Satisfying
the changing
needs of our
customers
Annual Report and
Accounts 2016
We are an energy and
services company.
Everything we do is
focused on satisfying
the changing needs
of our customers.
Group Highlights
GROUP FINANCIAL SUMMARY (Year ended 31 December)
Group revenue
Adjusted operating profit
Adjusted earnings
Adjusted basic earnings
per share (EPS)
£27.1bn
2015: £28.0bn
▼ 3%
£1,515m £895m
2015: £1,459m
▲ 4%
2015: £863m
▲ 4%
16.8p
2015: 17.2p
▼ 2%
Adjusted operating
cash flow
Group net debt
Return on average capital
employed (ROACE)
Growth revenue
£2,686m £3,473m 16%
2015: £2,253m
▲ 19%
2015: £4,747m
▼ 27%
2015: 12%
▲ 4ppt
£194m
2015: £114m
▲ 70%
Statutory operating
profit/(loss)
Statutory profit/(loss)
for the year attributable
to shareholders
Net exceptional items
after taxation included
in statutory profit/(loss)
Basic earnings per share
£2,486m £1,672m £27m
2015: £(857)m
● nm
2015: £(747)m
● nm
2015: £(1,846)m
● nm
31.4p
2015: (14.9)p
● nm
GROUP KEY OPERATIONAL PERFORMANCE INDICATORS
Total customer
account holdings –
Home
Total customer
account holdings –
Business
26,196
2015: 27,069
▼ 3%
*year end, ‘000s
1,348
2015: 1,396
▼ 3%
*year end, ‘000s
Total customer
gas consumption
(mmth)
12,022
2015: 12,177
▼ 1%
Total customer
electricity consumption
(GWh)
144,810
2015: 151,595
▼ 4%
Direct Group headcount1
Total recordable
injury frequency rate
1 Direct Group headcount
excludes contractors, agency
and outsourced staff. 2015
has been restated to include
North America DE&P.
36,494
2015: 39,389
▼ 7%
*year end
0.98
2015: 1.10
▼ 11%
*per 200,000 hours worked
At a Glance
Iain Conn Group Chief Executive
“We delivered our key objectives
including improved safety
performance, better customer
service, and more innovative
offerings and solutions, while
repositioning the portfolio,
building capability and driving
significant cost savings.”
SAFETY
Safety, compliance and conduct remains
our top strategic priority. The Group’s
total recordable injury frequency rate
reduced by 11% compared to 2015.
However there were two Tier 1 process
safety incidents across the Group
during the year, up from one last year.
Improving our performance in this
area remains a key focus.
GOOD FINANCIAL
PERFORMANCE
INVESTING IN NEW
TECHNOLOGIES AND
CAPABILITIES
Adjusted operating
profit and adjusted
earnings both up 4%.
▲ 4%
Enhanced ‘Internet of
Things’ platform, data
science and analytics,
and digital capability.
▲19%
14%
Adjusted operating
cash flow up 19%
to £2,686 million,
including £357 million
working capital inflow
in UK Business.
Underlying adjusted
operating cash flow
growth was 14%, in
excess of the Group’s
3–5% per annum
long-term target.
527,000
527,000 Connected
Home hubs installed;
now selling Hive
products in
North America.
Centrica builds
a pioneering local
energy market
in Cornwall.
CUSTOMER DELIVERY
MATERIALLY IMPROVED
RESHAPING OUR PORTFOLIO
IN LINE WITH STRATEGY
BALANCE SHEET SIGNIFICANTLY
STRENGTHENED
Investment in customer service and
digital capability resulted in UK Energy
Supply & Services complaints down
31% and higher net promoter scores
across all geographies in 2016.
ENER-G Cogen and Neas Energy
acquisitions add significant capabilities
in distributed generation and asset
management.
Launch of innovative
new product offers
for both Centrica
Consumer and
Centrica Business
customers.
Completed exit from wind power
with GLID and Lincs wind farm sales
and announced exit from Trinidad
and Tobago.
COST EFFICIENCY PROGRAMME
£384m
We made strong
progress with our
£750 million per
annum efficiency cost
programme delivering
£384 million of savings
in 2016.
Unless otherwise stated, all references to
operating profit or loss, taxation, cash flow,
earnings and earnings per share throughout the
Strategic Report are adjusted figures, reconciled
to their statutory equivalents in the Group Financial
Review on pages 52 to 55. See also notes 2, 4
and 10 to the Financial Statements on pages 113
and 114, 118 to 123 and 132, for further details of
these adjusted performance measures. In addition
see pages 219 and 220 for an explanation and
reconciliation of other adjusted performance
measures used within this document.
▼ 27%
▲ 112%
Net debt down
27% to £3.5 billion.
Net assets up 112%
to £2,844 million with
the share placement
and current year
profits offsetting the
movement in the
pension deficit.
FOCUS ON CASH FLOW,
CAPITAL DISCIPLINE AND
NET DEBT REDUCTION
Adjusted operating
cash flow expected
to exceed £2 billion
in 2017.
£2bn
Great companies meet a need that
is valued by customers and society.
Read more in the Chairman’s Statement
on page 4
Energy Supply
& Services
Read more on
pages 36 to 39
Business Model
Read more on pages 16 and 17
Connected
Home
Read more on
pages 40 and 41
Distributed
Energy & Power
Read more on
pages 42 and 43
Energy Marketing
& Trading
Read more on
pages 44 and 45
CONTENTS
14
12
10
16
18
20
Strategic Report
Our Businesses
2
Chairman’s Statement
4
Group Chief Executive’s
6
Statement
Focused on Innovating
to Satisfy the Changing
Needs of our Customers
Focused on Pioneering
a New Energy Future
Focused on Cutting Energy
Costs and Carbon Emissions
Our Business Model
Key Performance Indicators
Focused on Peace of Mind
for our Customers
Focused on Engaging
with our Customers
Responsible Business
Update
Our View on Taxation
Focused on Training the
Employees of the Future
Focused on Training
our Employees
Business Review
Group Financial Review
Our Principal Risks and
Uncertainties
36
52
56
31
32
34
22
24
Governance
66
68
69
Board of Directors
Senior Executives
Directors’ and Corporate
Governance Report
Remuneration Report
Independent Auditors’ Report
Smarter energy
Read more on pages 20 and 21
83
100
Responsible
Business
Update
Read more
on page 24
Exploration
& Production
Read more on
pages 46 and 47
Central Power
Generation
Read more on
pages 48 and 49
Group Financial Review
Read more on page 52
Centrica Storage
Read more on
pages 50 and 51
Principal
Risks
Read more
on page 56
Governance
Read more
on page 65
Remuneration Report
Read more on page 83
Financial Statements
108 Group Income Statement
109 Group Statement of
Comprehensive Income
109 Group Statement of
Changes in Equity
110 Group Balance Sheet
111 Group Cash Flow Statement
112 Notes to the
Financial Statements
190 Company Financial
Statements
192 Notes to the Company
Financial Statements
201 Gas and Liquids
Reserves (Unaudited)
202 Five Year Summary
(Unaudited)
203 Ofgem Consolidated
Segmental Statement
Shareholder Information
216 Managing Your Shares
219 Additional Information
– Explanatory Notes
IBC Glossary
Centrica plc Annual Report and Accounts 2016
1
STRATEGIC REPORT
OUR BUSINESSES
Our Businesses
Our focus
Centrica: a customer-facing
energy and services company
for the 21st century
CUSTOMER-FACING BUSINESSES
Connected
Home
Our Hive smart thermostat
and other products and
services help our customers
in the areas of home energy
management, home
automation and peace
of mind.
Distributed
Energy & Power
Providing industrial and
commercial consumers with
the ability to use energy more
intelligently, giving customers
tools to generate and manage
their energy usage.
Energy Marketing
& Trading
Providing risk management
and wholesale market access
for the Group building on
strong cross-commodity
trading capabilities and a
global presence in LNG.
Energy Supply
& Services
Supplying energy and services
to consumer and business
customers in the UK, the
Republic of Ireland and
North America through our
new business units: UK Home;
UK Business; Ireland;
North America Home; and
North America Business.
ASSET-BASED BUSINESSES
Exploration
& Production
Targeting production of between
40 to 50 million barrels of oil
equivalent per year focused
on the UK, the Netherlands
and Norway.
Central Power
Generation
The thermal power generation
portfolio is being rationalised
with a view to simplification and
cost reduction while retaining
low cost optionality. We hold
a 20% interest in eight nuclear
power stations in the UK.
Centrica
Storage
The Group operates the
Rough gas storage facility,
which is a strategic storage
asset for the UK.
2
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Our strategy
The world of energy is changing and, with our
chosen businesses, distinctive positions and
current capabilities, Centrica is well placed
to deliver for its customers and for society.
We will satisfy our customers, deliver cash
flow growth and returns for our shareholders
and be efficient and excellent in our operations.
We are shifting investment towards our
customer-facing businesses – organised
around two global customer-facing divisions:
Centrica Consumer and Centrica Business
focused on the residential consumer and
the business customer respectively.
Our areas of focus are Energy Supply
& Services, Connected Home, Distributed
Energy & Power, Energy Marketing & Trading
and the optimisation around Central
Power Generation.
We supply energy and services to around
28 million customer accounts mainly in the
UK, Ireland and North America through
strong brands such as British Gas, Direct
Energy and Bord Gáis supported by around
12,000 engineers and technicians.
We are focused on delivering high levels
of customer service, improving customer
engagement and loyalty. We are developing
innovative products, offers and solutions,
underpinned by investment in technology.
The role of Exploration & Production is
to provide diversity of cash flows and the
balance sheet strength required to supply
energy and services to our customers.
It continues to play an important role
in our portfolio.
We aim to be a good corporate citizen;
employer of choice and to provide leadership
in a dynamic and changing world.
Our performance
BREAKDOWN BY EXTERNAL OPERATIONAL REVENUE
BREAKDOWN BY EXTERNAL OPERATIONAL REVENUE
BREAKDOWN BY ADJUSTED OPERATING PROFIT/(LOSS)
BREAKDOWN BY ADJUSTED OPERATING PROFIT/(LOSS)
Energy Supply & Services – UK & Ireland
Energy Supply & Services – UK & Ireland
£12,055m
£906m
Energy Supply & Services – North America
Energy Supply & Services – North America
£10,366m
£314m
Connected Home
£25m
Distributed Energy & Power
£159m
Energy Marketing & Trading
£3,194m
Exploration & Production
£771m
Central Power Generation
£458m
Centrica Storage
£74m
Connected Home
£(50)m
Distributed Energy & Power
£(26)m
Energy Marketing & Trading
£161m
Exploration & Production
£187m
Central Power Generation
£75m
Centrica Storage
£(52)m
Centrica plc Annual Report and Accounts 2016
3
STRATEGIC REPORT
CHAIRMAN’S STATEMENT
Chairman’s Statement
2016 was an extremely challenging year in which Centrica
met or beat its targets whilst, importantly, underpinning
discipline throughout the organisation on key matters
of safety, ethics and compliance.
The impact has been broad with financial
delivery, organisational transformation,
process efficiency, cash flow and strategic
implementation all showing distinct progress.
The business re-orientation has been very
radical with a particular emphasis on finding
ways to enable our people and technology
to better understand and serve the changing
energy needs of our customers on both
sides of the Atlantic.
This process of reshaping Centrica has not
been easy or comfortable for our own people
and I would like to pay tribute to and thank
everyone for their hard work and resilience
during the year. Throughout this process,
Iain Conn has shown firm, imaginative and
decisive leadership. He has chosen his senior
team wisely and led them intelligently. They
too deserve credit for their performance.
Despite the improvement in our financial
position, we took the decision not to resume
a progressive dividend policy at this stage.
This was a finely weighted judgement. But, in
these uncertain times, we would rather err on
the side of prudence as further work still needs
to be done on strengthening the balance
sheet and returning the business to growth.
Our growth plans are clearly shaped with
the shift in investment intensity from the
resource businesses towards the customer,
supporting a focus on building our growth
businesses such as Distributed Energy
& Power, Connected Home, and Energy
Marketing & Trading. We are committed to
investing in these businesses, positioning
ourselves to compete successfully in
a fast-moving, attractive and aggressive
environment. We continuously ask ourselves
the question ‘What will it take to be a winner?’
in this new world, and always seek to act
to improve our probability of success by
adapting our capabilities, technologies
and governance as required.
We made strides in 2016, but we are far
from satisfied. Our objective is not simply
a return to profitable growth for the benefit
of our investors, important though that is.
Rather we are driven by an over-arching
aspiration to become a truly great company.
What does that require, in our view?
Great companies meet a need that is valued
by customers and society. And, in doing so,
they benefit their shareholders as well as
wider stakeholders, including employees,
suppliers, partners and communities.
And, the most important stakeholder of
them all, our customers for whom our clear,
resurrected purpose is unequivocally in
service; a purpose that seeks to bring a
contemporary relevance to a set of values
rooted in our 205-year history. And, in that
purpose, we are making progress.
Great companies are places where people
worry more about what is not working
than what is.
Customer complaints are down. But your
Board and executive leadership regard any
complaint as one too many. Efficiency has
improved. But we have suffered a decline
in employee engagement. Affordability has
improved. But our customers live in a world
where incomes continue to be squeezed.
And so, we are more consumed by how
far we still have to travel than by the distance
travelled thus far.
Great companies are places where people
think like owners and entrepreneurs, staying
viscerally and intellectually connected with
the dynamics of their businesses and the
forces that shape the operating context of
those businesses. And that context, today,
is not easy. Business and wealth creation
are terms of disparagement. Many reputations
have been damaged by the actions of a few.
And the positive impacts of globalisation,
new technologies and creative investment
have been drowned out by the concomitant
growth of social inequality.
“Reshaping Centrica has not
been easy or comfortable for
our own people and I would
like to pay tribute to and thank
everyone for their hard work
and resilience during the year.”
Rick Haythornthwaite
Chairman
4
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION This poor opinion of business is bad for us,
for the UK economy and for prosperity in
general. So, we are acutely aware that we not
only need to reconnect with our customers.
We also need to forge a new partnership with
government and our other stakeholders,
based on mutual understanding and a
willingness to work together.
That is why we welcome the Green Papers
on Industrial Strategy and Governance
recently published by the UK Government.
Government has the power to create a
constructive context in which businesses
can make the investments which the
nation needs.
In the end though, it is businesses, through
everyday contact with their customers,
which can make the biggest and most
immediate impact. The source of real
economic and social change is at a local,
community level. And that is where
companies can be very valuable facilitators
of change for the better in people’s lives.
Our engineers and technicians visit thousands
of customers every week. They are trusted on
an individual level to enter people’s homes
and meet an immediate need, as well as
assessing their overall energy requirements.
Our Hattersley call centre on the outskirts of
Manchester specialises in helping hundreds
of indebted customers every day to manage
their energy bills. Last year the proportion of
our customers in debt fell and, among them,
the proportion on an agreed repayment plan
is well above the industry average.
These are just two examples of how we as
a business connect with communities and
individuals to effect change on the ground.
We are close to the real issues and we can
make a difference. And we know that we
should do more.
It is in these relationships that trust is born,
nurtured and thrives.
And great businesses must be built on a
foundation of trust, a quality that is in short
supply today.
We are very intent on rebuilding trust in
our company and sector.
This requires not only an emotional and
physical investment in our relationship with
our customers and society but also the
addressing of the prevalent impression
that UK governance in general is failing,
an impression that will render any such
investment worthless if untreated.
In fact, there is a strong case to be
made that the UK has the best corporate
governance framework in the world.
The answer to any breakdowns in UK
governance lies not in further embellishment
of that framework but in promoting better
compliance and a collective commitment
to resolve some of the more intractable
and sensitive issues over time.
Foremost amongst those issues is executive
remuneration, often the lightning rod for
criticism of boards. We are making progress
over time. Long term executive pay trends
are shifting towards more simplicity, lower
differentials and internal succession in
preference to expensive ‘star signings’ from
outside. The responsibility lies with chairs and
boards of directors to manage the balance
between addressing this perniciously divisive
problem and avoiding the unintended
consequences that precipitous change,
though perhaps politically popular in the
short-term, may carry in terms of weakened
capabilities and competitiveness. More
regulation is unlikely to provide the answer.
In respect of compliance, your Board is
continuously seeking ways in which we might
better comply with and apply the Code. That
must always start with recruiting the best
possible directors whose track record speaks
to their credentials, wisdom and professional
approach. The quality of a board ultimately
flows from the sum of these attributes; perhaps
the setting and policing of standards in this
key determinant of good governance holds
the key to improving global standards rather
than further embellishment of the Code.
We have worked to enhance our governance
structures and processes throughout the
year. Full details of this activity is set out
in the Governance section on pages
65 to 82, but it is the ongoing, deliberate
refreshing of your Centrica Board that
holds the key.
During the year, we reviewed the succession
plans in place for the Board and the Executive.
We identified digital, retail, North America
and financial services as areas of business
experience and expertise where the
recruitment of new Board members could
complement the strengths of our existing
Board. We also paid heed to the public
concerns about the extent to which the
voices of customers and employees were
being heard in the boardroom, bolstering our
agendas and approaches were necessary.
There were several changes to composition
of the Board. In June, Stephen Hester was
appointed as a Director of the company
and, in October, he succeeded Ian Meakins
as Senior Independent Director. Stephen
has wide-ranging commercial experience,
particularly in customer-facing businesses.
“In the end though, it is
businesses, through
everyday contact with their
customers, which can make
the biggest and most
immediate impact.”
In addition, he brings a broad understanding
of financial services, together with a deep
knowledge of operating within highly
regulated businesses. I would like to thank
Ian for the great contribution he has made
in his six years’ service on the Board.
Scott Wheway joined the Board in May.
Scott has a wealth of experience as a
senior customer-facing business leader
with a mix of deep retail and consumer
expertise. He is also a seasoned
remuneration committee chair and will
assume that role for Centrica following the
2017 AGM. Joan Gillman was appointed
as a Non-Executive Director in October.
Joan is former executive vice president of
Time Warner Cable, the second largest
cable company in the United States,
and has wide experience in media,
communications and the shaping of
network technology strategies. Scott
and Joan are both valuable additions
to the Board and are already making
their contributions felt.
During 2016, the Centrica leadership did
a great deal to put in place the diverse
teams, structure and technology required
to underpin our growth and give us a
competitive advantage in our chosen
markets. Centrica has moved a long way
in 12 months. We may have ‘What does it
take to be great?’ as a constant challenge
but equally we never lose sight of the
question ‘What do we have to do to make
a difference now and make this future
possible?’ It is thanks to this healthy
combination of aspiration and practical
application amongst our executive team
that your Board looks to the future with
growing confidence.
Rick Haythornthwaite
Chairman
23 February 2017
Centrica plc Annual Report and Accounts 2016
5
STRATEGIC REPORT
GROUP CHIEF EXECUTIVE’S STATEMENT
Group Chief Executive’s Statement
For Centrica, 2016 was a year of robust performance and progress
in implementing our customer-focused strategy. We delivered our
key objectives including improved safety performance, better
customer service, and more innovative offerings and solutions, while
repositioning the portfolio, building capability and driving significant
cost savings as we build a platform for the future.
CENTRICA IN 2016
2016 was a very busy year for the Centrica
team, but they have delivered a lot, and
Centrica enters 2017 a stronger company,
with encouraging underlying momentum
and positioned to deliver longer-term
returns and growth.
