Annual Financial Report

RNS Number : 9317J

Centrica PLC

05 April 2018

5 April 2018

Centrica plc (the Company)

Annual Report and Accounts 2017

Further to the release of the Company's preliminary results announcement on 22 February 2018, the Company announces that it has today published its Annual Report and Accounts 2017 (Annual Report 2017).

The Company also announces that today, 5 April 2018, it posted to shareholders the Notice of Annual General Meeting to be held at 2.00pm on Monday 14 May 2018 at the QEII 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 at www.morningstar.co.uk/uk/NSM:

- Annual Report 2017;

- Annual Review 2017;

- Notice of Annual General Meeting 2018; and

- Proxy Form for the 2018 Annual General Meeting.

The above documents are also available at www.centrica.com/ar17 and www.centrica.com/agm18

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 22 February 2018. That information, together with the information set out below, which is extracted from the Annual Report 2017, is provided in accordance with the Disclosure and Transparency Rule (DTR) 6.3.5R, 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 2017. Page and note references in the text below refer to page numbers and note numbers in the Annual Report 2017.

Our Principal Risks and Uncertainties

Understanding those Risks that impact our Strategy

The fundamental trends outlined in our strategy on pages 10 and 11, including the decentralisation of energy systems, shift of power to consumers and increasing digitisation, present both opportunities and threats. Identifying and managing these risks is critical to delivering our strategy. The Group Priorities, as laid out below, are the lens through which we assess our risks and drive discussions around the level of risk we need to take and the requirements of our System of Risk Management and Internal Control.

Strengthening our System of Risk Management and Internal Control

Following our Strategic Review in 2015, we refreshed our approach to risk

management. In 2017 we focused on embedding this improved process aligned with the new operating model to ensure it makes a positive contribution to effective decision-making and business growth, while ensuring we successfully manage risks. In particular, as we have moved into new geographies, we have sought to ensure we are addressing risks associated with operating in those jurisdictions.

Each business unit and Group function is responsible for identifying and assessing its significant risks within the context of our Principal Risks. For each risk, they consider both the potential impact to the Group and the likelihood of occurrence on an inherent and residual basis. The Executive Committee then considers these perspectives alongside broader external and internal factors to create a Group-wide set of prioritised risks.

· We categorise our risks as:

- Risk Requiring Standards (RRS):

Risk with negative impacts that we control through Standards and Management Systems, for example process safety or data security.

- Risk Requiring Judgement (RRJ): Risk that we choose to take in order to execute our business strategy, for example new products or business improvement opportunities.

- External Risk: Risk that requires a focus on scenario and contingency planning with little or no ability to reduce likelihood, for example extreme weather or geopolitical turbulence.

On an annual basis, we evaluate our System of Risk Management and Internal Control, learning from any control incidents that have arisen, to ensure we are mitigating risks in line with our risk appetite.

Determining the risk we would like to take

The Board approves statements of risk appetite associated with each Group Priority. These statements provide a framework to guide our risk mitigation activities and to drive the appropriate level of risk taking:

· Safety, compliance and conduct: Our appetite for taking risk in this area is as low as reasonably practicable in relation to: ensuring the safety of our people, customers and communities; conducting our business operations in compliance with laws and regulations; and managing our financial reporting risks.

· Customer satisfaction and operational excellence: We have a moderate risk appetite to allow us to pursue innovative opportunities. We are driven to satisfy the changing needs of our customers.

· Cash flow growth and strategic momentum: We have a moderate to high risk appetite for seeking opportunities to deliver cash flow growth and our target return on capital.

· Cost efficiency and simplification: We have a low risk appetite for failing to implement and manage improvements sustainably and in a rigorous and systematic way.

· People and building capability: We accept a moderate level of risk in finding ways to attract, develop and reward people with the diverse capabilities needed to deliver our ambitions. However, we have a low risk appetite for rewarding and retaining people who fail to demonstrate our Values.

