where we need to improve.

8 Change management

Description: Execution of change programmes and business restructuring.

Potential impact: The scale of change planned in our business is significant. Any substantial delay or challenge experienced with the organisational restructuring, system implementation or growth of new businesses could adversely affect stakeholder expectations. At the same time we must maintain our systems of internal control throughout the change.

Controls and mitigating activities:

• Monthly Executive Committee review of the strategy implementation and required change programmes, allow for the open discussion of emerging risks and control requirements.
• Progress and issues reported to and discussed by the Board.
• Appointment of a senior executive in 2015 to lead the transformation programme bringing focused attention on benefits realisation, risk prioritisation and milestone tracking.
• Focused on our people throughout the change, recognising the need for appropriate capability to be built across the organisation.
• Established forums for sharing of good practice as we seek to standardise and simplify the business model.

9 Asset development, availability and performance

Description: Investment, development and integrity of operated and non-operated assets.

Potential impacts: Failure to invest in the maintenance and development of our assets could result in underperformance, assets being out of service or significant safety issues. The Company must have confidence in its operational integrity and ability to perform and deliver in line with objectives.

Controls and mitigating activities:

• The Board takes a direct interest in the oversight of our significant assets and in ensuring we have the highest operational standards.
• Group-wide minimum standards applied to all assets, whether operated or non-operated, in order to have confidence in their integrity.
• Clarity on future direction of E&P assets provided through the strategic review underpinning our continued commitment to this sector.
• Capital allocation and investment decisions governed through the Investment Committee chaired by the Chief Executive.

10 Sourcing and supplier management

Description: Dependency on and management of third parties to deliver the products and services for which they have been contracted to the agreed time, cost and quality.

Potential impact: Across our business operations we rely on services provided by third parties. These include outsourced activities and third party infrastructure as well as operating responsibility in some assets. As with any contractual relationship there are no guarantees that suppliers will always comply with legal, regulatory or corporate responsibility requirements.

Controls and mitigating activities:

• Board level oversight is provided through the SHESEC, with the executive level Ethics & Compliance Committee also focused on this area.
• All suppliers are required to sign up to our ‘Responsible Procurement’ policies and procedures.
• Financial health risk and anti-bribery and corruption due diligence and monitoring is implemented in supplier selection and contract renewal processes.
• Corporate responsibility processes in place for procurement of all goods and services.

11 Health, safety, environment and security (HSES)

Description: HSES hazards and regulations associated with Centrica’s operations.

Potential impact: Our operations have the potential to result in personal, environmental or operational harm. Significant HSES events could also have regulatory, legal, financial, and reputational impacts that would adversely affect some or all of our brands and businesses.

Controls and mitigating activities:

• HSES is considered to be of upmost significance to the Group and receives Board level oversight through the dedicated SHESEC.
• Specific HSES executive level committee also established, chaired by the Chief Executive on a monthly basis.
• Strengthening of the second line of defence assurance capability, to provide independent assessments of the controls and processes in place to manage these risks, to ensure they remain effective and continue to develop.
• Investment in capability development and awareness activities to ensure we maintain safe operating practices in all our businesses.
• Regular evaluation of security intelligence, operating procedures, crisis management and business continuity plans, to provide assurance of our capability to respond rapidly and appropriately to any incident.

12 Information systems and security

Description: Effectiveness, availability, integrity and security of IT systems and data essential for Centrica’s operations.

Potential impact: Our substantial customer base and strategic requirement to be at the forefront of technology development, means that it is critical our technology is robust, our systems are secure and our data protected. Sensitive data faces the threat of misappropriation from hackers, viruses and other sources, including disaffected employees.

Controls and mitigating activities:

• Information systems and cyber security received substantial Board level focus during 2015 and remain a continued focus for the SHESEC.
• Detection and investigation of threats and incidents were prioritised, through further investment in 2015 and by engaging with key technology partners and suppliers.
• Increased focus on employee awareness and training in relation to sensitive data and digital information.
• Policies over new technology development reviewed and tested regularly.
• Collaborative working with other parties across the energy industry and within the wider public and private sectors to share threat information.
• Evaluation and testing of cyber security crisis management and wider business continuity plans.

13 Legal, regulatory and ethical standards compliance

Description: Compliance with legal, regulatory and ethical requirements.

Potential impact: Our operations are the subject of intense regulatory focus and we seek to deliver the highest standards in compliance and ethical conduct. We recognise any real or perceived failure to follow our global Business Principles or comply with legal or regulatory obligations would undermine trust in our business. Non-compliance could also result in fines and other penalties.

Controls and mitigating activities:

• SHESEC established in 2015 to provide Board level oversight of this risk, alongside the executive level Ethics & Compliance Committee.
• The Disclosure Committee will review all external regulatory announcements.
• The Chairman is directly responsible for promoting high ethical standards and best practice in corporate governance and ensures the effective contribution of all Directors.
• Experienced Group Ethics and Compliance Officer appointed in 2016 to bring additional strength and focus.
• Group Business Principles govern how we conduct our affairs. Managers are required to declare that they will uphold these principles on an annual basis to ensure that we remain a responsible and fully compliant business.
• Speak Up process in place to enable employees to raise and report any concerns.