Our stated purpose is ‘to provide energy
and services to satisfy the changing needs
of our customers’. But, as that mission
statement also recognises, the nature of the
world in which we operate is evolving rapidly
and we need to respond equally fast if we
are to survive and prosper.
During the year, we made a good start in
the fundamental repositioning of Centrica by
focusing on our customers, in line with the
2015 strategic review of the business, and
concentrating on making ourselves more
efficient and improving capability in the key
functions which will allow us to deliver for
them and build a real competitive advantage.
It is by no means an easy task and we
are still in the early stages of the process.
But because of the difficult choices we have
already made, and specifically the refocusing
of the company and the significant efficiencies
we have been able to unlock, we have
given ourselves the time to establish the
capabilities necessary to pursue growth.
We mustn’t waste that opportunity and
we have exciting plans, but the world of
energy and services is changing rapidly.
There are three shifts driving change in the
energy market and in our business. The first
is the decentralisation of the energy system.
This arises from more viable technologies
and many types of solutions for energy
management at the point of use.
The second shift, which follows on from
the first, is that customers, communities,
businesses and individuals, are gaining
greater power to choose and control
their energy use.
And thirdly, these trends are being accelerated
by digital technology, especially big data and
the actionable insights provided by analytics.
Our focus must be on what customers
want and how we can best serve them.
They want affordable energy; they want
choice; they want control and the ability to
use less energy; and, increasingly, they want
lower carbon. We are very well positioned
to deliver on all of these needs.
Finally, the world beyond the customer
is also evolving. 2016 has seen some
big changes in the political and economic
environment. Centrica must be a trusted
and constructive partner with governments
and regulators, while also pursuing our own
goals and the interests of our shareholders.
2016 was a year of solid strategic progress
and good performance as we delivered for our
customers in a rapidly changing economic,
political and competitive environment.
RESHAPING CENTRICA
Against this backdrop, we have been
repositioning Centrica to be more customer
focused, and reallocating resources from
Exploration & Production (E&P) and Central
Power Generation towards the customer-
facing businesses. The asset businesses
remain important to the diversity of
our portfolio and therefore our cash flow
stability but, in relative terms, we are
concentrating more resources on
the customer.
In February 2017, we announced a major
step in reorganising our customer-facing
businesses. We have established two
operating divisions, Centrica Consumer
and Centrica Business. These two divisions
will contain all of our businesses which face
the residential consumer and the business
customer respectively. We are organising
to respond to their changing needs.
In addition to these two customer-facing
divisions, we will continue to develop our
portfolio in E&P and in Centrica Storage.
“2016 was a very busy year
for the Centrica team, but they
have delivered a lot, and Centrica
enters 2017 a stronger company,
with encouraging underlying
momentum and positioned
to deliver longer-term returns
and growth.”
Iain Conn
Group Chief Executive
6
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION “We must ensure we satisfy
our customers and deliver
operational excellence
every day. To this end, we
are investing £50 million in
improving customer service,
we have taken on more
call centre advisers and we
have increased the number
of their training days. We
try to make sure that our
customers can always speak
to someone who truly
understands their needs.”
If we are to grow the business and enter
new markets, we need to get our basic
level of effectiveness right. So, we have
tackled duplications and inefficiencies and
we will continue the journey to simplify
and standardise how Centrica works.
Altogether, our reorganisation programme
has so far required a direct like-for-like
headcount reduction of around 3,000.
I recognise the significant challenges
faced by colleagues over the last two years.
The Centrica team has performed very
well in extremely difficult circumstances.
But we are now more resilient and adaptable
to the external environment and all the
internal changes we have made are aligned
to achieving the purpose and strategic goals
of the Group. We are now in a much stronger
position to deliver for our customers, deliver
for our shareholders and ultimately deliver
for our own employees.
SAFETY
As we reposition the business, our overriding
priority remains safety, compliance and
conduct. If we don’t get this right, we won’t
be able to execute all our other plans. Last
year we saw a big improvement in customer
safety, with the number of incidents falling
by a quarter. Recordable and lost time injury
frequency rates among our own people
also fell. Sadly, however, one of our partner
engineers was in a road accident in which
they tragically died. One incident like this
is one too many. We continue to focus on
building safety capability with our people
through effective communication and training.
We also pay close attention to compliance
and the relationships with all our regulators.
SERVING OUR CUSTOMERS
We must ensure we satisfy our customers
and deliver operational excellence every day.
To this end, we are investing £50 million in
improving customer service, we have taken
on more call centre advisers and we have
increased the number of their training days.
We try to make sure that our customers
can always speak to someone who truly
understands their needs.
Our continued focus and investment in
customer service has resulted in higher
net promoter scores and significantly lower
complaint levels across our UK, Ireland and
North America customer-facing businesses.
We aim to be clear and competitive on
bills and pricing. We committed to freeze
our standard tariff, one of the cheapest on
the market, for the entire Winter 2016/17
period. We have since extended this freeze
until August 2017 just as other providers
are putting their prices up. Bord Gáis Energy
also cut household gas and electricity costs
by 2.5% and 5% respectively, making it the
only supplier in Ireland to have reduced
prices three times since February 2015.
HUMAN CAPABILITY
Centrica will only grow and prosper if we
have the right people and invest in human
capability across the company. Regrettably,
but understandably in the light of our
restructuring, we suffered a decline in
employee engagement last year. We’re
committed to change that and foster an
engaged, diverse and inclusive workforce
which will help us to better understand
the changing needs of our customers.
We pay at least the Living Wage to all
our UK employees and we continue to
train thousands of British Gas engineers
and apprentices every year. We are also
diversifying our talent pool through the
Movement to Work scheme which helps
young, unemployed people secure
the skills they need for the workplace.
Since 2014, we have provided 700 training
placements, of which 60% gained permanent
employment. As a whole, along with our
partner organisations, Movement to Work
has trained over 50,000 people and 54%
of them have secured some form of
employment in the workplace.
In 2016, we launched Spectrum, our Lesbian,
Gay, Bi-Sexual & Transgender Plus (LGBT+)
employee network which, together with our
networks for women, carers and parents,
provides a vital source of support for our
people and ensures we listen and get
feedback on how we can be more inclusive
as an organisation.
Despite all of the organisational change,
across the Group we have been focusing
on building capability and ensuring we have
the processes and tools to compete and
serve our customers for the long-term.
You can read more about our people and
some of their stories on pages 32 to 35
of the Annual Report.
TECHNOLOGY & INNOVATION
Reshaping the business is not simply
about efficiency and structure, it is also
about building new capabilities for the
future. And here we laid some strong
foundations in 2016.
We are working hard to understand what
our customers want and to develop new
technology and services to provide it.
We are pioneers of the Connected Home.
In the UK, we have over half a million users
Centrica plc Annual Report and Accounts 2016
7
STRATEGIC REPORT
GROUP CHIEF EXECUTIVE’S STATEMENT
Group Chief Executive’s
Statement continued
Key Events in 2016
of our Hive connected hub. Hive customers
can now use voice control, through
Amazon’s Alexa Voice Service, and Hive
products are also being sold in North America.
Our customers are seeing tangible benefits.
Our HomeEnergy FreeTime tariff for smart
meter customers provides free electricity
9.00am – 5.00pm on a Saturday or Sunday,
which can save an estimated £60 per year.
And our Boiler IQ offering provides early
warning of faults with heating or hot water.
Our Distributed Energy & Power (DE&P)
business has been boosted by a first full
year’s contribution from Panoramic Power,
a leading provider of wireless, device-level
management solutions, which is helping our
business customers to take control of their
energy by giving them the tools to monitor,
operate and optimise their own assets.
Distributed energy is growing, altering the
traditional supply model, and increasingly
consumers are becoming ‘prosumers’,
generating their own energy.
We have made strategic, value-creating
additions to our technological capability.
Last year we acquired Flowgem, which
specialises in water leak detection; Neas
Energy, a leading Danish provider of energy
management and optimisation services for
decentralised and renewable assets; and
ENER-G Cogen, an established supplier
and operator of Combined Heat & Power.
This year we will start a pioneering £19
million trial in Cornwall, which will see the
creation of a virtual marketplace to buy
and sell energy locally and the installation
of new technology in over 150 homes and
businesses. You can read more about it
in one of our Case Studies on pages 12
and 13 of this Annual Report.
Innovation is a key driver of growth. That
is why we have announced the formation
of a new unit, Centrica Innovations (CI), to
focus our efforts in this area and act as an
incubator and accelerator of new ventures.
The team will be small, agile and outward
looking, drawing on experience from
our own businesses, other companies,
start-ups and entrepreneurs.
We plan to invest £20 million a year over
the next five years (2017 to 2021) (up to
£100 million in total) in CI. Our existing Ignite
£10 million social enterprise investment fund
will become part of the new CI unit.
Find out more about some of our ground-
breaking products and services in the
Technology & Innovation section on pages
10 and 11 of the Annual Report.
8
6
1
0
2
11/02
British Gas leads
with a further gas
price cut of 5.1%
05/05
Equity placing
to access key
acquisitions and
strengthen the
balance sheet in
uncertain times
01/07
British Gas launches
innovative new
energy plan for smart
meter customers
called FreeTime
READ MORE ON
PAGES 20 AND 21
05/02
Centrica announces
sale of Glens of
Foudland, Lynn and
Inner Dowsing (GLID)
wind farms
READ MORE ON
PAGE 49
21/04
Centrica announces
the acquisition
of Neas Energy a
trading optimisation
business
READ MORE ON
PAGES 45
16/05
Centrica acquires
ENER-G Cogen
a combined heat
and power (CHP)
solutions business
READ MORE ON
PAGES 14 AND 15
15/09
Hive brings
voice-control to
heating, lighting
and plugs
01/12
British Gas makes
commitments to
energy customers
30/11
Centrica sells Trinidad
and Tobago assets
READ MORE ON
PAGE 47
15/12
First gas flows
from Cygnus
READ MORE ON
PAGE 47
7
1
0
2
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION
PERFORMANCE
Operationally, against a background of weak
commodity prices, 2016 marked a distinct
improvement on the previous year. In a
highly competitive market we delivered
new customer offers in energy supply
and services and were very focused on
improving our service levels. Home energy
accounts in the UK were broadly flat in the
second half, UK Business continued to
deliver strong capital inflows, and North
America Energy Supply & Services recovered
well from a warm first half of the year.
We made progress in reducing the scale of
our asset businesses and in simplifying the
portfolio. We have now completed our exit
from wind power generation, while in E&P
we announced the divestment of our Trinidad
and Tobago assets. We are targeting the
sale of our Canadian E&P assets this year.
In 2016 the Group’s financial performance
was robust. Adjusted operating profit and
earnings were both up 4%, with adjusted
earnings per share of 16.8p. Adjusted
operating cash flow was up 19% to
£2.7 billion, significantly in excess of our
3–5% per annum target from 2015 to 2020
and providing strong underpinnings to that
objective. Correcting for one-off working
capital inflows and for changes in commodity
prices between years, underlying adjusted
operating cash flow growth was 14%.
We delivered savings of £384 million as part
of the Group’s cost efficiency programme,
which aims to save £750 million a year by
2020. Organic capital investment came in
below the £1 billion limit we set, at around
£850 million.
Our net debt was 27% lower at the end of
2016, coming in at £3.47 billion, reflecting a
strong cash focus and capital discipline. We
have strengthened our balance sheet, and
our own sources and uses of cash continue
to be more than balanced.
RESPONDING TO CHANGING TIMES
2016 was the year which upset political
orthodoxies on both sides of the Atlantic.
As an international business, Centrica is not
a passive spectator of these events. They
affect us and we must manage through
them, making an active response to
changing and complex issues.
The UK referendum vote in June to leave
the European Union and the outcome of
the United States Presidential election in
November have added to the uncertainties
faced by businesses. However, we believe
the direct impact on Centrica and Direct
Energy specifically of these events is
limited in the short term.
Centrica plc Annual Report and Accounts 2016
As far as the UK’s withdrawal from the
EU is concerned, many details of the
implementation process remain unclear.
Extricating ourselves from all the European
treaties is a task of immense complexity.
But I hope that, despite the difficulties ahead,
the UK will find a pragmatic way to deal with
the issues, and Centrica is well-positioned
to manage any market impacts.
Our focus continues to be understanding
what the result means for energy and other
business regulations. As the UK is now a
major energy importer, what happens in
the European energy market will ultimately
affect the price consumers in the UK pay
for their energy. We will continue to engage
with the UK Government and the European
Commission as they move towards
a resolution.
A strong and open trading relationship with
the US is vital if we are to continue to prosper
as a nation and a business. Free trade is
fundamental to global prosperity and to the
efficient functioning of international markets.
It is important for the UK and the US to
maintain transatlantic alignment on markets
and regulation, so as to minimise distortions
and to safeguard the access which
businesses need.
US climate change policy is now in a state
of flux. In the UK, we continue to support the
Government’s policy aims of decarbonisation,
security of supply and affordability. We are
not a passive partner. In fact, our focus on
customers, in providing them with more
insight and more tools with which to use less
energy and to have more choice to produce,
store and save it, means we are a major
enabler of the response to climate change.
We welcome the publication of the UK
Government’s industrial strategy. This
represents a unique opportunity to forge
a new partnership between businesses
and the Government; a partnership where
the Government focuses on creating
the conditions for businesses of all sizes
to grow and flourish across the UK; and
where businesses invest to upgrade our
economy for a post-Brexit world.
But the Government must also take the
lead in tackling one of the major burdens
on the UK economy: productivity. The UK
lags US and German labour productivity
by 30 percentage points, France by over
25 and Italy by nine. To tackle this, we need
to upgrade our economy by investing in
infrastructure, jobs, skills and technology.
We intend to play our part at Centrica.
2016 brought greater clarity on the regulatory
front, with the Competition and Markets
Authority (CMA) publishing the final report
on its investigation into the UK energy
market and the UK Government confirming
reforms to the UK Capacity Market.
We have supported the CMA investigation
throughout the process, even when we
disagreed with some of its conclusions,
and we are now actively implementing
its remedies. Changes to Retail Market
Reform rules, especially the increase in
the number of tariffs we can offer, will also
allow us to provide more choice for our
UK Home customers.
The proposed reforms to the UK Capacity
Market will bring on more generating
capacity earlier than planned and improve
the return to investors. Three of our new
distributed energy projects and the replant
of our Kings Lynn A power station all
cleared the capacity market auction in
December, in addition to our existing
Langage, Humber and Brigg gas-fired
power stations and the UK nuclear fleet.
OUTLOOK
Centrica made significant progress and
delivered robust performance in 2016.
We delivered our key objectives while
repositioning the portfolio, improving
capability and driving significant cost
synergies as we build a platform for
the future.
Looking ahead, we are confident that
the trends we have identified are the right
ones and our response ensures we are
well positioned to compete and deliver for
our customers. We will place increasing
emphasis on developing and delivering new
products and services for our customers
and turn our eyes more to growth in a
complex world.
We will continue to concentrate on:
• High standards of safety, compliance
and conduct;
• Customer satisfaction and
operational excellence;
• Cash flow growth and strategic momentum;
• Cost efficiency and simplification; and
• People and building capability.
We will continue to strengthen the company
and to pay an attractive level of dividends
to our shareholders.
Through all of this, we will be able to deliver
for our customers, for our employees,
and for our shareholders.
Iain Conn
Group Chief Executive
23 February 2017
9
STRATEGIC REPORT
TECHNOLOGY AND INNOVATION
Focused on
Innovating to Satisfy the
Changing Needs of our Customers
Our customers’ needs are evolving. They want more than just
affordable energy and choice. They also want control of their energy
use and the ability to use less. Increasingly, they want to reduce their
carbon footprint; and to access new on-demand services for their
homes and businesses, which meet their changing needs.
We see the home as a focal point of
technology-enabled services where a wide
range of providers from different sectors are
competing to integrate devices, service and
data into a customer-oriented ecosystem.
Big data and technology advancements
and innovation also have the potential to
radically change the way that businesses
interact with energy. They can use
sophisticated, granular data to understand
how to run their machines more efficiently,
saving both money and energy.
This is why our focus on technology and
innovation is so important. The rapid pace
of change and growing digital disruption
in the global energy sector are altering
the way we work.
BUILDING TECHNICAL CAPABILITY TO
ACHIEVE COMPETITIVE ADVANTAGE
We can only achieve competitive
advantage by developing and delivering
new technology-based products, offerings
and solutions to residential and business
customers at a competitive cost.
We have set up Centrica Innovations,
a new venture to ensure Centrica identifies
opportunities and is aligned to new
technology that will benefit our customers.
We will invest up to £20 million a year over
the next five years in start-ups – up to
£100 million in total – giving us access to
technology and entrepreneurial resources.
We will have people scanning key technology
hubs around the world – in Seattle, Houston,
London, Cambridge and Tel Aviv – putting
us at the forefront of the latest innovations
and integrating learnings within the Group.
Centrica Innovations will also support
existing in-house ventures, such as Local
Heroes, our digital on-demand services
proposition. It will act as an incubator
for external ventures which are not yet at
a maturity level for investment and require
different types of support, for example,
business expertise, mentoring or
product piloting.
Our existing Technology & Engineering
(T&E) function, established in January 2016,
further strengthens our capability in this
area by acting as a catalyst for innovation.
It brings together our technical specialists,
scientists and engineers from across
the business. It maintains operational
excellence through risk and quality
assurance and protects our Intellectual
Property. T&E provides guidance, insight
and support to the business units in
planning the right strategies to manage
potential future technological disruption.
INVESTING IN INNOVATIVE
CUSTOMER OFFERINGS
In the Internet of Things (IoT), everyday
objects embedded with electronic sensors
and software are connected to the internet.
As customers take more control over their
energy use, the demand for connected
or smart devices will increase and provide
opportunities to develop innovative
customer solutions.
Digital business platforms
As one of the pioneers in the connected
home market, Centrica continues to build
a strong IoT proposition and capability.
• Honeycomb is our own IoT platform
supporting over 527,000 hubs and over
one million devices which communicate
over one billion messages every week.
• We are a UK connected home partner
for Amazon’s Alexa Voice Services,
which allows our Hive customers
to control their heating, lighting and
devices simply by speaking.
• My Energy Live will provide our
customers with access to their energy
use in real-time on smart phones and
tablets via our app. We have started
technical trials and customer pilots.
Remote diagnostics
• Boiler IQ was the UK’s first connected
boiler service that uses sensors to
identify and diagnose faults remotely.
• We have further strengthened our
capability through the acquisition of
Flowgem which specialises in the
remote detection of water leaks.
Data science and analytics
Data science and analytics, together with
our internally created algorithms, enable
over 3.6 million of our UK and North American
customers to reduce energy consumption
and control their home devices.
10
HomeEnergy FreeTime
With our innovative tariff, customers can choose
a day of the weekend to receive free electricity.
>3.6m customers
Data science and analytics, together with our
internally created algorithms, enable over 3.6 million
customers to reduce energy consumption and
control their homes.
>527,000
Connected Home
hubs installed
Sold over one million devices that communicate
over one billion messages every week, supported
by our Honeycomb platform.
Iain Conn Group Chief Executive
“We are working hard to
understand what our customers
want and to develop new
technology and services
to provide it.”
Data analytics identifies energy use by
category, such as heating appliances
or lighting.
• Using Hive data along with thermal
modelling and machine learning
we can provide our customers with
heating failure alerts which give
advance notice of boiler faults or
possible breakdowns.