Evaluating Risks through our Enterprise Risk Framework

Our Enterprise Risk Framework is designed to enable us to identify, evaluate and mitigate our risks appropriately. It comprises of six steps:

1. Identify

• Identify significant risks to achieving business unit and/or function objectives

2. Assess & Analyse

• Assess inherent impact and likelihood using Centrica risk assessment matrix

• Identify risk type (RRS, RRJ or External Risk) and determine target risk rating

• Identify mitigating activity and key risk indicators and assess current risk exposure

3. Design & Implement Controls

• Design and implement controls and actions to mitigate the potential impact and likelihood of risks

4. Manage & Monitor

• Management of risks and controls to deliver target risk level

• Monitor through inspection, performance reviews and regular reporting

• Identify and implement specific remediation actions

5. Calibrate & Assure

• Group Functions calibrate submitted risks to ensure consistency and prioritise their responses

• Functional assurance and internal audit activity

• Assess impact of assurance findings

6. Report, Evaluate & Improve

• Report consolidated risk, assurance and control position to the Group Risk, Assurance and Control Committee, Audit Committee and Safety, Health, Environment, Security and Ethics Committee

• Evaluate priority risks within the Group risk profile to identify any corrective actions

• Evaluate Group-wide severe, but plausible risks and implications

• Drive continuous improvement through reviewing the Risk Universe and Group risk appetite

Mitigating risks through the System of Risk Management and Internal Control

Risk management is a key pillar of the overall governance and management framework for the Group. Our system of Risk Management and Internal Control comprises the following elements that are assessed annually for effectiveness:

• What we stand for:

- Our Purpose: We are an energy and services company. Everything we do is focused on satisfying the changing needs of our customers.

- Our Values: The new values were rolled out globally in September 2017 to underpin our strategy and Priorities.

- Our Code: This was launched in early 2018 to replace our Business Principles and provides the foundation for how we operate.

• Our strategic framework:

- Strategy: Set out in July 2015 and aligned throughout the organization by the five Group Priorities.

- Financial framework: Sets out parameters and targets within which we operate to guide our strategic planning and financial decision making.

- Enterprise risk framework: Incorporates the Principal Risks within the Group Risk Universe, as outlined on pages 55 to 60.

• Our governance:

- Board and committees: Structured to effectively dispense with required duties and through which our Principal Risks are monitored.

- Legal entities: Subsidiary company legal entities with Boards of Directors required to meet legal and regulatory obligations.

- Delegations of authority: Accountability is delegated through the organisation to individuals in accordance with risk appetite.

- Executive and committees: Oversight to ensure appropriate planning and performance management.

• How we are organised and managed:

- Management systems: The detailed policies, standards and processes establishing the mandatory requirements and which are required for the systematic management of related risks.

• How we provide assurance:

- Functional assurance: Ensuring policies and standards are complied with through monitoring and testing activities performed by individuals who are not directly responsible for the operation of the controls.

- Internal Audit: Providing confidence to the Board, via the Audit Committee, that Centrica has appropriate risk management procedures and effective controls in place.

- External assurance: Auditing of the Group's Annual Report and Accounts prior to reporting, which includes assessment of internal controls relevant to financial reporting.

Principal Risks

The Group Risk Universe is made up of a holistic framework of Principal Risks, laid out below. The Board makes a robust assessment of these Principal Risks, considering future performance and our ability to deliver the strategy, including solvency and liquidity risks. For each Principal Risk, we discuss the nature of the risk, the risk climate and the impact on our Group Priorities. Each Principal Risk is overseen directly by the Board or one of its Committees, with the Board retaining overall responsibility for risk across the Group.

Description

Potential impacts

Mitigation

Political and Regulatory Intervention

Risk of political or regulatory intervention such as the adoption of blanket price caps in the UK energy supply market, changes to the political or regulatory landscape, or failure to influence that change.

External Risk

Governance oversight:

Board

Risk Climate: Increased

Priority: Cash flow growth and strategic momentum

Changes in government and regulatory oversight, specifically relating to the Consumer Divisions markets in the UK and North America, such as the developments in UK market regulation during 2017, could erode our profit margins through price caps, or through additional obligations that increase operating costs. The UK's decision to exit the European Union and wider political changes in the markets we operate in present risks relating to changing policies in relation to the energy market change and carbon emissions.