14 Financial market

Description: Exposure to market movements, including commodity prices and volumes, inflation, interest rates and currency fluctuations.

Potential impact: Our financial performance and price competitiveness is dependent upon our ability to manage exposure to wholesale commodity prices for gas, oil, coal, carbon and power, interest rates for our long-term borrowing, fluctuations in various foreign currencies and environmental factors.

Controls and mitigating activities:

• Audit Committee reviews, assesses and challenges the effectiveness of the governance and control mechanisms within Energy Marketing & Trading (EM&T).
• Group Financial Risk Management Committee meets monthly to review Group financial exposures and assess compliance with risk limits.
• Governance and controls exist to manage liquidity and funding exposures.
• Active hedging programmes in place to mitigate exposure to commodity and financial market volatility.

15 Credit and liquidity

Description: Management of counterparty exposures and funding uncertainties.

Potential impact: The seasonal nature of our business, contractual obligations, pension and decommissioning funding and margin cash arrangements associated with certain wholesale commodity contracts, have a significant impact on our liquidity. Certain events and activities may have a direct impact on our credit, ratings and liquidity, which could increase the cost of, and access to, financing.

Controls and mitigating activities:

• Significant committed facilities are maintained with sufficient cash held on deposit to meet fluctuations as they arise.
• A regular assessment of available resources is made including that required to support the viability and going concern assumptions within this report.
• Counterparty exposures are restricted by setting credit limits for each counterparty, where possible by reference to published credit ratings.
• Wholesale credit risks associated with commodity trading and treasury positions are managed in accordance with Group policy.

16 Financial processing and reporting

Description: Accuracy and completeness of internal and external financial information.

Potential impact: We must be able to maintain robust financial systems and produce accurate financial statements that adequately disclose all applicable accounting policies. This obligation includes maintaining processes to avoid misstatement through fraud or error. The confidence of our investor and regulatory stakeholders is reliant on the continued integrity of our financial public reporting.

Controls and mitigating activities:

• Audit Committee maintains close oversight of the financial policies and procedures within clearly defined guidelines.
• Processes in place provide assurance over the completeness and accuracy of our public financial reporting, with monitoring and internal audit activity designed to identify any misstatements or errors.
• We maintain an effective working relationship with our external auditors and value their insight and recommendations.

Related Party Transactions

The Group’s principal related parties include its investments in wind farms and the existing EDF UK nuclear fleet. During the year, the Group entered into the following arm’s length transactions with related parties who are not members of the Group, and had the following associated balances:

	Â		Â		Â		Â	2015	Â		Â		Â		Â	2014
Â		Sale of goods and services £m		Purchase of goods and services £m		Amounts owed from £m		Amounts owed to £m		Sale of goods and services £m		Purchase of goods and services £m		Amounts owed from £m		Amounts owed to £m
Joint ventures:
Wind farms (as defined in note 6)		14		(123)		232		(113)		16		(126)		414		(104)
Associates:
Nuclear (as defined in note 6)		–		(639)		–		(61)		–		(616)		–		(58)
Other		3		(9)		2		–		5		(42)		24		(2)
Â		17		(771)		234		(174)		21		(784)		438		(164)

Investment and funding transactions for joint ventures and associates are disclosed in note 14. Shareholder loan interest income for wind farm joint ventures in the period was £17 million (2014: £34 million). 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. No provision against amounts receivable from related parties was recognised during the year through the Group Income Statement (2014: nil). The balance of the provision at 31 December 2015 was nil (2014: £21 million).

At the balance sheet date, there were back to back committed facilities with Lake Acquisition Limited’s facilities to EDF Nuclear Generation Limited totalling £120 million at Centrica’s share, but nothing has been drawn down at 31 December 2015.

Key management personnel comprise members of the Board and Executive Committee, a total of 16 individuals at 31 December 2015 (2014: 15).

Remuneration of key management personnel Year ended 31 December	Â	2015 £m	Â	2014 £m
Short-term benefits		12.3		7.9
Post employment benefits		1.9		2.0
Share-based payments		5.4		0.4
Â		19.6		10.3

Remuneration of the Directors of Centrica plc Year ended 31 December	Â	2015 £m	Â	2014 (restated) (i) £m
Total emoluments (ii)		6.4		4.7
Gains made by Directors on the exercise of share options		–		3.6
Amounts receivable under long-term incentive schemes		–		1.9
Contributions into pension schemes		0.7		1.0

(i) The long-term incentives vesting in 2014 have been recalculated based on the share price on the date of vest. See Remuneration Report on page 72 for further details.

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

Directors’ responsibilities statement

The Directors, who are named on pages 44 and 45, 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 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 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 2015, 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 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 loss of the Group;
• the Strategic Report contained on pages 1 to 42 together with the Directors’ and Corporate Governance Report on pages 47 to 62, 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 55, 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.

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