• Io-Tahoe is an intelligent data
management system, created by
our own data scientists, to solve the
problem of linking our many legacy
systems and so unlock valuable data
insights. It is perfectly adapted to
the creation and management of data
lakes, and enables rapid generation
of customer insights and responses
to solve day-to-day data challenges
for businesses. Io-Tahoe is being
launched externally in 2017.
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Internet of Things
Building deep technology capability in the home
IoT space.
Home services on-demand
Book one-off home repairs online.
Hive + Amazon Echo
Gives our Hive customers the ability to control home
heating, lights and plugs though the Amazon Alexa
voice assistant.
Innovative remote leak detection
Uses technology to remotely detect water leaks.
My energy live
Provides our customers with access to their energy
use in real-time via our app.
Boiler IQ
Helps keeps homes running smoothly with the
UK’s first connected home boiler.
Smart metering
• Time-of-use tariffs create dynamic
and flexible time-based energy pricing
for our smart customers. HomeEnergy
FreeTime is one of the first time-of-use
tariffs giving customers one free day
of electricity use every weekend.
• We have improved payment channels
for our smart prepayment customers.
The introduction of interactive voice
response, app vending, online top ups
and phone payments now provide
our smart prepayment customers
with additional payment options.
• Our smart customers are able to switch
from credit to prepayment methods
without a physical meter exchange.
Digital services
As part of our focus on transforming
the digital customer experience, we have
launched Local Heroes, a technology
platform for on-demand home services.
Customers are able to book one-off home
repairs online and benefit from services
delivered by local traders and backed
by a British Gas guarantee.
INNOVATING AND DEVELOPING
FUTURE ENERGY SYSTEMS
Advanced machine learning algorithms
analyse energy consumption data
collected by Panoramic Power’s wireless
and self-powered sensors. This insight
allows business-to-business customers
to improve significantly their energy
and operational efficiency.
The acquisition of Neas Energy was a
valuable addition to our Energy Marketing
& Trading (EM&T) business. Its renewable
energy trading and Virtual Power Plant
(VPP) platform allows commercial
and industrial customers to connect and
aggregate their energy loads and resources,
and provides grid services in decentralised
electricity markets.
In 2016, we signed a funding agreement
to develop a pioneering local energy market
in Cornwall. Once complete, participants
will use the latest smart technologies to
connect to a virtual marketplace allowing
them to sell their flexible energy capacity
both to the grid and the wholesale
energy market.
SEE THE CORNWALL PROJECT CASE STUDY
ON PAGE 12
Centrica plc Annual Report and Accounts 2016
11
STRATEGIC REPORT
FOCUSED ON PIONEERING A NEW ENERGY FUTURE
Focused on
Pioneering a New
Energy Future
Building a local
energy market to
put homes and
businesses in control
Centrica is investing more than
£1.2 billion globally to pioneer
a new energy future for homes
and businesses that will be
smarter, greener and cheaper.
We’re bringing this to life in the UK with our
ground-breaking local energy market trial
in Cornwall, testing a new world of flexible
demand, generation and storage, and
rewarding customers for being more
responsive in how and when they use
their energy.
Working with partners, the £19 million
programme is being funded in part by
a £13 million grant from the European
Regional Development Fund. The three-year
trial will see the installation of new technology,
including battery storage and combined
heat and power (CHP), in over 150 homes
and businesses. Participants will then use
the very latest smart technology to connect
to a ‘virtual marketplace’ where they will
sell their flexible energy capacity to both
the electricity grid and the wholesale
energy market.
The trial will test a variety of technologies
across different users so we can learn how
the platform will work in a wide range of
circumstances. We would anticipate that
homeowners would typically be looking
for us to automate the process as much
as possible, while a business might
need or want more control.
For example, we might offer a homeowner
a new micro-CHP unit that allows them to
generate their own energy. We could then
automate the process so the unit fires up
at peak times of demand on the network
and therefore relieves pressure on the grid.
Providing this service could secure the
householder a payment, resulting in lower
energy bills.
On the other hand, a business owner might
combine their existing on-site generation
such as a back-up generator with a new
energy storage unit and choose to make
the decision themselves about whether to
export any excess energy to the grid and
make some money, or store it for use
on-site at a later time.
12
Cornwall has been at the forefront of moves
to harness renewable generation. But that
has created challenges for the local grid.
Our ambition is to explore how battery
storage, together with flexible demand
and generation, can reduce pressure on
the UK’s electricity grid, avoid expensive
network upgrades and support future
carbon reduction.
We believe this is a unique opportunity for
us to work together with local businesses
and homes to open up new avenues which
will give consumers more control of their
energy, both here in the UK and potentially
around the world.
TO FIND OUT MORE GO TO
CENTRICA.COM/CORNWALL
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Control
Use
Save
Centrica plc Annual Report and Accounts 2016
13
STRATEGIC REPORT
FOCUSED ON CUTTING ENERGY COSTS AND CARBON EMISSIONS
Focused on
Cutting Energy Costs
and Carbon Emissions
Putting ENER-G into
sport and leisure
Delivering sustainable energy
solutions, technologies and
cogeneration systems from
10kWe up to 10MWe fuelled by
natural gas, and several different
biogas, syngas and liquid fuels.
ABOUT ENER-G
Established in Salford, Greater
Manchester in the 1980s, ENER-G
Cogen delivers sustainable energy
solutions and technologies on a
business-to-business basis worldwide.
ENER-G designs, manufactures,
operates, maintains and finances
cogeneration systems from 10kWe
up to 10MWe fuelled by natural gas,
and several different biogas, syngas
and liquid fuels. ENER-G was
acquired by Centrica in 2016.
DAVID LLOYD LEISURE
Over the past 15 years, ENER-G has helped
to revolutionise the way that dozens of
David Lloyd Leisure clubs throughout the
UK and Ireland use their energy.
Combined heat and power (CHP) – the
simultaneous generation of electricity and
useful heat – is almost twice as efficient
as conventional power generation because
most of the heat is recovered and used on
site, rather than wasted into the atmosphere.
Since its first CHP system was installed by
ENER-G in 2001, David Lloyd has amassed
a fleet of 57 units. As a typical example
of the benefits, the David Lloyd club in
Southend saved £30,000 and reduced
carbon dioxide emissions by over
300 tonnes between 2013 and 2014.
The usual payback period on CHP
technology varies between two and four
years. But for David Lloyd the savings
were immediate. ENER-G finances and
installs the CHP system at no capital cost
to the client, as well as operating and
maintaining the CHP units throughout
their life. Energy generated by the units
is sold to the client at a discount.
14
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Control
Use
Save
NEWCASTLE UNITED FOOTBALL CLUB
In 2012, Newcastle United was the
first football club in the world to become
‘carbon positive’, offsetting more carbon
than it emits, and was awarded the
prestigious Carbon Trust Standard.
Installation of the CHP unit was challenging.
There were spacing constraints within the
existing plant room, which is eight storeys
within the fabric of the actual stadium, so
ENER-G had to deliver the CHP system
in three sections and rebuild it on site.
By generating its own low carbon supply
of power and heat using an ENER-G CHP
system, the club is now reducing its carbon
dioxide emissions by a further 390 tonnes
per year. This equates to the environmental
benefit of removing 130 cars from the road,
or the carbon that would be offset by 320
acres of forest, which would cover the area
of approximately 160 football pitches.
In partnership with ENER-G, the club has
adopted a range of innovative efficiency
measures, including boiler optimisation,
burner management, lighting upgrades,
boreholes for natural pitch irrigation,
smart building and energy monitoring
and controls, as well as encouraging
behavioural changes among the
operational staff.
Centrica plc Annual Report and Accounts 2016
15
STRATEGIC REPORT
OUR BUSINESS MODEL
Our Business Model
Focused on our business model
Our business model is designed to
deliver returns and growth through
a focus predominantly on our
customer-facing businesses.
Our Energy Supply & Services,
Connected Home, Distributed Energy
& Power and Energy, Marketing & Trading
businesses are organised into two global
customer-facing divisions; Centrica
Consumer is designed to support the
needs of residential consumers and
Centrica Business is designed to support
the needs of the business customer.
Each division has a strategic framework
built around five pillars and these are set
out in the diagram below.
Our Central Power Generation business
is included within the Centrica Business
division given its role in the management
and optimisation of central power
generation and its interface with
wholesale markets.
Our customer-facing businesses are
supported by the common operating
functions of Customer Operations and
Field Operations. These functions are
where we touch the customer and
are fundamental to our success.
Our remaining two asset businesses of
Exploration & Production and Centrica
Storage are operated separately and
continue to play an important role in
our portfolio.
To ensure our model remains efficient and
scalable, all businesses are supported by
a number of centre-led Group Functions
that are responsible for setting boundaries
and standards which allow us to effectively
manage risk and ensure a strong system
of internal control.
Customer-facing strategic framework
Centrica
Business
Energy
supply
Wholesale
energy
Energy
insight
Energy
optimisation
Energy
solutions
• Gas supply
• Electricity supply
• Trading partner
• Energy commodities
& risk products
• Central Power Generation
• Energy resource
management & monitoring
• Asset optimisation
• Aggregation and
• Multi-technology solutions
• Design, install,
• Operational insights
from energy data
optimisation of distributed
energy resources (‘VPP’)
maintain & service
• Business services
• Preventative maintenance
• Access to energy,
capacity & flexible markets
Energy
supply
Services
Peace
of mind
Home energy
management
Home
automation
• Gas supply
• Electricity supply
• Heating & aircon installation
• Repair and maintenance
• Home risk management
• Remote diagnostics
– Heating & aircon
– Plumbing & drains
– Electrical wiring
– Appliances
• Energy insight
• Energy efficiency
• Energy optimisation
• Energy solutions
• Appliance control
• Home control
Centrica
Consumer
16
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION
Customers relationships
worldwide
28m
Employees worldwide
36,500
Engineers and technicians
12,000
Total gas and
liquids production
71.2mmboe
Vulnerable customer
households helped in the UK
2.1m
1 Controllable costs comprise controllable cost of sales (costs which management deem can be directly
influenced and excluding items such as commodity costs and transmission and distribution costs) and adjusted
operating costs (excluding depreciation and amortisation, smart metering and solar expenses, dry hole costs,
profit on fixed asset disposals, business performance impairments, portfolio changes including AlertMe,
Neas Energy and ENER-G Cogen acquisition costs and foreign exchange movements). Like-for-like controllable
costs are controllable cost of sales and adjusted operating costs, excluding growth investment in Connected
Home and Distributed Energy & Power.
Focused on our long-term financial goals
Our long-term financial goals are
delivered through a clear financial
framework that enables us to deliver
long-term shareholder value through
returns and growth.
The risks to achieving the Group’s
strategy are monitored and reported
regularly. For more information on
managing our exposure to risk see
our Principal Risks and Uncertainties
on pages 56 to 64.
Our priorities also ensure that progress
in delivering performance in Safety,
Customer Satisfaction, Operational
Excellence and People is a core part of
the overall Group performance, which
is then measured through individual
employee scorecards.
Metric
Target
3%–5% growth
per annum
Progressive in line
with AOCF
Cost growth
527,000
Percentage of customers with smart
thermostats who feel more in control
over their heating
88%4
Smart meters delivered to homes
and businesses in the UK
3.9m
Smart meters installed as a proportion
of the UK’s total number of installations
>70%5
BEING CLEAR AND COMPETITIVE
ON PRICING
Energy bills can be a real worry for
hard-pressed households. Despite 83%
of the energy bill being made up of costs
we cannot fully control, such as wholesale
energy costs, distribution charges and social
and environmental taxes, we are committed
to keeping our prices competitive.
In addition to reducing energy prices
(see left), British Gas committed to freeze
its standard tariff for the entire winter
2016/17 period through to August 2017.
In spite of increases in external costs,
British Gas has consistently offered one
of the cheapest standard energy deals
available over the last year, made possible
by significantly reducing our own costs.
Our standard tariff continues to be cheaper
than 95% of similar contracts in the market.
In 2016, Bord Gáis Energy also cut
household gas and electricity costs by
2.5% and 5% respectively, making it the
only supplier in the Republic of Ireland
to have reduced prices three times
since February 2015.
We continue to engage with the UK
Government and regulators on securing
a more affordable and stable energy
future by improving UK energy policy and
competition. We are also actively testing
the role of Distributed Energy & Power
(DE&P) in building smarter energy systems,
which have the potential to save the UK
£8 billion a year by 2030.3
2
1
Brand NPS has been implemented consistently in
the UK, Ireland and North America from 2016. Prior
period comparatives are presented where available.
Brand NPS for Business energy supply in Ireland is
not currently reported. Reflecting this, the stated
metric represents UK Business only.
3 National Infrastructure Commission, 2016.
4 UK Hive satisfaction survey based on feedback from
around 3,600 customers, March – November 2016.
5 Department of Business, Energy and Industry
Strategy, September 2016.
Centrica plc Annual Report and Accounts 2016
27
STRATEGIC REPORT
RESPONSIBLE BUSINESS UPDATE
Helping those in need
We are making a difference in society by supporting
vulnerable people with their energy needs and helping
local communities thrive.
Vulnerable customer households
helped in the UK
2.1m
Amount spent supporting vulnerable
people with their energy needs through
mandatory and voluntary initiatives
£196m
£106 million invested in mandatory
and voluntary contributions to the
British Gas Energy Trust since 2004,
helping over
195,000 people
Through Ignite, we have committed
alongside
£8m
27,600
hours of employee expertise in
start-ups which has helped
41,700
people since 2013
HELPING PEOPLE WITH
THEIR ENERGY BILLS
While we strive to keep bills as low as
possible, we recognise some customers
struggle to pay for energy. Identifying
customers who need extra support is
therefore key. That is why the vast majority
of our call centre advisers receive
vulnerability training which enables them
to provide bill assistance, debt advice
and energy efficiency support.
In 2016, we gave bill assistance payments of
£140 each to more than 650,000 vulnerable
customers as part of the mandatory
Warm Home Discount scheme. Meanwhile
in North America, nearly 3,700 customers
received grants of up to $600 (£450) through
our voluntary Neighbor-to-Neighbor bill
assistance programme in Texas.
We fund the British Gas Energy Trust,
an independent charity, with mandatory
and voluntary contributions. In 2016, the
Trust helped nearly 22,600 people get back
on their feet with invaluable debt advice
and grants.
We are also improving the energy efficiency
of homes through the Energy Company
Obligation. This has enabled us to save
an estimated £68 million on energy bills
for vulnerable people since 2013.
MAKING ENERGY MORE ACCESSIBLE
We decided to become a dementia-friendly
organisation in 2016. As part of this, we
encouraged employees to take part in
the Dementia Friends programme, which
is the biggest ever initiative to change
the perception of dementia and will help
improve our support for people living with
the condition. By the end of 2016, over
5,000 employees had become Dementia
Friends and we are on track to reach
10,000 Friends by May 2017. As a result
of the programme, we have reviewed
our Power of Attorney process, making it
easier for customers and their loved ones
to access and manage their energy.
In 2017, we will roll-out a video relay service
that will enable British Sign Language users
to communicate with us like never before.
CREATING IMPACT IN COMMUNITIES
Through Ignite, the UK’s first corporate
impact investment fund focused on
energy, we are investing in entrepreneurs
with innovative energy ideas that make
a difference in society. So far, we have
committed £8 million to a range of causes
from alleviating fuel poverty using free
solar electricity, to delivering energy
education programmes for young people
while at the same time, generating a
sustainable biofuel.
Ignite was cited by the UK
Government as a blueprint
for how business can
generate value in society.
During 2016, British Gas continued its
partnership with Shelter to raise standards
in the private rented sector where over
a third of homes fail to meet the UK
Government’s Decent Homes Standard.
Building on successful campaign wins that
secured improvements for an estimated
four million people through better electrical
and carbon monoxide safety as well
as protection from retaliatory evictions,
we supported Shelter’s development of
the Living Home Standard. The Standard
defines what everybody needs from a
home to live comfortably and we hope it
will help deliver better homes for Britain
by driving up living standards.
28
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Being a responsible employer
Creating a great place to work is essential for attracting
and retaining the highly motivated and skilled workforce
that can deliver for our customers.
SECURING A TALENT PIPELINE
We are building new opportunities to attract
and retain diverse talent that will support
the growth of our business, enabling us to
deliver a better service for customers and
plug the shortage of skills in our sector.
In 2016, we:
• Invested £35 million in training
8,000 British Gas engineers and
over 1,220 apprentices.
• Trained 130 technicians through Direct
Energy partnerships with local schools.
• Developed workplace skills for 190 people
on our global graduate programmes.
In 2017, we intend to expand our UK
apprenticeship intake, with a particular
focus on customer service.
We are inspiring future generations to
pursue science, technology, engineering
and maths (STEM) careers. Through our
British Gas Generation Green education
programme, over 460,000 young people
have learnt to think more innovatively about
energy since 2010. Similarly, Direct Energy
will launch its own school programme in
2017, using Panoramic Power’s wireless
sensors that show how energy could
be used more sustainably.
We also reward our people with fair
remuneration which includes paying at
least the Living Wage to employees in
the UK.
GENERATING SKILLS
THROUGH VOLUNTEERING
We provide our 36,500 employees with
up to two days paid leave to volunteer
each year, which not only makes a
valuable difference in local communities,
but provides an exciting opportunity
to learn new skills.
In 2017, we will continue to raise awareness
about our volunteering programmes and
we plan to extend our volunteering portal
across the business to boost involvement.
1
2
Excluding the Board and senior management.
58% of employees disclosed data.
Centrica plc Annual Report and Accounts 2016
Total volunteering hours
▲53,513
(2015: 52,588)
EMPLOYEE ENGAGEMENT
Our ability to provide an excellent
service and retain our people
is inextricably linked to employee
engagement. To understand how
employees feel, we conduct an
annual survey.
READ MORE ON PAGE 19
DIVERSITY
We embrace workplace diversity because
having a range of backgrounds and
perspectives enables us to better serve
the changing needs of our customers.
Our sector, however, traditionally lacks
diversity so we are working hard to
address the issue.
READ MORE ON PAGE 72
MOVEMENT TO WORK
Through Movement to Work, we are
helping young, unemployed people
secure workplace skills. Since 2014, we
have provided 700 training placements,
with 60% of those taking part going
on to secure permanent employment
or further training. We will provide 300
additional places by the end of 2017.
READ MORE ON PAGE 32
Our employees
Female
27%1
Female senior management
26%
Ethnic minorities
24%2
Part-time
3%
We are also proud to have launched
Spectrum, our Lesbian, Gay, Bi-Sexual
& Transgender Plus (LGBT+) Network
in 2016, providing a vital source of
support for employees and feedback
for our continual improvement.
29
STRATEGIC REPORT
RESPONSIBLE BUSINESS UPDATE
Reducing carbon emissions
With around 90% of our carbon emissions arising
from customer consumption of energy, the greatest role
we can play in tackling climate change is to empower our
customers to cut their carbon while reducing emissions
across our own business.
HELPING HOMES CUT CARBON
We are helping customers reduce their
energy consumption and carbon emissions
through innovative and energy efficient
products that give customers greater
control and choice (see pages 10 and 11).
In the UK, we calculate that we have
enabled customers to save nearly
27mtCO2e from products installed since
2008 – equivalent to the average annual
emissions of seven million UK homes.1
In North America, we focused on reducing
carbon emissions through renewable solar
generation. While 2016 was a challenging
year for the solar market, we completed
residential installations that generated
21MWp, up slightly from 18MWp in 2015.