· We are active in contributing our views on the development of the markets in which we operate and in discussions with political parties, regulatory authorities and other influencers.

· We are committed to an open, transparent and competitive UK energy market that provides choice for consumers. In November, we announced seven unilateral steps we would take and recommended a series of broader market reforms (as detailed on page 18).

· The UK is due to exit the European Union within two years of Article 50 being triggered in March 2017. We have a dedicated Brexit project group which is working to understand and assess the many Brexit-related issues which could impact the Group and our customers.

· We accept that we may be the subject of regulatory scrutiny that could result in stakeholder concerns. We co-operate fully with any enquiry or investigation and take measures to react as quickly as possible.

Financial Market

Risk of financial loss due to our exposure to market movements, including commodity prices and volumes, inflation, interest rates and currency

fluctuations.

External Risk with elements that are Risks Requiring Judgement

Governance oversight:

Board and Audit Committee

Risk climate: at a similar level

Priority: Cash flow growth and strategic momentum

Our exposure to adverse price movements in commodity markets, due to our large upstream and downstream positions, could impact profitability and cash flow generation across the business.

Financial market risk is taken on by Energy Marketing & Trading (EM&T) as part of the proprietary trading business. Increased

volatility in commodity prices could provide more opportunities but also give rise to higher collateral costs and/or additional credit risk for both EM&T and

North America Business.

· We have hedging strategies in place to mitigate exposure to

commodity and financial market volatility.

· Financial risk is reviewed regularly by the Group Finance Function and the Group Risk Assurance and Control

Committee to assess financial exposures and compliance with risk limits. Regular review is also undertaken by the Audit Committee.

· As we move into new trading arrangements, including the continued expansion of our LNG business, we are focused on ensuring that our financial risk policies remain appropriate to the risks we face.

· Our business units have risk measures, policies and monitoring commensurate with the activities and risks that they manage, and we invest in our systems to further automate our control environment.

Health, Safety, Environment

and Security (HSES)

Risk of failure to protect the health, safety and security of customers, employees and third parties or to take appropriate measures to protect our environment and in response to climate change.

Risk Requiring Standards

Governance oversight: Board and Safety, Health Environment, Security and Ethics Committee

Risk climate: at a similar level

Priority: Safety, compliance and conduct

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

· We undertake regular reviews and have assurance processes in place with reporting to the HSES Subcommittee on a quarterly basis and full discussion of all issues arising.

· The HSES management system is used to manage our controls, focusing on areas of concern including process safety, driving and working at heights.

· We continue to invest in training to ensure we maintain safe operating practices. During 2017 all senior leaders took part in a HSES leadership event.

· Security intelligence and operating procedures, as well as crisis management and business continuity plans, are regularly evaluated and tested.

· Significant Centrica representation on Board Committees and establishment of a Shareholder Office to ensure that mitigation of HSES risks remains a priority within the new joint venture organisation, Spirit Energy.

· We actively engage with climate change bodies and NGOs to offer our perspective, understand the direction of potential future actions, and assess our readiness to manage through change.

· A description of how we manage our environmental risk is described on page 36.

Strategy Delivery

Risk that we do not deliver our strategy due to insufficient capability to execute it in line with plan or failure to adapt quickly enough to respond to changes in the external environment. In our bottom-up process of risk reporting, this is a key area of focus for our business units and functions.

Risk Requiring Judgement

Governance oversight: Board

Risk climate: increased

Priority: Cash flow growth and strategic momentum

Successful delivery of our strategy requires delivering the energy and services our customers desire in a way that satisfies their needs in a competitive market place. Failure to identify changing trends in customers' needs, adapt to

changing market and competitive environments, deliver major transformation programmes to be an efficient supplier, and build the necessary capabilities to compete, have the potential to impact our cash flow growth and value creation goals.

· The Board sets and approves the Group's strategy, setting the strategic direction and confirming the strategic choices made by the business. Regular reviews are conducted on changes in market trends and the competitive environment, and the business response.

· We have a clear financial framework to ensure capital is allocated in line with the strategy and that balance sheet strength and return on capital boundary conditions are met.

· The Board and Executive Committee regularly review the capabilities required to deliver on the strategy and address gaps as they arise.

External Market Environment

Risk that events in the external market or environment could affect the delivery of our

strategy.

External Risk

Governance oversight: Board

Risk Climate: at a similar level

Priority: Cash flow growth and strategic momentum

We operate in highly competitive and changing markets, where customer behaviour, needs and demands are evolving due to digitisation, energy efficiency, climate change, government initiatives, and the general economic outlook. In addition, we are subject to global market

volatility in our upstream businesses in commodity

markets.

· We focus on understanding customer segments and their needs, aiming to design products and offerings that are attractive and competitive.

· We are increasing our investment in areas like Connected Home and Distributed Energy & Power that represent emerging customer needs and reinforce our existing energy supply and services offerings, putting customers more in control of their energy use as described on page 33.

· Regular analysis is undertaken of commodity price fundamentals and their potential impact on our business plans and forecasts.

Brand, Trust and Reputation

Risk that our competitive position is compromised by poor standards of fairness and transparency and by failing to protect our brands.

Risk Requiring Judgement

Governance oversight:

Board

Risk climate: increased

Priority:

Customer satisfaction and operational excellence

Failure to appropriately manage brand perception, media attention and campaign or pressure groups could have a negative impact on consumer sentiment and contribute to a fall in overall customer numbers. Failure to be fair and transparent in all our operations could cause reputational damage and if standards are particularly low, lead to legal action.

· We regularly monitor and review our level of customer service, aiming to deliver a fair, simplified and transparent offering to all of our consumers. Operational processes are in place to address failure in service and customer complaints.

· We engage with NGOs, consumer and customer groups, political parties, regulators, charities and other stakeholders to identify solutions to help reduce bills and improve trust in the industry.

· We review and monitor changes in our customer brand position through net promoter score (NPS) and other metrics as described on page 31.

· We consider our impact on society as part of being a good corporate citizen. This is set out in the Building strong communities section on pages 37 to 38.

Change Management

Risk of failure in the identification, alignment and execution of change programmes and business restructuring.

Risk Requiring Judgement

Governance oversight: Board

Risk climate: at a similar level

Priority: Cost efficiency and simplification

If change projects are not aligned to strategic objectives or not implemented appropriately, the expected benefits may not be realised.

If acquisitions are not integrated effectively the business benefits may not be realised.

· Significant change management programmes are reviewed as a regular aspect of Group and business unit performance reviews, and are regular agenda items of Executive Committee meetings.

· Change activity is managed through a network of programme offices providing oversight and governance at the appropriate level.

· We have dedicated change capability at Group and business unit level to monitor the realisation of benefits, the prioritisation of efforts and to share best practice.

· Our people capability is continually reviewed and developed to ensure we have the right skills to deliver our plans.

· We have post-merger integration guidelines in place to integrate acquired businesses.

Legal, Regulatory and Ethical Standards Compliance

Risk of failure to comply with laws and regulations and behave ethically in line with Our Code, resulting in reputational or financial damage. This includes market conduct, customer conduct, data protection and financial crime risk.

Risk Requiring Standards

Governance oversight: Board and Safety, Health, Environment, Security and Ethics Committee

Risk climate: at a similar level

Priority: Safety, compliance and conduct

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

· Regulatory compliance monitoring activities are performed by a single Group-wide function to drive consistency and quality.

· Control frameworks are in place in the UK and in development in other markets to ensure that the customer experience is delivered in line with our Customer Conduct guidelines. This is managed through a Group-wide practice group.

· The Market Conduct practice group shares best practice with standardised controls and processes and aligns mitigation activities where possible.

· Data is a strategic asset and its protection is a priority under a Steering Group led by the Executive Director, Centrica Consumer.