GIVING LARGE-SCALE USERS CONTROL
Our global DE&P business is revolutionising
our relationship with businesses and other
large-scale energy users, giving them the
power to operate and optimise their energy.
We do this by bringing together flexible
and local renewable generation, storage
and energy efficiency measures alongside
smart building management systems.
This not only lowers carbon emissions
and cuts bills, but reduces pressure
on the electricity network.
To develop these capabilities further,
in 2016 we invested:
• £19 million with partners in a pioneering
local energy market trial in Cornwall
that will explore the role of distributed
energy across more than 150 homes and
businesses over three years. We will test
how participants interact with the latest
technology and develop a virtual market
place that provides a platform to buy
and sell energy to the grid and wholesale
energy market (see page 12).
• £149 million to acquire ENER-G Cogen,
a supplier of combined heat and power
(CHP) solutions that allow customers
to reduce costs and carbon emissions
by generating heat and power on site.
1 Ofgem 2015 household annual usage and 2016
Defra greenhouse gas emission conversion factors.
Electricityinfo.org, 2015/16.
Restated due to availability of improved data.
Awarded in 2016, based on 2015 data.
2
3
4
30
Our carbon emissions
2016
2015
Total carbon emissions
5,119,709tCO2e
4,392,965tCO2e3
Scope 1
Scope 2
Total carbon intensity by revenue
5,032,493tCO2e
4,282,138tCO2e3
87,216tCO2e
189tCO2e/£m
110,827tCO2e3
157tCO2e/£m
We report on an equity basis with practices drawn from WRI/WBCSD Greenhouse Gas Protocol, IPIECA’s Petroleum
Industry Guidelines for Reporting Greenhouse Gas Emissions and Defra’s Environmental Reporting Guidelines.
• £210 million to acquire Neas Energy,
providing trading optimisation for
customers with decentralised assets,
including wind farms and CHP plants.
REDUCING OUR CARBON FOOTPRINT
We emit 63% less carbon for every
pound of revenue raised compared to
2010, primarily due to a reduction in
our gas fired power generation.
In 2015/16, the power we sold to
customers had the lowest carbon intensity
among major UK electricity suppliers
at 137gCO2/kWh; well below the UK
average of 290gCO2/kWh.2
We are making good progress against our
Central Power Generation (CPG) carbon
intensity target of 200gCO2/kWh by 2020.
While our CPG carbon intensity increased
17% to 137gCO2/kWh, the rise was due
to power generation volumes recovering
following outages in 2015 and was the
main factor for the increase in our total
carbon emissions.
We also remain on target to secure a
20% reduction in our core internal carbon
footprint by 2025, having achieved an
8% reduction compared to 2015.
We are recognised as
leaders in addressing climate
change by CDP, an international
non-governmental organisation
(NGO) reporting to investors
representing around a
third of the world’s capital,
who gave us an ‘A’ grade
for action and disclosure.4
Our UK fuel mix of power sold
Coal
Gas
Nuclear
Renewables
Other
2%
30%
34%
33%
1%
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION OUR VIEW ON TAXATION
Our View on Taxation
The Group takes its obligations to pay and collect
the correct amount of tax very seriously. Responsibility
for tax governance and strategy lies with the Group
Chief Financial Officer, with the oversight of the Board
and the Audit Committee.
OUR APPROACH
Wherever we do business in the world we
take great care to ensure we fully comply
with all of our obligations to pay or collect
taxes and to meet local reporting and
disclosure requirements.
We fully disclose information on ownership,
transactions and financing structures to the
relevant tax authorities. Our cross-border
tax reporting reflects the underlying
commercial reality of our business.
We ensure that income and costs,
including costs of financing operations,
are appropriately recognised on a fair
and sustainable basis across all countries
where the Group has a business presence.
We understand that this is not an exact
science and we engage openly with tax
authorities to explain our approach.
TAXES PAID IN THE UK
We maintain a transparent and constructive
relationship with Her Majesty’s Revenue
& Customs (HMRC) in the UK. This
includes regular, open dialogue on issues
of significance to HMRC and Centrica.
Our relationship with fiscal authorities in
other countries where we do business
is conducted on the same principles.
We carefully manage the tax risks and costs
inherent in every commercial transaction,
in the same way as any other cost. However,
we do not enter into artificial arrangements
in order to avoid taxation nor to defeat the
stated purpose of tax legislation.
We actively engage in consultation with
government on tax policy where we believe
we are in a position as a Group to provide
valuable commercial insight.
TAXES PAID OUTSIDE THE UK
Outside the UK the Group’s businesses
are subject to corporate income tax rates
in excess of the UK Corporation Tax Rate
(see below).
Our Group Tax Strategy, a more detailed
explanation of the way the Group’s tax
liability is calculated and the timing of
cash payments is provided on our
website at centrica.com/responsibletax.
Tax charge v. cash tax by region
2016 £m
Breakdown of UK tax charge
£m
Statutory tax rates on profits
185
UK
(152)
33
Mainland Europe
77
39
168
207
102
North America
32
27
Total UK tax charge
Group activities
Deferred taxes
33
(185)
UK supply of energy and services
UK oil and gas production
Tax credits due from other periods
Norway oil and gas production
152
2016 taxes to be repaid in 2017
54
2015 taxes paid in 2016
252
284
PRT refund from prior periods
Taxes paid in 2016
35
(12)
77
Netherlands oil and gas production
United States supply of energy
and services
Canada supply of energy and
services and oil and gas production
Denmark energy services
Republic of Ireland supply
of energy and services
%
20
40
78
50
35
26
22
12.5
-150
-100
-50
0
50
100
150
200
250
300 350
-150
-100
-50
0
50
100
150
As at December 2016.
Deferred tax charge
Current tax charge
Net tax charge
Cash tax paid/(received)
Payments made on account in the early part of
2016 are expected to be repayable in 2017 as a
consequence of mark to market movements in
the latter part of 2016.
FURTHER INFORMATION ON THE TAX
CHARGE IS SET OUT IN NOTE 9
Centrica plc Annual Report and Accounts 2016
31
STRATEGIC REPORT
FOCUSED ON TRAINING THE EMPLOYEES OF THE FUTURE
Focused on
Training the Employees
of the Future
Finding a way into
work through an
apprenticeship scheme
Centrica is proud to be part of
Movement to Work, an industry-
wide initiative, working with
other leading organisations,
to tackle youth unemployment
in the UK.
Over the last three years, Centrica
has supported 700 young people
who were not in education or
employment by providing training
and work placements. 90% of those
who took part said that their confidence
and understanding of the work place
increased and that they now felt
ready to find a role. 60% of those
taking part have gone on to secure
a permanent job or further training
as a result. We have pledged to
do even more in 2017 by providing
a further 300 work places, and to
integrate support for ‘Movement
to Work’ more closely into our
successful apprenticeship scheme.
AIMEE HEARN
Customer Service Adviser, British Gas
Aimee had been out of work for six months
and was struggling to find a job, sapping
her self-confidence.
“For months, I would visit my local job
centre really regularly, but struggled to find
anything. Applying for jobs and being turned
down for interviews made life very hard
and I struggled with my self-confidence.
When you’re unemployed, people look
down on you. All you need is for someone
to give you a chance.”
Her job centre adviser suggested applying
for a British Gas apprenticeship through
the ‘Movement to Work’ scheme. British
Gas’ parent company Centrica is proud
to be part of this industry-wide initiative,
working with other leading organisations,
including M&S, Starbucks, BT, Unilever,
Accenture and BAE Systems, to tackle
youth unemployment in the UK.
32
After completing the ‘Movement to Work’
eight week pre-employment training,
Aimee was accepted onto the British Gas
apprenticeship scheme, which she completed
in July 2015. She now has a permanent,
full-time Customer Service Adviser role
with British Gas. It’s an uplifting story
that Centrica hopes will inspire more
young people.
FOR MORE INFORMATION ABOUT MOVEMENT
TO WORK, VISIT: MOVEMENTTOWORK.COM
TO LEARN ABOUT CENTRICA’S APPRENTICESHIP
SCHEME, AND TO APPLY, VISIT: CENTRICA.COM/
CAREERS/APPRENTICE-TRAINEES/ABOUT-
APPRENTICES-TRAINEES
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Learn
Develop
Engage
Centrica plc Annual Report and Accounts 2016
33
“I really am a people
“I really am a people
person and learning
person and learning
about helping customers
about helping customers
every day and some of
every day and some of
the responses from them
the responses from them
are what the job is about,
are what the job is about,
it makes you feel good
it makes you feel good
about yourself knowing
about yourself knowing
you can help others”.
you can help others”.
STRATEGIC REPORT
FOCUSED ON TRAINING OUR EMPLOYEES
Focused on
Focused on
Training our
Training our
Employees
Employees
Rewarding careers
Rewarding careers
serving our customers
serving our customers
Before joining British Gas,
Before joining British Gas,
Ryannie, 16, was at school
Ryannie, 16, was at school
and volunteered at a school
and volunteered at a school
for children with disabilities.
for children with disabilities.
She had always thought
She had always thought
about staying on in education
about staying on in education
but wasn’t sure what her
but wasn’t sure what her
options were.
options were.
Ryannie had done a few weeks of casual
work and knew that she wanted more for
her education and career, but wasn’t sure
what that was.
“If I’m honest I was going to go to
university to be a physiotherapist, but
the more I thought about it, the more
I knew that university wasn’t really for me.
Even though I had no idea what it was like
being an apprentice in a contact centre,
it’s been one of the best things I’ve done,
as I can earn money whilst studying.
I also feel like I have a career.”
“I applied for the apprenticeship because
I think it is exciting to be a part of something
completely different from what I thought
I wanted to do. Now I’ve been here for a few
months it’s definitely the opportunity for me
as I can develop and help customers. I can
also make a career in customer service.”
Ryannie’s team are one of the top
performing teams in Edinburgh and
are making a key difference to the
Centrica service business by driving
customer satisfaction scores and
regulatory adherence.
Ryannie said, “I really am a people person
and learning about helping customers
every day and some of the responses from
them are what the job is about, it makes
you feel good about yourself knowing you
can help others”.
The new Customer Service Trailblazer
Apprenticeship has been created by
leading service employers, including
British Gas, to ensure we meet and exceed
the needs of UK customers, learners and
employers, both now and in the future.
34
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Engage
Learn
Develop
Centrica plc Annual Report and Accounts 2016
35
STRATEGIC REPORT
BUSINESS REVIEW
Business Review
Energy Supply & Services –
UK & Ireland
Supplying energy and services to
residential and business customers
in the UK and the Republic of Ireland
through our new business segments:
UK Home, UK Business and Ireland.
HIGHLIGHTS
UK Home customer accounts
21.8m
UK Business customer accounts
0.72m
Ireland customer accounts
0.69m
36
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION ENERGY SUPPLY & SERVICES –
UK & IRELAND
We made good progress in implementing
our customer-facing strategy in the UK and
Ireland during 2016. We have established
a new customer-centric operating model as
we reposition the business beyond energy
supply, enabling us to broaden and deepen
the relationship with the customer in their
home. Our strategy recognises customers are
more empowered, with increased demand for
technology-enabled service and integrated
devices. Against this backdrop, we are
focused on improving customer satisfaction,
enhancing our range of innovative products
and solutions, and delivering cost efficiencies.
Our efficiency programme enables us to
prioritise our resources to defend and grow
our core energy and services activities and
invest in new growth opportunities. During
the year we restructured our UK energy
and services businesses to create two new
business units, UK Home and UK Business,
and two operating functions, Customer
Operations and Field Operations. This
has enabled us to realise scale benefits
from common processes and develop
a segmented customer approach and
targeted propositions. We have now
consolidated operations into fewer sites
and streamlined our sales channels and
services product lines and reflecting this,
direct like-for-like headcount reduced by
nearly 3,000 during 2016. This resulted
in redundancy costs, which contributed
towards the Group’s £228 million exceptional
restructuring costs, the majority of which
were incurred in UK Home. In addition,
we made changes to pension terms with
our employees, with the vast majority voting
to accept the proposals. These actions,
combined with a focus on discretionary
expenditure and a normalisation of UK
Business costs, meant total like-for-like
controllable costs fell by 7% compared
to 2015 while our cost per UK home
customer fell by 1%.
UK HOME
Against a competitive backdrop, excellent
customer service is a core requisite for
retaining and winning new customers.
During the year we took actions to improve
employee training, pro-actively re-assessed
direct debit payments, implemented a more
customer friendly ‘moving home’ process
and improved call scripts. This all led to
lower complaints in both energy supply
and services, and Brand NPS improved
by 10 points to move into positive territory
at +3. Engineer NPS remains high at +69.
1
Based on NPS relating to residential
customer satisfaction.
Centrica plc Annual Report and Accounts 2016
The number of energy supply customer
account holdings reduced by 409,000 or 3%
in 2016 including the impact of a significant
roll-off of long-term fixed price contracts in H1
2016. However, it was broadly flat in H2 2016,
despite higher market churn rates, reflecting
the launch of new competitively priced
customer offers and British Gas having one
of the lowest standard variable tariff prices
in the market following a 5% reduction
in our residential gas tariff in March. The
number of services product holdings fell by
3% in 2016, reflecting the ongoing market
trend for customers using on-demand and
home emergency services, although the
rate of loss was much reduced in the
second half with targeted offers helping
improve customer retention. We have
developed a technology-led on-demand
proposition, Local Heroes, which leverages
our engineer base as well as providing
access to local tradesmen backed by a
British Gas guarantee. Across both energy
and services, a greater focus on and
understanding of customer preferences and
more sophisticated customer segmentation
is enabling us to develop more targeted
offers as we focus increasingly on
customer value.
We continue to lead the industry in
the smart meter roll-out, having installed
3.3 million to date. Smart meters will bring
significant benefits to customers, with an
end to estimated bills and a greater ability
to monitor and reduce consumption helping
improve customer engagement. Utilising
smart meter technology, we launched
our ‘HomeEnergy FreeTime’ tariff in June,
offering free electricity to customers on
either a Saturday or Sunday.
UK Home adjusted operating profit fell 8%
to £810 million, which includes energy supply
operating profit of £553 million, down 11%.
This reduction in energy supply profitability
reflects a changing product mix and lower
customer account holdings partially offset
by efficiency benefits. However, adjusted
operating cash flow increased significantly
due to strong working capital management.
UK BUSINESS
UK Business returned to profitability in
2016 following an operating loss in 2015,
with billing issues associated with the
migration of customer accounts and
associated data on to a new billing and
CRM system from multiple legacy systems
now fully resolved. Billing accuracy and
timeliness are now significantly better than
under the old systems, and as a result,
complaints fell by around a quarter
Energy supply complaints down
▼ 31%
UK Home brand NPS up
▲ 10 points
compared to 2015 and operating costs
returned to pre-implementation levels.
Following investigations by Ofgem into the
impact of the transition to a new IT system
on business customers, and into the roll-out
of advanced meters for certain categories
of business customers, we have agreed
to pay £14 million in total in redress
distributed across affected micro-business
customers, the charity Money Advice Trust,
which provides a business debt line
service to help customers in need, and to
fund energy efficiency advice and related
activities through the Carbon Trust.
Collecting customer debt resulting from
the billing issues was a key area of focus
throughout the year and, as a result, adjusted
operating cash flow was £418 million
compared to a cash outflow of £132 million
in 2015. Customer account holdings fell by
6% in 2016, as we focused on rebuilding
our reputation in the UK business market
and our retention activities on higher
value SME customers. UK Business also
continues to support the DE&P business
in the development of energy insights
and solutions for our customers.
IRELAND
Our Irish business, Bord Gáis Energy,
delivered a strong result in 2016. Customer
service levels improved with complaints
down reflecting investment in customer
agent training and Brand NPS increasing
to +20.1 We also delivered 4% growth in
customer accounts, which reflected our
competitive pricing position resulting from
a reduction in gas and electricity prices
for customers in Q4 of 2016.
Adjusted operating profit and adjusted
operating cash flow were significantly
higher than in 2015, with H2 2016 profit
higher than H2 2015 including a strong
operational performance in energy
supply and generation and trading.
37
STRATEGIC REPORT
BUSINESS REVIEW
Business Review
Energy Supply & Services –
North America
Supplying energy and services to
residential and business customers
in North America through our new
business segments: North America
Home and North America Business.
HIGHLIGHTS
North America Home customer accounts
3.8m
North America Business customer accounts
0.59m
38
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION ENERGY SUPPLY & SERVICES –
NORTH AMERICA
We made good progress in implementing
our North America strategy in 2016, as
we look to build on our market leading
consumer and business positions. As in
the UK and Ireland, our focus remains
on improving customer satisfaction levels,
enhancing our range of innovative products
and solutions and delivering cost efficiencies.
Overall, North America profitability was down
3% compared to 2015 and down 17% on
a local currency basis after normalising for
the effects of foreign exchange movements.
This reflected the impact that warm weather
in H1 2016 had on consumption and in
reducing spot optimisation opportunities
from our natural gas pipeline and storage
capacity contracts. However, H2 2016
adjusted operating profit was significantly
higher than both H1 2016 and H2 2015,
with the realisation of higher B2B forward
net margin under contract, improved solar
performance and cost efficiencies.
NORTH AMERICA HOME
Excellent customer service is a core
requisite for retaining and winning new
residential customers. During the year we
made good progress, implementing user
interface enhancements for our customer
care agents, providing additional training
for both customer care and sales agents
and introducing new service channels
including social media and online chat.
This contributed to a 47% reduction in
energy supply complaints while Brand
NPS over the year was +32.
We remain focused on continuing to improve
the sustainability of the business through
offer differentiation and innovative customer
propositions. This includes the bundling of
products, with 21% of energy sales being
bundled with one or more other products,
such as a protection plan or smart thermostat.
In November, we launched bundled energy
and Hive connected home tariffs in Texas,
the US North East and Alberta, and a full
launch is planned in H1 2017.
We are also looking to expand into new
geographies as opportunities open up
and during the year we started providing
energy in New Hampshire and Rhode
Island, while we opened 78 new services
franchise territories. Energy customer
retention improved by 3ppt, however the
total number of energy supply customer
accounts fell by 136,000 in 2016, reflecting
our decisions to stop door-to-door sales in
Texas and wind down our customer base
in Ontario, as we focus on the higher value
customer segments and regions. Services
North America Home: Brand NPS
over the year was
+32
The number of paid annuity contracts
grew by 9%, with increased conversion
from trial to paid contracts.
▲ 9%
customer account holdings fell by 13%,
as a number of trial offers came to an end.
However increased conversion from trial
to paid contracts resulted in a 9% increase
in the number of more valuable paid
annuity contracts.
Our efficiency programme is key to
retaining a competitive position and
serving our customers more effectively.
The combination of our residential energy
and services activities to create the
North America Home business unit has
led to synergies from simplification, more
effective and efficient sales channel use
and reductions in headcount. In addition,
we simplified our services business with
the divestment of two small non-core
businesses, Airtron Canada and Airco
Mechanical. We have also repositioned our
solar business to make it more efficient,
restructuring our operations, streamlining
sales processes and closing a number
of loss-making offices in non-core markets.
Cost per Home account increased by
3% compared to 2015, primarily reflecting
the lower customer account holdings.