· Our Code was launched globally in January 2018 to underpin the new values introduced in 2017. This sets the standard for behaviour across the Group.

· Where we enter new territories via acquisition or organic growth we ensure country risks are identified and managed appropriately, including anti-bribery and corruption risk and compliance with local legislation.

Asset Development, Availability and Performance

Risk that failures in the development or integrity of our investments in operated and non-operated assets could compromise performance delivery.

Risk Requiring Judgement

Governance oversight: Board

Risk climate: decreased

Priority: Customer satisfaction and operational excellence

Failure to invest in the maintenance and development of our assets could result in significant safety issues or asset underperformance. Operational integrity is critical to our ability to deliver performance in line with the strategic objectives.

· Capital allocation and investment decisions are governed through the Investment Committee, the final decision resting with the Group Chief Executive Officer and/or Board of Directors.

· Group-wide minimum standards are applied to all assets, whether operated or non-operated to give confidence in their integrity.

· Maintenance activity and improvement programmes are conducted in all asset-based businesses to maximise effectiveness and production levels.

Information Systems and Security

Risk of reduced effectiveness, availability, integrity or security of IT systems and data essential for Centrica's operations.

Risk Requiring Standards with elements that are Risks Requiring Judgement

Governance oversight: Board and Safety, Health, Environment, Security and Ethics Committee

Risk climate: at a similar level

Priority: Safety, compliance and conduct

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, leading to potential financial loss and/or reputational damage to the Group.

Failure to deliver IT solutions in support of the prioritised objectives and change programmes in the business would have consequences both for our organisational transformation and in some cases, our compliance obligations.

· Our information security strategy seeks to integrate information systems, personnel and physical aspects in order to prevent, detect and investigate threats and incidents.

· We engage with key technology partners and suppliers, to ensure potentially vulnerable systems are identified.

· Regular controls testing and security patching around our core systems is undertaken and our controls are further tested periodically by outside experts.

· Strengthening of the Chief Information Security Officer (CISO) role to oversee the development of standards, controls and assurance across the Centrica estate.

· We regularly evaluate the adequacy of our infrastructure and IT security controls, undertake employee awareness and training and test our contingency and recovery processes, recognising the evolving nature and pace of the threat landscape.

· Established governance bodies to oversee plans to comply with new requirements including the European General Data Protection Regulation (GDPR).

Financial Processing and Reporting

Risk of errors or losses arising from the processing and reporting of financial transactions for internal and external purposes. This includes potential errors such as the reassessment of unbilled power revenues in our North America Business Unit of £46m, reported in our November 2017 trading update.

Risk Requiring Standards

Governance oversight: Board

Risk climate: increased

Priority: Safety, compliance and conduct

The increasingly complex financial accounting landscape, including new financial reporting standards, increases the likelihood of errors being made in the application of accounting judgements. The potential for failures in core controls around critical processes increases in a period of significant change. As Finance continues to implement the functional transformation programme, the risk of control degradation could increase and this is an area of significant focus.

· Our financial control framework incorporates our financial controls and management self-assessment compliance, with progress being made to improve the use of systems and reduce the reliance on manual controls.

· We have implemented a revised balance sheet review and reconciliation procedure to target minimising control gaps arising in our underlying systems and ensure that issues are detected on a timely basis.

· We undertake detailed testing and evaluation of the effectiveness of our controls in response to critical financial risks and report to the Financial Risk, Assurance and Controls Committee quarterly.

· Controls improvement is a key objective of the Finance transformation programme, with oversight of delivery of this objective provided by the Audit Committee.

Business Planning, Forecasting and Performance Management

Risk that plans and forecasts may not be deliverable or may fail to drive efficient and effective performance and the risk of failures in performance reporting. This includes the risk that we do not quickly respond to and reflect performance management issues in any of the Business Units as and when they arise.

Risk Requiring Judgement with elements that are Risks Requiring Standards

Governance oversight: Board

Risk climate: at a similar level

Priority: Cash flow growth and strategic momentum

We prioritise how we use our resources based on our business plans and forecasts. Failure to accurately plan and forecast, taking into account the changing business environment, could result in sub-optimal decisions and failure to realise anticipated benefits.

· Annual planning processes are subject to scrutiny and challenge with respect to underlying market trends, competitive threats and organisational capability and delivery from the Executive Committee and the Board.

· Group Functions have adopted standardised planning processes in support of the business priorities, driving improved integration of plans.

· Quarterly performance review meetings involving the Executive Committee enable the review of performance against forecasts, ensuring that mitigating actions or revisions are developed and implemented.

People

Risk that we cannot attract or retain employees to ensure we have the appropriate capabilities to deliver our strategy. There is also the potential risk of industrial action in our Consumer businesses.

Risk Requiring Judgement with elements that are Risks Requiring Standards.

Governance oversight: Board

Risk climate: increased

Priority: People and building capability

In challenging conditions, it is critical that we attract and retain key capabilities across the business. The consequence of not being able to fulfil key roles could have a detrimental impact on our ability to meet our strategic objectives.

The risk of industrial action in our businesses would have a potential impact on customer service levels and retention.

We require the right behaviours from our leaders and employees to deliver our business strategy in accordance with our Values and Our Code.

· We continue to evolve a clearly defined people strategy based on culture and engagement, equality and wellbeing, talent development, training and reward and recognition.

· We regularly review organisational capability in critical business areas, reward strategies for key skills, talent management and learning and development programmes through external benchmarking.

· We conduct an annual survey of employee engagement and take seriously the messages arising with a plan of actions.

· The Executive Committee has clear oversight through regular discussions of the people related challenges inherent in our transformation programme.

· 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.

· Our Code was launched in early 2018. This sets the expectations for all employees, replacing the Business Principles.

Customer Service

Risk of failure to consistently meet the expectations of our customers through the customer lifecycle.

Risk Requiring Judgement

Governance oversight: Board

Risk climate: at a similar level

Priority: Customer satisfaction and operational excellence

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 if they face an unacceptable customer experience. Remaining at the forefront of digital developments and innovating to provide choice and control for our customers is critical. This risk faces increased scrutiny as political and regulatory attention focuses on introducing competition by applying pressure over pricing strategies.

· Customer and Field Operations teams monitor customer service levels, ensuring enquiries are answered in a timescale and manner acceptable to the customer, complaint levels are minimised, and that customer satisfaction is reviewed at all stages of the customer journey.

· Leadership teams in our front-line businesses establish accountability for specific aspects of the customer journey and assess performance against agreed metrics weekly.

· Performance parameters are monitored on a weekly basis for all third-party service providers involved in the front-line and back office customer service process.

· Customer service agents are quality assessed for consistency with a rigorous training and performance management programme, and a structured performance management process is in place for field teams.

· We operate an environment of continuous improvement, incorporating an accredited programme (STAR), and use root cause analysis of complaint and NPS insight to continuously improve our service delivery.

Balance Sheet Strength and Credit Position

Risk that the balance sheet may not be resilient with implications for our credit rating, liquidity risk and long-term financial obligations.

Risk Requiring Judgement

Governance oversight: Board and Audit Committee

Risk climate: at a similar level

Priority: Cash flow growth and strategic momentum

Failure to operate within the Group's financial framework resulting in risk to maintaining our target credit rating, impacting our access to cost effective capital and trading arrangements.

Long term financial obligations may increase in value due to factors both inside and outside of our control, for example pension schemes, resulting in additional funding required to meet our obligations.

· We assess available resources on a regular basis and this analysis underpins our going concern assumption and viability analysis as described on pages 61 and 62.

· Significant committed facilities are maintained with sufficient cash held on deposit to meet working capital fluctuations as they arise.

· Counterparty exposures are restricted through a Group Credit Limit policy which is regularly reviewed and adjusted as necessary.

· Wholesale credit risks associated with commodity trading and treasury positions are managed in accordance with Group policy.