North America Home adjusted operating
profit increased 21% to £93 million, or
6% on a local currency basis, reflecting
improved unit margins in energy resulting
from our focus on customer value and
growth in our annuity business. Adjusted
operating cash flow was down 8%,
reflecting the impact of weather on
working capital.
NORTH AMERICA BUSINESS
Customer satisfaction and retention remain a
key focus in our B2B business. During the year
we launched a number of new operational
processes to enhance the experience for our
customers, including improving the timeliness
of generating a quote and engaging earlier
with the customer prior to contract renewal.
Excellent customer service is a core requisite
for retaining and winning new customers in
North America.
We also continued to invest in our systems,
helping to improve efficiency and delivering
efficiencies. Reflecting all this, complaints
fell by 21% while Brand NPS improved
from +20 in 2015 to +31 in 2016.
Total gas consumption was broadly flat
and electricity consumption was down 4%
compared to 2015, reflecting the warmer
weather, partially offset by a slight shift in
customer mix towards higher consuming
customers. We continue to build on our
position as the largest C&I gas supplier in
the North East of the United States, as we
look to increase our brand awareness and
develop innovative offers. We are focused
on developing a range of products targeted
at different customer segments, delivering
tailored offerings for larger businesses and
simpler digital offers for small and medium
sized customers.
We will also continue working closely
with our international DE&P business, with
Direct Energy the key channel for the sale
of Panoramic Power’s wireless energy
management solution to both new and
existing customers. The number of licences
deployed for Direct Energy customers
increased threefold in 2016 in comparison
to 2015, with sales to a diverse range of
customers including retailers, manufacturers,
cinemas and healthcare providers.
North America Business adjusted operating
profit was down 10%, or 24% on a constant
currency basis, and adjusted operating cash
flow was down 16% compared to 2015.
This predominantly reflects warmer weather
in 2016, which impacted consumption and
imbalance charges and limited the potential
for spot optimisation profit from our natural
gas pipeline and wholesale power contracts.
Centrica plc Annual Report and Accounts 2016
39
STRATEGIC REPORT
BUSINESS REVIEW
Business Review
Connected
Home
In Connected Home, our Hive smart
thermostat and other services help
our customers manage their energy
use in the UK, the Republic of Ireland,
Canada and the United States.
We plan to build a global business
providing new and innovative solutions
for consumers across the world.
READ MORE ON PAGES 22 AND 23
HIGHLIGHTS
Cumulative hubs installed
527,000
New products launched
5
40
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION CONNECTED HOME
Connected Home is one of our focus
areas for growth and we have brought
together our existing expertise in the
UK and North America to create a global
business unit. Connected Home products
are an important source of differentiation
when linked to energy and services
products for residential customers, helping
drive engagement and brand awareness
and enabling us to broaden and deepen the
customer relationship, as well as providing
growth opportunities in their own right.
Our Connected Home customer offer is
being developed around three categories;
peace of mind, home energy management,
and home automation.
We already have strong capabilities,
including ownership of our proprietary
Connected Home platform acquired through
the AlertMe acquisition in 2015. We are well
placed to compete in this space, with our
existing customer base in the UK, Ireland
and North America providing a strong
initial route to market. We installed 527,000
connected hubs cumulatively by the end
of 2016, with the number of hubs installed
in H2 2016 more than double the number
installed in H1 2016. During the year
we launched four new Connected Home
products in the Hive range; the Active Plug,
Window and Door Sensor, Motion Sensor,
and Active Lights. We have also redesigned
our products for non-UK markets and
we are now selling Hive products in
North America, with plans for a full launch,
including the Hive smart thermostat, in H1
2017. In total we sold over 450,000 Hive
products in 2016, more than three times
the amount sold in 2015.
In H1 2016 we also launched ‘Boiler IQ’,
our innovative connected boiler proposition
and first subscription-based product,
which uses sensors to remotely diagnose
faults, creating a unique experience for
services contract customers. We have now
installed around 30,000 ‘Boiler IQ’ devices,
with very positive feedback. We also continue
to integrate our Hive product range with other
eco-systems and in H2 2016 we partnered
with Amazon Echo, as smart home launch
partner in the UK, allowing our Hive
customers to control their heating, lighting
and plugged-in devices simply by speaking
through the Alexa voice assistant. In addition,
our energy insight products, My Energy
in the UK and Direct Your Energy in
North America, are now available to more
than 3.6 million customers.
In 2017, we will continue to invest in
the business. We will look to expand the
Hive product range, including the launch
of a water leak detection product enabled
by the acquisition of Flowgem in H2 2016,
and drive sales of Hive products in North
America. We will also look for opportunities
to expand into new geographies where
we don’t currently serve customers and
build new partnerships across further
geographies and channels. In addition we
will look to move towards a subscription
based commercial model, and have
already launched a number of trial offers
in the UK.
Connected Home reported a 74% increase
in gross revenue in 2016, reflecting the
increase in the installation of Hive hubs
and product sales. However, the business
reported an adjusted operating loss and
negative adjusted operating cash flow,
reflecting investment in infrastructure,
product development and capability
to support business growth.
Customers love our Hive products so much that
they are keen to share their stories.
READ MORE ON PAGES 22 AND 23
Our energy insight products, My Energy in the UK
and Direct Your Energy in North America, are now
available to more than 3.6 million customers.
Our connected home customer offer is being
developed around three categories – peace
of mind, home energy management and
home automation.
READ MORE ON PAGE 10
Centrica plc Annual Report and Accounts 2016
41
STRATEGIC REPORT
BUSINESS REVIEW
Business Review
Distributed
Energy & Power
We are an international business
in which we develop integrated
energy solutions for commercial and
industrial customers, including flexible
generation, energy management
systems and battery storage. We help
our customers take control and turn
their energy into an opportunity.
READ MORE ON PAGES 12 TO 15
HIGHLIGHTS
Flexible distributed energy capacity
under management
543MW
Active customer sites
3,924
Panoramic Power sensors deployed
~40,000
42
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION under management, which has fallen by 3%
over the past 12 months reflecting market
changes in H1 2016 that limited the
eligibility of some diesel generation in
the North American market, however,
it increased by 5% in H2 2016. In March
we closed the Killingholme gas fired
power station following completion of
its winter 2015/16 SBR contract, with the
asset having become uneconomic due
to its age and prevailing market conditions.
The Killingholme site was sold in
December 2016.
We also announced plans to build new
distributed power assets, having been
awarded 15-year contracts in the 2020/21
capacity market auction for two new
fast-response 50MW distributed gas fired
assets at Brigg and Peterborough and a
49MW battery storage project at Roosecote.
We will run these plants alongside
customer-owned assets to optimise them
as part of a wider portfolio. In December
we announced a pioneering trial to develop
a local energy market in Cornwall, which
will see the development of a virtual
marketplace and the installation of new
technology in over 150 homes and
businesses. The programme will test the
use of flexible demand, generation and
storage, allowing participants to sell flexible
energy capacity to both the grid and the
wholesale energy market, rewarding
local people and businesses for being
more flexible.
Total gross revenue increased by 69%
to £161 million and secured revenue
increased to £321 million, predominantly
reflecting the ENER-G Cogen acquisition.
DE&P reported an adjusted operating
loss of £26 million and negative adjusted
operating cash flow of £15 million in
2016, with continued low returns from the
peaking plants and a focus on investments
to build its distributed energy capability.
However, the loss was lower than in 2015,
primarily reflecting the closure of the
Killingholme plant and additional STOR
and SBR revenue across our peaking plants,
as well as an initial contribution from
ENER-G Cogen.
DISTRIBUTED ENERGY & POWER
Distributed Energy & Power (DE&P) is one
of our focus areas for growth. Reflecting
this, we have established a new international
business unit, bringing together expertise
from our UK business services and power
generation activities and our North America
business division. Our existing capabilities,
together with the combined heat and power
(CHP) capabilities obtained through the
£149 million acquisition of ENER-G Cogen
in May 2016, provide us with the base to
capitalise on the global trend towards
distributed energy. Our distributed energy
offer is being developed around three
categories; energy insights, energy
optimisation, and energy solutions.
The ENER-G Cogen integration has been
proceeding to plan and we are now able
to offer both off-the-shelf and bespoke
end-to-end CHP solutions for B2B customers,
from initial design through to installation,
operation and maintenance, complementing
Centrica’s existing capability in installing and
managing distributed systems. The business
operates primarily in the UK, but also has
operations in North America, Hungary,
Italy and the Netherlands. The acquisition
added capacity, under contract, of over
500MW across 1,400 CHP units.
The acquisition of ENER-G Cogen fits
alongside the 2015 acquisition of Panoramic
Power, and with the Energy Marketing &
Trading acquisition of Neas Energy adding
enhanced energy optimisation capability,
we have a good core of experience and
expertise, and the range of products
to create a compelling customer offer.
During 2016 we saw further growth in sales
of our energy insights product, developed
by Panoramic Power, and have now
deployed nearly 40,000 sensors in total
with H2 2016 sales up 65% compared
to H1 2016.
The DE&P segment also includes our
smaller operating gas fired peaking
plants at Barry, Brigg and Peterborough.
Peterborough and Barry have Short Term
Operating Reserve (STOR) contracts
until March 2018, while the 99MW Brigg
plant continues to operate as a distributed
generation asset. All three plants were
awarded one year capacity contracts
starting in October 2017 in the Early Capacity
Auction. Brigg capacity is included within
our total flexible distributed energy capacity
ENER-G Cogen
We acquired ENER-G Cogen in May 2016
enhancing our CHP capabilities.
Barry, Brigg and Peterborough were all
awarded one year capacity contracts in the
Early Capacity Auction.
Centrica plc Annual Report and Accounts 2016
43
STRATEGIC REPORT
BUSINESS REVIEW
Business Review
Energy Marketing
& Trading
Operating in UK and European
energy markets, we provide risk
management and wholesale market
access for customers and across
the Group. We have a strengthening
global presence in LNG.
HIGHLIGHTS
Adjusted operating profit
▲ £161m
Neas Energy serves customers with
installed capacity of approximately
8,600MW
44
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION ENERGY MARKETING & TRADING
Energy Marketing & Trading (EM&T)
provides risk management and wholesale
market access for the Group. During the
year we continued to build on our strong
cross-commodity trading capabilities,
made good progress in expanding our
route to market offer for customers and
strengthened our global presence in
liquefied natural gas (LNG).
In October, we completed the £210 million
acquisition of Denmark based Neas Energy,
one of Europe’s leading providers of risk
management and revenue optimisation
services for decentralised third party owned
assets. Neas Energy serves customers who
own 2,500 individual decentralised assets,
including wind farms, solar plants and CHP
plants with a combined installed capacity
of approximately 8,600MW. In addition, the
transaction brings an enhanced technology
platform and strengths in energy analytics.
Neas Energy operates predominantly in
Denmark, the UK, Germany and Sweden,
and the business model is complementary
to Centrica’s existing UK-based EM&T
activities. The acquisition enables Centrica
to materially accelerate its route to market
strategy across Europe, while also
strengthening the optimisation activity
offering for DE&P customers. The business
has performed well since acquisition,
making a strong initial contribution to
adjusted operating profit and cash flow.
EM&T continues to enhance its global
presence in LNG. During 2016 we signed
a Memorandum of Understanding with
Tokyo Gas Co Ltd, Japan’s largest natural
gas utility, to optimise contracted volumes
from both Atlantic and Asia-Pacific markets
through location swaps. We announced
a five year Sales and Purchase Agreement
with Japanese utility JERA, the world’s
largest buyer of LNG, under which we will
purchase up to six cargoes per annum
at the Isle of Grain Terminal in the UK
from April 2019. We also entered into a new
five-year supply agreement with Qatargas
for the purchase of up to two million tonnes
per annum of LNG, which will start in
January 2019 following the expiry of our
existing contract with Qatargas. In October,
we signed a seven-year agreement with
GasLog Ltd to charter a new build LNG
carrier, starting in 2019. The agreement is
expected to coincide with first commercial
delivery of our US export supply contract
with Cheniere.
EM&T continues to have a number of
flexible gas contracts, the profit and cash
flow from which will vary between periods
based on the commodity price environment
and decisions we take to optimise these
contracts to maximise value. Some of
these contracts are ‘take or pay’, where
the payments are made for gas even if
delivery is deferred to future periods. The
commodity price environment provided
opportunities for us to optimise these
contracts and associated hedges during
H2 2016 and the contracts overall were
profitable for the full year, having been
loss-making in H1 2016. This optimisation
strategy was value-accretive in total,
improving the 2016 result, while reducing
our 2017 expectation from these contracts.
Overall, EM&T adjusted operating profit
more than doubled to £161 million,
reflecting strong trading performance,
the optimisation of flexible gas contracts
between 2015–16 and 2016–17, and the
strong initial contribution from the Neas
Energy acquisition. Adjusted operating
cash flow fell 20% reflecting the timing
of internal tax payments and movements
in working capital.
Neas Energy
We acquired Neas Energy, one of Europe’s leading
providers of risk management and revenue
optimisation services for decentralised third-party
owned assets.
Centrica plc Annual Report and Accounts 2016
45
We have a strengthening global presence in LNG.
STRATEGIC REPORT
BUSINESS REVIEW
Business Review
Exploration
& Production
Targeting production of
between 40 to 50 million barrels
of oil equivalent per year focused
on the UK, the Netherlands
and Norway.
HIGHLIGHTS
Total gas and liquids production
71.2mmboe
Unit lifting and other cash production
costs1 reduced 19% to
£10.1/boe
Free cash flow
£166m
46
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION EXPLORATION & PRODUCTION
We made good progress in 2016 in
transitioning to a sustainable Exploration
& Production (E&P) business producing
between 40–50mmboe per annum and
focused on the UK, Netherlands and Norway.
Capital expenditure reduced to within our
targeted £400 million–£600 million range,
we announced the sale of our portfolio
of assets in Trinidad and Tobago and we
continue to work on the divestment of
our Canadian E&P assets.
Total gas and liquids production of
71.2mmboe was down 9% compared to
2015. Production in Europe was down 8%,
with the positive impact of consistent
performance in Norway, and the completion
of a number of infill drilling projects at the
Kvitebjørn and Statfjord fields more than
offset by natural portfolio decline, and a
longer than expected maintenance outage
at the Morecambe asset. Production
in the Americas was down 12% reflecting
significantly reduced drilling activity and some
shut-ins of producing fields for economic
reasons in the low gas price environment.
Capital expenditure was down 28% to
£518 million. This included spend on the
Cygnus project, which delivered first
commercial gas in December 2016, and
production from the asset is expected to
ramp up towards peak production during
2017. It also included spend on a fourth
production well at the York field, which
failed to deliver commercial volumes owing
to reservoir quality issues. The well was
shut-in, resulting in a pre-tax impairment
of £63 million being reported in adjusted
operating profit. There was limited exploration
drilling activity in Europe in 2016.
We continue to focus our investment on
the most attractive development options
in our portfolio. The Maria project remains
on track to produce first oil in 2018, with
drilling operations scheduled to begin in 2017.
We also made a positive final investment
decision on the Centrica-operated Oda field
in the Norwegian North Sea. Centrica has
a 40% interest in the field and its share of
capital expenditure is expected to be around
£200 million, with estimated development
costs having reduced by more than 40%
over the past two years. Production is
scheduled to start in 2019. In addition,
further infill wells are planned for Statfjord
and Kvitebjørn in 2017. In early 2017 a gas
discovery was announced at Valemon West,
in which Centrica owns a 13% interest.
Centrica’s share of reserves is estimated
at 2.4–6.3mmboe and production is
expected to start later in Q1 2017.
In November, we announced the disposal
of our remaining portfolio of gas assets
in Trinidad and Tobago for $30 million
(£24 million). The assets consist of 17.3%
interest in the producing NCMA-1 block
and 80% and 90% operated interests
respectively in the undeveloped blocks
NCMA-4 and Block 22. Centrica will
receive further payments subject to Block
22 and NCMA-4 reaching agreed project
milestones. The transaction is expected
to close in H1 2017 and an exceptional
pre-tax write back of £56 million has been
recognised in the 2016 financial results.
We sold our other assets in the region,
Blocks 1a and 1b, in April. We also
disposed of our interests in the Skene
and Buckland oil and gas assets in the
UK North Sea for £10 million in H1 2016,
which resulted in a £50 million exceptional
gain on disposal. Reflecting these disposals,
production during the year and positive
revisions in Norway, E&P proven and
probable (2P) reserves were 474mmboe
at the end of 2016.
The business delivered very strong cost
reduction performance during 2016. Unit
lifting and other cash production costs1 were
15% lower in Europe and 39% lower in the
Americas, despite reduced production,
and total lifting and other cash production
costs were £352 million or 33% lower when
compared to a 2014 baseline. This includes
the absorption of incremental costs from
new projects such as Valemon. We have
delivered initiatives across all our assets to
make these savings, including supply chain
improvements and collaboration with other
operators to drive efficiency. In 2016 we
also moved the organisation from a regional
to an asset-based structure, reducing
duplication and enabling reductions in
headcount across all levels.
Adjusted operating cash flow fell 17%
compared to 2015, to £655 million, with
materially lower cash production costs,
working capital management and benefits
from the phasing of tax payments only
partially offsetting the impact of lower
commodity prices, reduced benefits from
historic hedges and lower production.
However, including the impact of reduced
capital expenditure and some small disposals
the business generated £166 million of
free cash flow in 2016, higher than in
2015 despite the lower commodity price
environment. Adjusted operating profit
increased by 97% to £187 million,
which reflects lower costs and reduced
depreciation resulting from the impairment
of assets at the end of 2015.
Kvitebjørn
Further infill wells are planned at Kvitebjørn field
which is situated in block 34/11 of the Tampen area
in the North Sea, Norway.
Cygnus
At the end of 2016, the first gas flowed from Cygnus,
the UK North Sea’s largest producing gas field.
1
Lifting and other cash production costs are
total operating costs and cost of sales excluding
depreciation and amortisation, dry hole costs,
exploration costs and profits on disposal.
Centrica plc Annual Report and Accounts 2016
47
STRATEGIC REPORT
BUSINESS REVIEW
Business Review
Central Power
Generation
We are rationalising our thermal
power generation portfolio with
a view to simplification and cost
reduction while retaining low
cost optionality.
HIGHLIGHTS
Best performance of nuclear since
acquisition – our share of generation
volume was
13.0 TWh
CCGT Reliability
89%
48
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION We have now completed our exit from
wind power generation, in line with
the strategy set out in July 2015. In H1
2016 we disposed of a 50% share in the
220MW GLID joint venture, resulting in
cash proceeds to Centrica of £116 million
and an exceptional gain on disposal of
£73 million. In February 2017 we disposed
of our remaining offshore wind farm,
Lincs, resulting in cash proceeds to
Centrica of £224 million. Generation from
our share of wind assets was 39% lower
than 2015, reflecting the GLID disposal
and lower wind speeds affecting Lincs.
Central Power Generation adjusted
operating profit reduced by 41%
compared to 2015. Adjusted
operating cash flow was marginally
negative, reflecting a lower power price
environment for much of the year and
reduced benefit from historic hedging,
and £51 million repayments in 2016
of amounts owed by the Group to
the GLID and Lincs joint ventures.
CENTRAL POWER GENERATION
In 2016 we made significant progress
in improving operational efficiency and
reshaping our centralised power portfolio,
in line with our strategy to focus on
growth in distributed generation.