· We consider accounting assumptions impacting on our balance sheet carefully, including decommissioning and impairment, as described as part of the Group Financial Review on pages 48 to 51 and in note 3(b) to the Financial Statements.

Procurement and Supplier Management

Risk of failure to source responsibly and to co-ordinate and collaborate with supply chain partners to ensure value delivery and continuity.

Risk Requiring Judgement with elements that are Risks Requiring Standards

Governance oversight: Board

Risk climate: at a similar level

Priority: Customer satisfaction and operational excellence

Our business operations rely on products and services provided through third parties, including outsourced activities, infrastructure and operating responsibility for some assets. We rely on these parties to comply not only with contractual terms, but also legal, regulatory and ethical business requirements.

· All suppliers are required to sign up to our 'Ethical 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.

· Audits are conducted in relation to third-party operation of jointly operated Exploration & Production assets.

· We review the ethical conduct of our suppliers including a programme of supplier visits to provide additional assurance over practices employed, including respect for human rights, as part of being a good corporate citizen as laid out on page 38.

· Procurement practices have been reviewed across the Group and a global Procurement Policy and Standard was implemented from 1 January 2018.

Related Party Transactions

The Group's principal related party is its investment in Lake Acquisitions Limited, which owns the existing EDF UK nuclear fleet. The disclosures below, including comparatives, only refer to related parties that were related in the current reporting period.

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:

				2017				2016
	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 (i) £m	Amounts owed to £m
Joint ventures:
Wind farms (i)	1	(10)	-	-	7	(80)	120	(43)
Associates:
Nuclear	-	(527)	-	(40)	-	(617)	-	(57)
Other	-	-	-	-	4	(5)	-	-
	1	(537)	-	(40)	11	(702)	120	(100)

(i) Disposed on 17 February 2017. See note 12(d) for further details. Transactions have only been included above up to this disposal date.

During the year, there were no material changes to commitments in relation to joint ventures and associates. During the year a provision against a receivable from one of the Group's joint ventures was charged to the Group Income Statement amounting to £1 million. No other provision for bad or doubtful debts relating to amounts owed from related parties was recognised during the year through the Group Income Statement (2016: nil). The balance of the provision at 31 December 2017 was nil (2016: nil)

At the balance sheet date, the Group committed facilities to the Lake Acquisition Group totalling £120 million, although nothing has been drawn at 31 December 2017.

Key management personnel comprise members of the Board and Executive Committee, a total of 18 individuals at 31 December 2017 (2016: 18).

Remuneration of key management personnel Year ended 31 December	2017 £m	2016 £m
Short-term benefits	9.8	15.8
Post employment benefits	1.3	1.1
Share-based payments	4.8	7.8
	15.9	24.7

Remuneration of the Directors of Centrica plc Year ended 31 December	2017 £m	2016 £m
Total emoluments ⁽ⁱ⁾	4.0	9.8
Amounts receivable under long-term incentive schemes	1.9	-
Contributions into pension schemes	0.8	0.8

(ii) These emoluments were paid for services performed on behalf of the Group. No emoluments related specifically to services performed for the Company. 2016 comparatives have been restated. Further detail is provided in the Remuneration Report on pages 78 to 89.

Directors' responsibilities statement

In compliance with DTR 4.1.12R, the Annual Report 2017 contains a Directors' responsibilities statement. This is reproduced below, in line with DTR 6.3.5R. The statement relates to and is extracted from the Annual Report 2017 and does not attach to the extracted information presented in this announcement or the preliminary results announcement released on 22 February 2018.

The Directors, who are named on pages 64 and 65, are responsible for preparing the Annual Report, the 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 have elected to prepare the Company Financial Statements in accordance with United Kingdom Generally Accepted Accounting Practice including FRS 101 'Reduced Disclosure Framework' (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 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 2017, 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 profit or loss of the Group;

· the Strategic Report contained on pages 2 to 62 together with the Directors' and Corporate Governance Report on pages 63 to 100, 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 73, there is no relevant audit information of which Deloitte LLP 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.

ENDS

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