Gas fired generation volumes were 65%
higher in 2016 than in 2015, with improved
plant reliability and power market tightness
in H2 2016 resulting in higher load factors
from our Langage and South Humber Bank
power stations and higher volumes from
the Spalding tolling arrangement. The three
plants were awarded one-year agreements
in the 2020/21 capacity market auction
held in December 2016, and in the 2017/18
Early Capacity Auction held in January 2017,
and all now have contracts for four years
starting in October 2017. We were also
awarded a 15-year contract starting in
October 2020 at the 370MW CCGT at
King’s Lynn, which had previously
been mothballed.
Our share of nuclear generation volumes
was up 7% to 13.0TWh, the highest
output since we purchased our interest in
the fleet in 2009. This reflected excellent
operational performance, with limited
unplanned outages, and the impact of a
return to full service of three of the four
reactors that had been operating at reduced
temperatures following the identification of
an issue on one boiler spine at Heysham 1
in 2014. Following the completion of further
work at Heysham 1, Reactor 1, load has
now been raised and the unit is now able
to operate at up to 87.5%, compared to
75% previously. All of the nuclear reactors
in which we own an interest were awarded
one-year capacity agreements starting
in October 2020 and were also successful
in the Early Capacity Auction, meaning all
now have contracts for four years in total
starting in October 2017.
Langage
Langage in Devon is the Group’s latest gas fired
station, which was completed in 2010.
South Humber Bank
Gas fired generation volumes were 65% higher in
2016 than in 2015, with improved plant reliability.
Nuclear
We have a 20% interest in eight nuclear power
stations generating electricity to the grid in the UK.
Centrica plc Annual Report and Accounts 2016
49
STRATEGIC REPORT
BUSINESS REVIEW
Business Review
Centrica Storage
The Group operates the
Rough gas storage facility,
which is a strategic storage
asset for the UK.
HIGHLIGHTS
Limited stock in Rough for the first part
of 2016 was
33–36TWh
50
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION During 2016, the issues with the Rough
storage asset resulted in customers being
unable to use the SBU capacity they had
previously purchased. Reflecting this,
Centrica Storage agreed with its customers
to buy back unusable capacity during
H2 2016. In December, Centrica Storage
launched a consultation regarding an
application to Ofgem to reduce the minimum
Rough capacity for the 2017/18 storage
year, to avoid being required to sell more
capacity than Rough can physically deliver.
Gross revenue fell to £93 million, down
40% compared to 2015, reflecting the
reduced capacity at Rough during H1 2016,
the cessation of injection and withdrawal
operations during H2 2016 and low
seasonal gas price spreads. This includes
slightly higher revenue from the sale of
cushion gas, following consent from
the Oil and Gas Authority to increase the
reservoir size of Rough by approximately
4.5TWh in July 2015. Total costs increased
by 22% largely due to increased maintenance
expenditure, as well as costs relating to
lower asset availability and managing the
reservoir at lower pressure. Reflecting
this, Centrica Storage reported an adjusted
operating loss of £52 million compared
to a profit of £37 million in 2015. Adjusted
operating cash flow was an outflow of
£49 million compared to an inflow of
£112 million in 2015, which includes the
impact of a higher volume of Centrica
Storage operational gas in the reservoir
at the end of 2016.
A pre-tax exceptional charge of £176 million
(post-tax £144 million) was recorded in
2016, resulting from updated assumptions
on asset availability in the near term,
future expenditure on asset integrity and
the impact from the permanent withdrawal
of the 47/8A installation from service,
which was announced in September.
CENTRICA STORAGE
Seasonal gas price spreads remained at
historic low levels through much of 2016,
with a continued abundance of flexible
supply across Europe. Reflecting this,
it was announced in April that all Standard
Bundled Units (SBUs) for the 2016/17
storage year had been sold at 15.4 pence,
significantly lower than the 21.1 pence
achieved in 2015/16 and the lowest price
since Centrica acquired the asset in 2002.
Following the identification of a potential
technical issue in March 2015, the maximum
operating pressure of the Rough wells
remained limited to 3,000 psi during H1
2016, which limited the stock in Rough
to 33-36TWh. The highest level reached
in 2014 was 41.1TWh. As a responsible
operator, and given the age of the field
and installation, Centrica Storage decided
to take the prudent step to test and verify
the operating parameters of the Rough
wells. Following a change to the Rough
Undertakings, Centrica Storage was able
to reduce the number of SBUs it sold for
the 2016/17 storage year to 340 million,
from 455 million in 2015/16, to reflect
the impact of the reduced maximum
operating pressure.
In June, Centrica Storage identified an
additional issue on one of the Rough wells
and as a consequence ceased all injection
and withdrawal operations pending further
testing in relation to the issue. In July, it was
announced that tests on the affected well
had identified further uncertainties in the
remaining untested wells and as a result,
Centrica Storage would continue with
an enhanced testing programme, with
completion expected in March to April 2017.
As a prudent and safe operator Centrica
Storage extended the cessation of injection
and withdrawal operations, although
was able to return 20 wells to service for
withdrawal operations in December 2016,
in time for the majority of the winter 2016/17
withdrawal season.
In February 2017, Centrica Storage
announced that although it expected to
complete the testing programme on all
24 wells at Rough by the end of April 2017,
Rough will not be available for injection
operations until at least the end of
June 2017, as test results are evaluated.
Returning the asset to injection operations
in 2017 remains subject to the successful
completion of the well testing and any
further works necessary to ensure Rough
can be safely returned to service.
Easington terminal
The Easington terminal processes gas from the
Rough gas storage facility.
Rough
The Rough gas storage facility is the largest in the
UK, able to meet approximately 10% of the UK’s
winter peak day demand.
Centrica plc Annual Report and Accounts 2016
51
STRATEGIC REPORT
GROUP FINANCIAL REVIEW
Group Financial Review
Profit for the year increased to £885 million and after
adjusting for losses attributable to non-controlling interests,
adjusted earnings increased by 4% to £895 million.
The low UK adjusted effective tax rate
is due principally to upstream losses being
taxed at a rate higher than the UK standard
rate, together with the impact of a 1%
reduction to that standard rate.
GROUP EARNINGS AND DIVIDEND
Profit for the year increased to £885 million
(2015: £833 million) and after adjusting
for losses attributable to non-controlling
interests, adjusted earnings increased
by 4% to £895 million (2015: £863 million).
Adjusted basic EPS fell 2% to 16.8 pence
(2015: 17.2 pence) reflecting a higher
number of shares in issue due to the
effects of the 7% equity placing in May
and the scrip dividend.
The statutory profit attributable to
shareholders for the period was £1,672
million (2015: loss of £747 million). The
reconciling items between Group profit for
the period from business performance and
statutory profit are related to exceptional
items and certain re-measurements.
The difference compared to 2015
is principally due to a £27 million net
exceptional credit (2015: charge of
£1,846 million) and a higher net gain from
certain re-measurements of £750 million
(2015: £129 million). The Group reported
a statutory basic EPS of 31.4 pence
(2015: loss of 14.9 pence).
In addition to the interim dividend of
3.6 pence per share, the proposed
final dividend is 8.4 pence giving a
total full year dividend of 12.0 pence
(2015: 12.0 pence).
GROUP REVENUE
Group revenue fell 3% to £27.1 billion
(2015: £28.0 billion). This primarily reflects the
impact of lower commodity prices on tariffs
in UK and North America energy supply
and on achieved prices in Exploration &
Production (E&P) and Energy Marketing
& Trading (EM&T), lower consumption due
to warmer weather in North America
and reduced account holdings.
OPERATING PROFIT
From 1 January 2016 new reporting
segments are in place. 2015 comparatives
have been restated accordingly. Within
the statement, reference is made to a
number of different profit measures,
as shown on page 53.
Total adjusted operating profit increased
4% to £1,515 million. Profit from customer-
facing businesses increased by 9%, with
strong EM&T performance, a return
to profitability in UK Business, favourable
foreign exchange moves and cost efficiencies
more than offsetting the impact of lower
account holdings. Combined profitability
from the asset businesses – E&P, Central
Power Generation (CPG) and Centrica
Storage (CSL) – was lower, with cost
efficiencies only partially offsetting the
impact of lower commodity prices on E&P
and CPG and lower CSL profitability due
to asset availability and low spreads.
GROUP FINANCE CHARGE AND TAX
Net finance costs increased to £300 million
(2015: £279 million), predominantly reflecting
a higher interest cost on bonds following
the issuance of £1 billion equivalent of
hybrid securities in April 2015 and lower
interest income following the disposal of
Lincs wind farm debt in 2015.
Business performance taxation on profit was
broadly flat at £282 million (2015: £286 million)
and after taking account of tax on joint
ventures and associates, the adjusted tax
charge was £298 million (2015: £294 million).
The resultant adjusted tax rate for the Group
was 25% (2015: 26%). An effective tax rate
calculation is shown on page 53.
52
Group revenue
£27.1bn
2015: £28.0bn
▼ 3%
Adjusted operating profit
£1,515m
2015: £1,459m
▲ 4%
Adjusted basic earnings
per share (EPS)
16.8p
2015: 17.2p
▼ 2%
Statutory operating
profit/(loss)
£2,486m
2015: £(857)m
● nm
Full year dividend per share
12.0p
2015: 12.0p
0%
Basic earnings per share
31.4p
2015: (14.9p)
● nm
Adjusted effective tax rate
25%
2015: 26%
▼ 1ppt
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION “Adjusted
operating cash
flow was up 19%
to £2,686 million.”
Jeff Bell
Group Chief
Financial Officer
Operating profit
Adjusted operating
cash flow
£2,686m
2015: £2,253m
▲ 19%
Adjusted earnings
£895m
2015: £863m
▲ 4%
Group net debt
£3.5bn
2015: £4,747m
▼ 27%
Year ended 31 December
Notes
Business
performance
£m
Exceptional
items and certain
re-measurements
£m
Statutory
result
£m
Business
performance
£m
Exceptional
items and certain
re-measurements
£m
2016
2015
Statutory
result
£m
4(c)
4(c)
4(c)
8
9
Adjusted operating profit/(loss)
Energy Supply & Services – UK & Ireland
(UK&I ES&S)
Energy Supply & Services – North America
(NA ES&S)
Connected Home (CH)
Distributed Energy & Power (DE&P)
Energy Marketing & Trading (EM&T)
Total customer-facing businesses
Exploration & Production (E&P)
Central Power Generation (CPG)
Centrica Storage (CSL)
Total adjusted operating profit
Interest and taxation on joint ventures
and associates
Group operating profit/(loss)
Net finance cost
Taxation
Profit/(loss) for the year
Less loss attributable to
non-controlling interests
Adjusted earnings
Group tax charge
Year ended 31 December
Adjusted operating profit
Share of joint ventures’/associates’ interest
Net finance cost
Adjusted profit before taxation
Taxation on profit
Share of joint ventures’/associates’ taxation
Adjusted tax charge
Adjusted effective tax rate
Centrica plc Annual Report and Accounts 2016
906
314
(50)
(26)
161
1,305
187
75
(52)
1,515
(48)
1,467
(300)
(282)
885
10
895
UK
£m
932
(32)
(235)
665
31
16
47
7%
891
323
(49)
(32)
66
1,199
95
128
37
1,459
(61)
1,398
(279)
(286)
833
30
863
UK
£m
1,057
(53)
(156)
848
74
8
82
10%
1,019
–
(242)
777
2,486
(300)
(524)
1,662
Non-UK
£m
583
–
(65)
518
251
–
251
48%
2016
Total
£m
1,515
(32)
(300)
1,183
282
16
298
25%
(2,255)
–
538
(1,717)
(857)
(279)
252
(884)
Non-UK
£m
402
–
(123)
279
212
–
212
76%
2015
Total
£m
1,459
(53)
(279)
1,127
286
8
294
26%
53
STRATEGIC REPORT
GROUP FINANCIAL REVIEW
Group Financial Review
continued
Operating cash flow
Year ended 31 December
Net cash flow from operating activities
Add back/(deduct):
Net margin and cash collateral inflow (i)
Payments relating to exceptional charges
Dividends received from joint ventures and associates
Defined benefit deficit pension payment
Adjusted operating cash flow
2016
£m
2,396
(177)
273
117
77
2015
£m
2,197
(282)
81
180
77
2,686
2,253
(i) Net margin and cash collateral inflow includes the reversal of collateral amounts posted when the related derivative contract settles.
“ The Group’s net debt
at the end of 2016 fell
to £3,473 million.”
Jeff Bell
Group Chief Financial Officer
GROUP CASH FLOW, NET DEBT
AND BALANCE SHEET
Net cash flow from operating activities
increased to £2,396 million (2015: £2,197
million). Adjusted operating cash flow,
which is reconciled to net cash flow from
operating activities in the table below,
was up 19% to £2,686 million.
Net cash outflow from investing activities
increased to £803 million (2015: £611 million),
with the impact of lower organic capital
expenditure more than offset by lower
disposal proceeds, reduced dividends
received from our UK nuclear associate
and the acquisitions of ENER-G Cogen
and Neas Energy in our growth businesses.
Net cash outflow from financing activities
reduced to £546 million (2015: £1,331 million),
reflecting the issuance of new ordinary
share capital following the equity placing,
lower financing interest due to hedging
cash flows and lower net repayment of
borrowings, partially offset by an increase
in cash dividends paid.
Reflecting all of the above, the Group’s net
debt at the end of 2016 fell to £3,473 million
(2015: £4,747 million), which includes cash
collateral posted or received in support
of wholesale energy procurement.
During the year net assets increased to
£2,844 million (2015: £1,342 million) with
the equity placing, a higher level of retained
earnings and a translation gain on foreign
operations more than offsetting an
increased actuarial loss on the Group’s
defined benefit pension schemes.
The net pension liability at the end of 2016
was £1,137 million (2015: £119 million).
The Group has now finalised its triennial
review with the Pension Trustees, based
on the position as at 31 March 2015,
with an agreement to fund a £1,203 million
deficit on a Technical Provisions basis,
with additional annual cash contributions
of £76 million per year over the next 14
years commencing in 2017. Further details
can be found in note 22.
ACQUISITIONS AND DISPOSALS
In May, the Group acquired 100% of
ENER-G Cogen, an established supplier
and operator of combined heat and power
(CHP) solutions, for cash consideration
of £149 million. In October, the Group
acquired 100% of Neas Energy, one of
Europe’s leading providers of energy
management and revenue optimisation
services for decentralised third-party
owned assets for cash consideration
of £210 million.
In March, the Group completed the sale
of the Glens of Foudland, Lynn and Inner
Dowsing (GLID) wind farm joint venture
for £116 million, including £22 million for
outstanding interest due to the Group.
Further details on acquisitions, assets
purchased and disposals are included
in notes 4(e) and 12.
54
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION ACCOUNTING POLICIES
UK listed companies are required to
comply with the European regulation to
report consolidated financial statements
in conformity with International Financial
Reporting Standards (IFRS) as adopted by
the European Union. The Group’s specific
accounting measures, including changes
of accounting presentation and selected
key sources of estimation uncertainty,
are explained in notes 1, 2 and 3.
RISKS AND CAPITAL MANAGEMENT
The Group’s principal risks and uncertainties
are set out on pages 56 to 64. Details of
how the Group has managed financial risks
such as liquidity and credit risk are set out
in note S3. Details on the Group’s capital
management processes are provided
under sources of finance in note 24(a).
EXCEPTIONAL ITEMS
A net exceptional pre-tax charge of
£11 million was recognised during the
period (2015: £2,358 million).
As a result of the implementation of
a salary cap on pensionable pay for the
Centrica Pension Plan final salary scheme,
the Group recognised a past service
credit of £78 million. It also recognised a
£53 million net credit on onerous power
procurement contracts, with a reduction
in onerous provisions relating to its UK
gas fired power station tolling contract
and its US wind power procurement
arrangements partially offset by an
additional charge following termination of
the Group’s Dutch gas fired power station
tolling contract. The Group recognised a
£228 million charge relating to restructuring
associated with implementing the Group’s
new operating model.
The Group recognised a £73 million gain on
disposal of the GLID wind farm joint venture,
a £50 million gain on disposal of the Skene
and Buckland oil and gas assets and a
£22 million loss on disposal of two non-core
businesses, Airtron Canada and Airco
Mechanical, in North America.
The Group also recognised a £135 million
write back on some E&P assets, reflecting
increases in reserves, cost savings, revisions
to decommissioning estimates and the
agreed sale proceeds for its Trinidad and
Tobago gas assets. A £26 million write
back was also recognised on the Group’s
Kings Lynn CCGT, primarily reflecting the
15-year capacity market contract awarded
in December 2016. It also recognised a
£176 million impairment on its UK gas
storage facility, Rough, in H1 2016 reflecting
updated assumptions on asset availability
in the near term and the permanent
withdrawal of its 47/8A installation
from service.
Taxation on these charges generated a
credit of £9 million (2015: £477 million) and
combined with a £29 million credit related
to a decrease in upstream UK tax rates,
total net exceptional items after tax generated
a credit of £27 million (2015: £1,846 million
net exceptional charge). Further details
can be found in note 7.
CERTAIN RE-MEASUREMENTS
The Group enters into a number of forward
energy trades to protect and optimise
the value of its underlying production,
generation, storage and transportation
assets (and similar capacity or off-take
contracts), as well as to meet the future
needs of our customers. A number of
these arrangements are considered to be
derivative financial instruments and are
required to be fair-valued under IAS 39.
The Group has shown the fair value
adjustments on these commodity
derivative trades separately as certain
re-measurements, as they do not reflect
the underlying performance of the business
because they are economically related
to our upstream assets, capacity/off-take
contracts or downstream demand, which
are typically not fair valued. The operating
profit in the statutory results includes
a net pre-tax gain of £1,030 million
(2015: £103 million) relating to these
re-measurements. The Group recognises
the realised gains and losses on these
contracts in business performance when
the underlying transaction occurs. The
profits arising from the physical purchase
and sale of commodities during the year,
which reflect the prices in the underlying
contracts, are not impacted by these
re-measurements. See note 7 for
further details.
EVENTS AFTER THE BALANCE
SHEET DATE
On 13 January 2017, Centrica announced
the sale of its 50% share in the Lincs
wind farm for net cash proceeds of
£224 million. The transaction completed
on 17 February 2017.
On 16 February 2017, Centrica Storage
announced that following further well tests
at the Rough gas storage field, injection
services cannot currently be offered for the
2017/18 storage year. Analysis of the testing
programme is expected to be completed
by 30 June 2017.
Further details of events after the balance
sheet date are described in note 26.
Centrica plc Annual Report and Accounts 2016
55
STRATEGIC REPORT
OUR PRINCIPAL RISKS AND UNCERTAINTIES
Our Principal Risks
and Uncertainties
Managing our risks and
uncertainties is key to achieving
our priorities.
LINKS TO STRATEGY
In line with our strategy we are concentrating
more investment on our customer-facing
businesses organised into the two global
customer-facing divisions of Centrica
Consumer and Centrica Business. We are
focused on delivering high levels of customer
service, improving customer engagement
and loyalty, and developing innovative
products, offers and solutions for both
residential and business customers,
underpinned by investment in technology.
Our asset businesses of Exploration and
Production and Centrica Storage continue
to play an important role in our portfolio
providing cash flow diversity and balance
sheet strength.
Our activities for near-term implementation
and delivery of our strategy are framed
around the five priorities below. These
priorities are a lens through which we
assess our risks and discussions around
risk appetite. Each priority has associated
risks, which are managed as part of our
overall system of risk management and
internal control.
Our five priorities
Safety, compliance and conduct
Customer satisfaction and
operational excellence
Cash flow growth and strategic momentum
Cost efficiency and simplification
People and building capability
56
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION The Group’s strategic review in 2015 and
its implementation in 2016 highlighted
emerging risks and provided an opportunity
to simplify and standardise how significant
risks are managed. We have identified
the differing nature of our risks including:
• Risks that require standards where
our tolerance for error is generally very
low. This will include Health, Safety,
Environment and Security, Legal and
Regulatory Compliance, Financial
Processing and Reporting, Information
Systems and Data Security, and Ethical
and Behavioural Standards. For these
risks there will be management systems
providing clearly prescribed standards
with ring-fenced functional monitoring
and assurance.
• Risks where judgement is required
within a range of acceptable outcomes
in order to deliver our priorities. This
includes areas where we need to take a
certain level of risk such as in commodity
trading and our investment in the growth
areas of the business.
• Risks resulting from external factors
where we have limited influence over
their occurrence, but can influence
the impact on our business through
our actions.
MANAGING THE RISKS
TO THE DELIVERY OF
OUR PRIORITIES
Risk management is fundamental to the
way the Group is governed and managed.
Our system of risk management and
internal control comprises the following
elements that are assessed for
effectiveness annually:
• Business Principles: sets our expected
behaviours across the organisation.
• Enterprise Risk Framework:
incorporates the principal risks within the
Group Risk Universe, as outlined below.
• Board and Committees’ governance:
committees are structured to be aligned
with the Principal Risks identified,
as outlined below.
• Executive management oversight:
establishing appropriate executive
processes to ensure appropriate
planning and performance management.
• Operational management
accountability and certification:
represents the first line accountability
for the risk and control environment.
• Delegations of Authority: structure
within which accountability is delegated
through the organisation in accordance
with identified risk appetite.
• Management systems: the detailed
Policies, Standards and Procedures
establishing the requirement for process
level controls that are monitored
throughout the organisation.
• Assurance providers: second and
third line assurance provided to ensure
that Policies, Standards and Procedures
are being followed and that risks are
being mitigated in line with risk appetite.
ASSESSING OUR PRINCIPAL RISKS
IN 2016
As in previous years we identified and
assessed our risks within the categories
of Principal Risk overleaf to ensure
appropriate mitigating activities. During
2016 the risks that were prioritised for
leadership attention, and those that had
most significant impact in our assessment
of the future viability of the organisation,
particularly related to:
• ensuring we deliver a safe and compliant
operating environment in all respects;
• our strategic transformation and its
impact on our people;
• the changing political environment,
and the potential for further intervention,
including Brexit;
• the evolving regulatory requirements,
particularly the outcome of the
Competition and Markets Authority
(CMA) investigation;
• ongoing volatility in the commodity
market with its impact on pricing; and
• our commitment to our growth
businesses and excellence in
customer service.
We align our assessment of the extent
of risk we wish to take with our priorities
and express our risk appetite in relation
to these priorities. For example, in relation
to ensuring we have a safe and compliant
operating environment our appetite is
very low, whereas we are prepared to
take risks in relation to delivering our
growth objectives.
The Principal Risks, and their related
components, are allocated oversight
through the Board and its Committees
as indicated overleaf. The table also
provides an indication of the risk mitigation
strategy for each risk category, reflecting
our appetite for risk, and our view on
changes in the risk climate compared
with 2015.
Centrica plc Annual Report and Accounts 2016
57
STRATEGIC REPORT
OUR PRINCIPAL RISKS AND UNCERTAINTIES
Our Principal Risks and Uncertainties
continued
The Board retains overall non-executive responsibility for risk
across the Group. With the exception of certain risks that the Board
reserves to itself, oversight of specific Principal Risks contained
within the Group Risk Universe are delegated by the Board to
one or more of its Committees. The table below summarises
each Principal Risk with reference to oversight by the Board
or its Committee, its risk climate and the associated priority.
Description
Potential impacts
Mitigation
Following the conclusion of the
strategic review, the delivery of
our future strategy will involve
growth in a number of business
areas, implementing substantial
cost efficiencies and making certain
disposals. This is fundamental to
our future success and incorporates
both controllable and uncontrollable
risk elements which require
careful monitoring.
• The Board approves the Group annual plan setting the
strategic direction and confirming strategic choices that
are embedded in targets across the business.
• Quarterly performance reviews are held with all parts of
the business to monitor progress against these targets.
• We have a clear financial framework to ensure capital is
allocated in line with strategy and prioritised to deliver
optimal business benefits.
• We continue to strengthen our leadership team in order
to deliver in our growth areas, including the appointment
during the year of a Chief Information Officer to support
our digital strategy.
• We apprise ourselves constantly of developments that
are central to achieving our strategy.
Customer behaviour and demand
can change due to improved
energy efficiency, climate change,
government initiatives, long-term
weather patterns and the general
economic outlook. In addition we
face competition in our upstream
businesses in uncertain commodity
markets and we must respond
appropriately.
• Events within the external market environment sit largely
outside of our direct control, but set the tone for our
future business.
• Regular analysis is undertaken on commodity price
fundamentals and their potential impact on business
plans and expectations.
• We continue to pursue a range of investment options
across the energy chain and in different markets and
geographies in response to external market opportunities.
• We are increasing our investment in connected homes
through smart meters, personalised customer energy
usage reports, smart and time-of-use tariffs, applications
for remote heating control and US appliance rental
programmes in order to respond to market disruption
and position us at the forefront of new technology.
We are subject to oversight from
various political and regulatory
bodies in the UK, Republic of Ireland,
US, Canada and elsewhere. These
bodies set and oversee the terms of
our licences and the conduct of our
operations. In particular at present,
as a consequence of the UK’s
decision to exit the European Union
and wider political changes in the
markets we operate in, risks relating
to changing policies in relation
to energy markets and carbon
emissions are recognised.
• The Executive Committee members actively engage
in discussions with all political parties, influencers
and regulatory authorities.
• Following the decision to exit the European Union in
June we have been active in contributing our views on
the development of the markets in which we operate.
• We are committed to an open, transparent and
competitive UK energy market that provides choice
for consumers.
• We accept that we may be the subject of focused
regulatory scrutiny, with informal investigations into one
or more areas that could result in stakeholder concerns
and take measures to react as quickly as possible.
• We work with regulators to seek the right approach
to intervention.
1
Strategy delivery
Failure to deliver Centrica strategy.
Governance oversight
Board
Risk climate
Priority
Cash flow growth and strategic momentum
2
External market
Changes and events in the external market
or environment that could impact delivery
of Centrica’s strategy.
Governance oversight
Board
Risk climate
Priority
Cash flow growth and strategic momentum
3
Political and regulatory
intervention
Changes, intervention or a failure to
influence change to the political or
regulatory landscape.
Governance oversight
Board
Risk climate
Priority
Cash flow growth and strategic momentum
58
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Risk climate
Unchanged
Increased
Reduced in some parts of the
business, but unchanged in others
Overall unchanged,
but differing drivers
Description
Potential impacts
Mitigation
4
Brand, trust and reputation
Competitive positioning and protection
of the Centrica and subsidiary brands.
Our primary focus is to serve
our customers and satisfy their
changing needs in all of the markets
we operate in. We also actively
manage our brands and reputation,
in order to protect and develop
our competitive position amongst
a wide range of stakeholders.
Governance oversight
Board
Risk climate
Priority
Customer satisfaction and
operational excellence
5
Business planning, forecasting
and performance
Business planning, forecasting, risk
management and achievement of
anticipated benefits.
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 suboptimal decisions and failure
to realise anticipated benefits.
• During the year a review of our brand positioning has
been undertaken to ensure that this is aligned with
our priorities.
• The primary mechanism by which we review changes
in our brand position is through NPS and other metrics
as described on page 19.
• We are focused on providing affordable energy and
excellent service to deliver a fair, simplified and transparent
offering to all of our consumers.
• 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.
• 2016 was the first full year of planning using a refreshed
approach designed to underpin the delivery of
the priorities.
• Group functions have adopted standardised planning
processes in support of the business priorities, driving
improved discussion and integration.
• Quarterly performance review meetings involving the
Executive Committee enable the discussion of plans
and forecasts with revisions identified as necessary.
• Constructive challenge is provided across each level
of the business to ensure that the key assumptions
remain robust and appropriate.
Governance oversight
Board
Risk climate
Priority
Cash flow growth and strategic momentum
6
Customer service
Failure to provide good quality customer
service through the customer lifecycle.
Governance oversight
Board
Risk climate
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 supplier 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.
• Great customer outcomes are at the heart of our
strategy and their requirements shape our processes
and interactions.
• Our risk appetite reflects the need to be innovative
and to invest appropriately to deliver new products
and service to our customers.
• We are wholly focused on providing affordable energy
and excellent service, working to deliver a fair, simplified
and transparent offering to consumers and protecting
the most vulnerable, fuel-poor households through
initiatives to improve energy efficiency or with financial
advice and aid.
• We continue to invest in connected home solutions
and the development of digital platforms.
• We have a sustained programme of simplification
including the use of mobile apps, online service and
breakdown bookings, and electronic billing.
• Where we experience issues we invest to put them right,
including making substantial improvements in our UK
Business environment during 2016.
Centrica plc Annual Report and Accounts 2016
59
STRATEGIC REPORT
OUR PRINCIPAL RISKS AND UNCERTAINTIES
Our Principal Risks and Uncertainties
continued
Description
Potential impacts
Mitigation
7
People
Attraction, retention, and succession of
the right people with the right skills in the
right role at the right time.
Governance oversight
Board and Safety, Health, Environment,
Security and Ethics Committee
The attraction, retention, development
and motivation of our people and
leaders are critical factors in the
successful execution of our strategy.
In addition, we require the right
behaviours from our leaders and
employees to deliver our business
strategy in accordance with our
values and Business Principles.
• We have an established People Committee that has
overseen the people related challenges inherent in our
transformation programme.
• We continue to evolve a clearly defined people strategy
based on culture and engagement, equality and wellbeing,
talent development, training and reward and recognition.
• Our Business Principles are currently under review
to ensure they drive the right behaviours across our
organisation, with a view to launching our new
Code of Conduct in 2017.
• 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 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.
• Feedback from our annual employee engagement
survey is acted upon by leadership teams.
• Fortnightly transformation Steering Group meetings
are attended by the Executive Committee.
• Change activity is managed through a structured network
of programme offices providing oversight and governance
at the appropriate level.
• We have established a dedicated change capability at
Group and business unit level to ensure benefits realisation,
prioritisation of efforts and share best practice.
• Our people capability has continued to be developed
through 2016 to ensure we have the right skills to deliver
our future plans.
• We have a clear controls transition framework
underpinning our system of internal control.
The successful delivery of
business change is fundamental
to our future success, and
includes organisational, cultural
and technical transformation.
At the same time, we must
continue to focus on maintaining
our systems of internal control
throughout.
Failure to invest in the maintenance
and development of our assets could
result in underperformance, assets
being out of service or significant
safety issues, particularly given
the aging nature of a number of our
assets. Operational integrity is critical
to be able to deliver performance in
line with the strategic objectives.
• Capital allocation and investment decisions governed
through the Investment Committee with the decision
right remaining with the Group Chief Executive.
• Group-wide minimum standards applied to all assets,
whether operated or non-operated, in order to have
confidence in their integrity.
• Issues related to the integrity of our assets are responded
to quickly, resulting in a number of unplanned shut downs
during 2016 to ensure that appropriate investigations
could be undertaken and remediation performed.
• The leadership teams in our asset-based businesses
have been refreshed to ensure that there is appropriate
experience to provide oversight of this critical area.
Risk climate
Priority
People and
building capability
8
Change management
Execution of change programmes
and business restructuring.
Governance oversight
Board
Risk climate
Priority
Cost efficiency and simplification
9
Asset development,
availability and performance
Investment, development and integrity
of operated and non-operated assets.
Governance oversight
Board
Risk climate
Priority
Customer satisfaction and
operational excellence
60
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Description
Potential impacts
Mitigation
10
Sourcing and supplier
management
Dependency on, and management of,
third parties to deliver the products and
services for which they are contracted
to the agreed time, cost and quality.
Governance oversight
Board and Safety, Health, Environment,
Security and Ethics Committee
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 with not only contractual
terms, but also legal, regulatory
and ethical business requirements.
Risk climate
Priority
Customer satisfaction and
operational excellence
• 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.
• Joint venture audits are conducted in relation to third
party operation of critical assets.
• We review the ethical conduct of our suppliers and are
currently implementing a programme of supplier visits to
provide additional assurance over practices employed.
• We appointed a new Chief Procurement Officer in 2016
and are implementing a programme of activities to ensure
consistent Group-wide practices are implemented in line
with our policies.
11
Health, safety, environment
and security (HSES)
HSES hazards and regulations
associated with Centrica’s operations.
Governance oversight
Board and Safety, Health, Environment,
Security and Ethics Committee
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.
Risk climate
Priority
Safety, compliance and conduct
• HSES remains our highest priority with a continued
focus across all our assets and operations.
• We undertake regular reviews and have thorough
assurance processes in place in relation to these risks,
with reporting to the HSES Committee on a monthly
basis and full discussion of all issues arising.
• Third line of defence responsibility for HSES has been
transferred into Internal Audit to ensure appropriate
objectivity and reinforce our assurance provision.
• We have strengthened our controls through the
development of the HSES management system,
focusing on areas including process safety, driving
and working at heights.
• We continue to invest in training to ensure we maintain
safe operating practices, including HSES leadership
programmes.
• Security intelligence and operating procedures, as well
as crisis management and business continuity plans are
regularly evaluated and tested.
Centrica plc Annual Report and Accounts 2016
61
STRATEGIC REPORT
OUR PRINCIPAL RISKS AND UNCERTAINTIES
Our Principal Risks and Uncertainties
continued
Description
Potential impacts
Mitigation
12
Information systems
and security
Effectiveness, availability, integrity
and security of IT systems and data
essential for Centrica’s operations.
Governance oversight
Board, Audit Committee and Safety,
Health, Environment, Security and
Ethics Committee
Risk climate
Priority
Safety, compliance and conduct
13
Legal, regulatory and
ethical standards compliance
Compliance with legal regulatory
and ethical standards requirements.
Governance oversight
Board and Safety, Health, Environment,
Security and Ethics Committee
Risk climate
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 from
hackers, viruses and other sources,
including disaffected employees.
• 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.
• We regularly evaluate the adequacy of our infrastructure
and IT security controls, undertake employee awareness
and training, and test our contingency and recovery
processes.
• We test our cyber security crisis management and
business continuity plans recognising the evolving
nature and pace of the threat landscape.
• The appointment of a new Group Chief Information
Officer during 2016 has provided additional focus on
ensuring that all information systems and security
risks are managed appropriately.
Our operations are the subject
of intense regulatory focus and
we seek to deliver the highest
standards in compliance. This is
part of our operating commitment
to conduct our business in an
ethical and compliant manner.
We recognise any real or perceived
failure to follow our Business
Principles or comply with legal or
regulatory obligations would
undermine trust in our business.
Non-compliance could also result
in fines, penalties or other intervention.
• Following the completion of the CMA investigation into
our UK ES&S business we have established a programme
to implement its recommendations in full.
• We have similarly responded to changing regulatory
requirements in a number of our NA ES&S markets
during 2016.
• We have moved our regulatory compliance monitoring
activities to a single function to drive Group-wide
consistency and quality.
• We have a programme of improvement activities in place
to align our practices in areas including our Business
Principles, financial crime and Speak Up with our
operating model.
• Our Business Principles and Values have been subject
to review in 2016 with the involvement of many of
our employees.
62
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Description
Potential impacts
Mitigation
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.
Certain events and activities have
a direct impact on our credit ratings
and liquidity which could increase
the cost of, and access to, financing.
In a changing external environmental
we need to be able to respond
to macro-economic or political
influences. In particular, the lower
interest rate adversely impacts our
pension liabilities.
14
Financial market
Exposure to market movements, including
commodity prices and volumes, inflation,
interest rates and currency fluctuations.
Governance oversight
Board and Audit Committee
Risk climate
Priority
Cash flow growth and strategic momentum
15
Balance sheet strength
and credit position
Group balance sheet management
and credit position.
Governance oversight
Board and Audit Committee
Risk climate
Priority
Cash flow growth and strategic momentum
• The Audit Committee regularly assesses the effectiveness
of control mechanisms within EM&T.
• Following a review undertaken during the year, weekly
meetings have been introduced within EM&T involving our
specialist financial risk team and operational management.
• The Group Financial Risk Management Committee meets
monthly to review Group financial exposures and assess
compliance with risk limits.
• We have an active hedging programme to mitigate
exposure to commodity and financial market volatility,
which has enabled British Gas to freeze prices on the
standard tariff until August 2017.
• As we move into new trading arrangements, including
expanding our LNG business and as a result of the
acquisition of Neas Energy, we are focused on ensuring
that our financial risk policies remain appropriate to
the risks we face.
• We are investing in our systems to further automate
our control environment.
• We assess available resources on a monthly basis and
this analysis underpins our going concern assumption
and viability analysis as described on page 64.
• Significant committed facilities are maintained with
sufficient cash held on deposit to meet fluctuations as
they arise.
• Our private placement, (see note 25), has strengthened
our balance sheet.
• Counterparty exposures are restricted by setting credit
limits for each counterparty, where possible with reference
to published credit ratings.
• Wholesale credit risks associated with commodity trading
and treasury positions are managed in accordance with
Group policy.
• We continue to seek to repair the pension deficit and have
responded with a number of actions implemented during
2016 (see note 22).
• We consider accounting assumptions impacting on our
balance sheet carefully, including decommissioning and
impairment, as described on page 76.
Centrica plc Annual Report and Accounts 2016
63
STRATEGIC REPORT
OUR PRINCIPAL RISKS AND UNCERTAINTIES
Our Principal Risks and Uncertainties
continued
Description
Potential impacts
Mitigation
16
Financial processing
and reporting
Accuracy and completeness of internal
and external financial information.
Governance oversight
Board and Audit Committee
Risk climate
Priority
Safety, compliance and conduct
We must be able to maintain robust
financial systems to produce accurate
financial statements underpinned by
appropriate accounting judgements
and the right information to support
optimal business decisions.
Our obligation includes maintaining
processes to avoid misstatement
through fraud or error so that
the confidence of our customers,
investors and regulators is not
undermined and they can rely
on available information.
• The Audit Committee reviews carefully our compliance
with our internal policies and external requirements.
• As described above, we maintain a robust control
framework with a focus on our financial controls and
management self-assessment compliance.
• Our dedicated Group Controls function monitors our critical
financial risks and mitigating controls and reports to the
Financial Risk, Assurance and Controls Committee quarterly.
• We maintain an effective working relationship
with our external auditors, listening to their advice and
recommendations, and they rely on our internal assurance
and monitoring activities where appropriate.
• risks associated with keeping our people
and our customers safe, incorporating
potential adverse consequences of
breaches in regulatory compliance
obligations;
• challenges relating to the security of
our systems and keeping our data safe,
including cyber-security;
• the impact of a loss of containment
in our upstream assets; and
• a sustained significant adverse
movement in commodity prices.
In making this assessment we have taken
the worst case assumptions, including all
significant adverse events on the above
scenarios, and determined their potential
impact on the available sources of liquidity
and net debt throughout the period.
Based on the conclusions of this assessment,
the Directors confirm that they have a
reasonable expectation that the Group will
continue to operate and meet its liabilities,
as they fall due, over a period of at least
three years.
VIABILITY STATEMENT
In accordance with provisions C.2.1 and
C.2.2 of the 2014 UK Corporate Governance
Code, the Directors have assessed the
prospects for the Group over a longer time
period than that required in adopting the
going concern basis of accounting.
In making this assessment the Directors
have taken into account: the liquidity
analysis performed in relation to the Group’s
net debt and available credit facilities;
the current business performance, Group
annual plan for 2017 and strategic plan
for the years beyond this; consideration
of potential risks and uncertainties in the
delivery of the strategic plan through a
number of potential scenarios and events;
and available mitigating actions.
The Board has reviewed the timeframe
over which it makes this assessment and
considers three years to be the appropriate
timeframe for consideration. The factors
taken into account in determining the
time period include: the alignment of this
assessment with the period over which we
perform liquidity analysis for the purpose
of monitoring credit metrics; the short term
nature of some of our more significant risks,
such as the potential for disruption in our
customer-facing markets and volatility
related to the current political and economic
environment; and the increasing uncertainty
inherent in estimations beyond this time
period. Three years balances the shorter
term planning horizons in our customer-
facing businesses, with the longer
term requirements of our more asset
based businesses.
The Directors carry out a robust risk
assessment of the Principal Risks
outlined on pages 58 to 64. In making this
assessment consideration of the potential
severe, but plausible, impact has been
made where the realisation of those risks is
considered more than remote, taking into
account the effectiveness of our systems
of risk management and internal control.
The potential impact is based on known
consequences, historical evidence and
similar events observed in the market.
The consequences have been combined
into a number of scenarios and events that
have been compared with the available
headroom based on our liquidity analysis.
We have considered available mitigating
actions such as the potential disposal of
assets, additional restrictions and limits on
capital investment and further cost reduction
opportunities in making this assessment.
Whilst the Group has a strong position
in its chosen markets, with strong brands,
a highly skilled customer-facing workforce
and reliable operations, there are a number
of risks that could have a significant impact
on the financial performance of the Group.
The risks that we considered, through
a number of scenarios, to be of most
significance in making the assessment
of viability included:
• the potential for regulatory or political
intervention resulting in a significant
impact on our customer margins
and retention;
• our inability to respond to disruption in
the market and grow our businesses
as indicated in our strategic plan;
64
GOVERNANCEFINANCIAL STATEMENTSSHAREHOLDER INFORMATION GOVERNANCE
Governance
The ultimate objective of corporate
governance is to promote good
decision-making and effective
stewardship of the Company to
ensure its sustainable success.
66 Board of Directors
68 Senior Executives
69
Directors’ and Corporate
Governance Report
83 Remuneration Report
100 Independent Auditors’ Report
Centrica plc Annual Report and Accounts 2016
65
GOVERNANCE
BOARD OF DIRECTORS
Board of Directors
Full biographies can be found at centrica.com
JEFF BELL
Group Chief Financial
Officer
Jeff was appointed Group Chief
Financial Officer and joined the
Board on 1 August 2015.
Skills and experience
Jeff has a broad range of
finance experience. He joined
the Group’s Direct Energy
business in Toronto in 2002
where he held various senior
finance positions before moving
to the Company’s head office
in 2008 to support the Group
Chief Executive and to lead the
Group Strategy team. In 2011
he was appointed Director
of Corporate Finance. Prior to
Centrica, Jeff worked in Toronto
for both KPMG, where he
qualified as a chartered
accountant, and the Boston
Consulting Group.
RICK HAYTHORNTHWAITE
Chairman
Rick joined the Board as
a Non-Executive Director
on 14 October 2013. He was
appointed Chairman of the
Board on 1 January 2014
and is Chairman of the
Nominations Committee.
Skills and experience
Rick has a wealth of knowledge
in the energy industry and has
significant board experience,
both as an executive and
non-executive. He led the
rescue of Invensys from 2001
to 2005 and the defence,
turnaround and subsequent
sale of Blue Circle Industries
from 1997 to 2001. He has
served on the boards of Network
Rail as chairman and Cookson,
Lafarge, ICI and Land Securities
as a non-executive director.
External appointments
Chairman of the global board
of MasterCard Incorporated,
QIO Technologies and
Arc International.
IAIN CONN
Group Chief Executive
Iain was appointed Group
Chief Executive on 1 January
2015 and is Chairman of the
Disclosure Committee.
Skills and experience
Iain possesses a deep
understanding of the energy
sector built up over a lifetime in the
industry and has demonstrated
strong commitment to customers,
safety and technology. Iain was
previously BP’s chief executive,
downstream (BP’s refining and
marketing division) a position he
held for seven years. Iain was a
board member of BP for 10 years
from 2004 and had previously
held a number of senior roles
throughout BP including in
trading, exploration and
production, and the management
of corporate functions such as
safety, marketing, technology
and human resources.
External appointments
Non-executive director of
BT Group plc.
MARGHERITA DELLA VALLE
Non-Executive Director
Margherita joined the Board on
1 January 2011 and is Chairman
of the Audit Committee.
Skills and experience
Margherita brings considerable
corporate finance and
accounting experience and
she has a sound background
in marketing. She was chief
financial officer for Vodafone’s
European region from April
2007 to October 2010 and chief
financial officer of Vodafone Italy
from 2004 to 2007. Previously
she worked for Omnitel Pronto
Italia in Italy and held various
consumer marketing positions
in business analytics and
customer base management
prior to moving to finance.
External appointments
Deputy Group CFO of
Vodafone Group plc, a member
of HM Treasury’s Financial
Management Review Board of
HM Government and a trustee
of the Vodafone Foundation.
RICK
HAYTHORNTHWAITE
C N
IAIN
CONN
D
JEFF
BELL
D
MARGHERITA
DELLA VALLE
A N R S
JOAN
GILLMAN
N S
MARK
HANAFIN
STEPHEN
HESTER
A N
MARK
HODGES
LESLEY
KNOX
A N R
CARLOS
PASCUAL
N R S
STEVE
PUSEY
A N S
SCOTT
WHEWAY
N R S
C Chairman of the Board
A Audit Committee
D Disclosure Committee
N Nominations Committee
R Remuneration Committee
S Safety, Health, Environment,
Security & Ethics Committee
Denotes Committee Chairman
66
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION JOAN GILLMAN
Non-Executive Director
Joan joined the Board
on 11 October 2016.
Skills and experience
Joan is former executive vice
president of Time Warner Cable,
as well as chief operating officer,
Time Warner Cable Media and
president, Time Warner Cable
Media LLC. Prior to its acquisition
by Charter Communications,
Time Warner Cable was the
second largest cable company
in the United States, operating
in 29 states and generating over
$23 billion in annual revenue.
Joan led one of Time Warner
Cable’s three operating divisions,
doubling revenues and
overseeing the company’s
big data strategy.
External appointments
Director of Airgain, Inc.
STEPHEN HESTER
Senior Independent
Director
Stephen joined the Board
on 1 June 2016 and is the
Senior Independent Director.
Skills and experience
Stephen has wide-ranging
experience, particularly in
customer-facing businesses,
together with recognised
expertise in transforming
business performance.
He has a deep knowledge of
operating within highly regulated
businesses with over 30 years’
experience in financial services
and FTSE 100 companies.
External appointments
Group chief executive of
RSA Insurance Group plc.
LESLEY KNOX
Non-Executive Director
Lesley joined the Board on
1 January 2012 and is Chairman
of the Remuneration Committee.
STEVE PUSEY
Non-Executive Director
Steve joined the Board
on 1 April 2015 and is
Chairman of the SHESEC.
Skills and experience
Steve has a wealth of
international experience as
a senior customer-facing
business technology leader.
He has considerable experience
in the telecommunications
industry, in both the wireline and
wireless sectors, and in business
applications and solutions.
Steve has worked for Vodafone,
Nortel and British Telecom and
is a graduate of the Advanced
Management Program at
Harvard University.
External appointments
Non-executive director
of FireEye, Inc.
Skills and experience
Lesley brings a wealth
of strategic and financial
experience across a range
of businesses to the Board
and she is an experienced
remuneration committee chair.
She was previously with
British Linen Bank and was a
founder director of British Linen
Advisers. Lesley was senior
non-executive director of Hays
plc and also spent 15 years
with Kleinwort Benson.
External appointments
Non-executive director of
Thomas Cook Group plc and
Legal & General Group Plc,
trustee of the Grosvenor Estate
and chairman of Grosvenor
Group Limited. Chairman
of Design Dundee Limited
and a trustee of National
Galleries Scotland.
MARK HANAFIN
Chief Executive
Centrica Business
Mark joined the Board
on 14 July 2008.
MARK HODGES
Chief Executive
Centrica Consumer
Mark joined the Board
on 1 June 2015.
Skills and experience
Mark has senior management
experience across the energy
value chain from E&P through to
product sales. He has excellent
midstream and trading
credentials as well as a strong
track record in developing
supply and marketing
businesses. Before joining
Centrica, Mark spent 21 years
with Royal Dutch Shell.
External appointments
Non-executive director
of EDF Energy Nuclear
Generation Group Limited
(representing Centrica).
Skills and experience
Mark brings a strong
understanding of the
UK consumer market and
a track record in improving
business performance. He
is experienced in working in a
regulated environment, driving
significant improvements in
customer service and efficiency,
‘offer innovation’, major IT and
change projects. Mark was
group chief executive officer of
Towergate Partnership and prior
to this he spent over 20 years
with Norwich Union and Aviva
plc holding a variety of finance,
planning and strategy roles
including sitting on both the
executive committee and
Aviva plc board.
External appointments
Director of Energy UK
(representing Centrica).
CARLOS PASCUAL
Non-Executive Director
Carlos joined the Board
on 1 January 2015.
SCOTT WHEWAY
Non-Executive Director
Scott joined the Board
on 1 May 2016.
Skills and experience
Scott has a wealth of experience
as a senior customer-facing
business leader with a mix
of deep retail and consumer
expertise. He has considerable
knowledge gained in both
retail and insurance industries,
together with a strong
understanding of operating
within highly regulated
businesses. Scott worked
in retail for 27 years both in
the UK and internationally.
External appointments
Chairman of Aviva Insurance
Limited and senior independent
director of Santander UK PLC.
Skills and experience
Carlos has held a number of
senior positions in the energy
industry and is a senior leader
in energy geopolitics and
economic and commercial
development. Between 2011
and 2014 Carlos established
and directed the US State
Department’s Energy Resource
Bureau. Until August 2014
Carlos was special envoy and
coordinator for international
energy affairs, acting as senior
adviser to the US Secretary of
State on energy issues. He has
also served as US ambassador
in Mexico and Ukraine.
External appointments
Non-resident senior fellow at the
Centre on Global Energy Policy,
Columbia University and senior
vice president for global energy
at IHS Markit.
Centrica plc Annual Report and Accounts 2016
67
GOVERNANCE
SENIOR EXECUTIVES
Senior Executives
Full biographies can be found at centrica.com
CHARLES
CAMERON
CHRIS
COX
GRANT
DAWSON
D
JILL
SHEDDEN, MBE
MIKE
YOUNG
CHARLES CAMERON
Director of Technology
& Engineering
Charles was appointed Director
of Technology & Engineering
on 1 January 2016.
CHRIS COX
Managing Director,
Exploration & Production
Chris was appointed Managing
Director, Exploration & Production
on 1 February 2016.
GRANT DAWSON
Group General Counsel
& Company Secretary
Grant was appointed Group
General Counsel & Company
Secretary in February 1997.
D Disclosure Committee
Skills and experience
Charles has extensive
technology and engineering
experience and has held
corporate roles in marketing,
planning and M&A. Before
joining Centrica he was head of
technology, downstream at BP
plc and was a member of the
downstream executive team.
Prior to his time at BP, Charles
spent 23 years with the French
Institute of Petroleum and their
catalyst, technology licensing
and engineering service
business, Axens.
Skills and experience
Chris has extensive experience
in global oil and gas upstream
activities. Since 2006 and
prior to his appointment with
Centrica, he held a number of
senior roles at BG Group plc
and was latterly the executive
vice president, BG Advance
and a member of the group
executive team. Prior to his
time at BG Group plc, Chris
was with Amerada Hess
and Chevron Corporation.
Skills and experience
Grant joined British Gas plc
in October 1996 and has been
Group General Counsel &
Company Secretary of Centrica
plc since the demerger of British
Gas plc on 17 February 1997.
He was called to the Bar in
1982 and has spent most of
his career in industry, joining
the legal department of Racal
Electronics plc in 1984 and then
STC plc as legal adviser in 1986
until they were taken over in 1991
by Northern Telecom Limited.
Between 1991 and 1996,
he was the associate general
counsel for Nortel in Europe,
Africa and the Middle East.
JILL SHEDDEN, MBE
Group HR Director
Jill was appointed Group
Director, Human Resources
on 1 July 2011.
Skills and experience
Jill joined British Gas plc as
a graduate in 1988 and has
since held a wide range of roles
across the Group. Prior to her
appointment as Group HR
Director Jill was HR Director
in British Gas Business and
British Gas Energy. In the
2017 New Year’s Honours list
Jill was awarded an MBE for
‘services to women and equality’
in recognition of her work with,
amongst other organisations,
the Women’s Business Council.
MIKE YOUNG
Group Chief
Information Officer
Mike was appointed Group
Chief Information Officer
on 1 November 2016.
Skills and experience
Mike brings a wealth of
experience in managing global
IS functions in partnership
with customer-facing units,
and using big data and digital
technologies to drive revenue
growth and improve the
customer experience. Before
joining Centrica he was group
chief information officer
with the media and digital
marketing company Dentsu
Aegis Network.
68
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION DIRECTORS’ AND CORPORATE GOVERNANCE REPORT
Directors’ and Corporate
Governance Report
Dear Shareholder
I am pleased to confirm that your Company has fully complied
with the principles and provisions of the UK Governance Code
throughout the year and the following pages set out in detail
how we have done so.
Important as this is, however, good corporate governance is
about much more than compliance. The structures, processes
and policies described in this report are just the tools we use.
The ultimate objective of corporate governance is to promote
good decision-making and effective stewardship of the Company
to ensure its sustainable success.
It is important to remember that the now familiar features of the
governance landscape such as separation of responsibility at the
top of companies, independent and diverse boards, committees
with clear responsibility for key areas and transparency in reporting
are but means to an end; preventing unhealthy concentrations
of power, avoiding groupthink, ensuring decisions are based upon
informed and wide-ranging discussions and are implemented
effectively. Most importantly, good governance also depends
upon the Board setting the tone from the top; the values and
behaviours that protect and promote the long term success
of the Company.
It is disappointing therefore that corporate governance has
been in the news again in 2016 for all the wrong reasons,
reflecting the failures of a few, exceptional companies, rather
than the good practice of the many. The Corporate Governance
Reform Green Paper was prompted largely by these failures.
We have submitted a response to the consultation and
stand ready to work with Government and regulators towards
meaningful improvements, where possible. It is crucial, however,
that better regulation does not simply mean more regulation
and that, vitally, any reform retains the comply or explain principle
that has been the foundation of the very significant improvements
in corporate governance in the UK over the past two decades.
This Directors’ and Corporate Governance Report describes
how we are approaching these important issues within Centrica
and I hope shareholders will find it interesting and informative.
Rick Haythornthwaite
Chairman
23 February 2017
“ It is crucial, however, that better
regulation does not simply mean
more regulation and that, vitally,
any reform retains the comply or
explain principle that has been the
foundation of the very significant
improvements in corporate
governance in the UK over the
past two decades.”
Rick Haythornthwaite
Chairman
Centrica plc Annual Report and Accounts 2016
69
GOVERNANCE
DIRECTORS’ AND CORPORATE GOVERNANCE REPORT
Directors’ and Corporate Governance Report
continued
CORPORATE GOVERNANCE
The Board believes that effective corporate governance provides
an essential foundation for the long-term success of the Company.
This report sets out the key elements of our corporate governance
arrangements, including how we have sought to apply the
principles and provisions of the UK Governance Code (the Code).
The Board confirms that, up to the date of this report, it fully
complied with the Code.
THE BOARD
The Board is responsible for promoting the overall success of
the Company. In doing so, it delegates certain responsibilities
to Board Committees and executive management. Details of the
Board Committees and their activities during the year are set out
on pages 74 to 79. The Board delegates authority to the Group
Chief Executive for the execution of strategy and the day-to-day
management of the Group. The Board oversees, guides and
challenges executive management in the execution of
these activities.
There are certain key responsibilities that the Board does not
delegate and which are reserved for its consideration. The full
Schedule of Matters Reserved is available on our website,
but key features include:
• the development of strategy and major policies;
• approving the annual operating plan, Financial Statements
and major acquisitions and disposals;
• approving interim dividend payments and recommending
final dividend payments; and
• the appointment and removal of Directors and the
Company Secretary.
For more information on our strategy and operating model
see page 16 and for more information on our technology and
innovation developments see pages 10 and 11.
Board meetings
The Board holds regular scheduled meetings throughout the year.
In 2016, the Board met 9 times. Further information on topics
considered by the Board in 2016 are detailed on page 73.
Directors
We have sought to ensure we have an appropriate mix of diversity
and skills on our Board to ensure constructive debate and thoughtful
decision-making. In addition, we believe it is helpful to maintain
a blend within the Non-Executive group where some are in full-time
executive employment and others are pursuing a non-executive
portfolio career path.
At present, there are a total of 12 Directors, of whom four are
Executive and eight, including the Chairman, are Non-Executive.
All of our Non-Executive Directors are considered to be
independent and free from any business interest which could
materially interfere with the exercise of their judgement. In addition,
the Board is satisfied that each Non-Executive Director is able
to dedicate the necessary amount of time to the Company’s
affairs. Our Non-Executive Directors are members of various
committees of the Board, which are the Audit, the Nominations,
the Remuneration and the Safety, Health, Environment,
Security & Ethics Committees.
During the year the Non-Executive Directors, including the
Chairman, met frequently without management present.
In addition, the Senior Independent Director met with the
Non-Executive Directors in the absence of the Chairman
to appraise the Chairman’s performance.
The Directors have full access to the advice and services
of the Group General Counsel & Company Secretary, who is
responsible for advising the Board, through the Chairman,
on corporate governance matters. They are also able to seek
independent professional advice at the Company’s expense
in respect of their duties.
The Board has agreed that each Director shall stand for
reappointment at each Annual General Meeting (AGM).
Details of the Directors of the Company are set out with their
biographies on pages 66 and 67. Information on remuneration
and share interests are set out in the Remuneration Report on
pages 83 to 99. Details relating to Directors’ service contracts
or letters of appointment, in the case of Non-Executive Directors,
are set out in the remuneration policy that was approved by
shareholders on 27 April 2015. The full remuneration policy
can be found on our website.
Copies of the Executive Directors’ service contracts and letters
of appointment for the Non-Executive Directors are available
for inspection by shareholders at each AGM and during normal
business hours at the Company’s registered office.
In line with best practice, the roles of our Chairman and Group
Chief Executive are separate, formalised in writing and have
been approved by the Board. A summary of these and other
roles is shown in the table opposite.
70
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Board composition and roles
Chairman
Rick Haythornthwaite
Group Chief Executive
Iain Conn
Group Chief
Financial Officer
Independent
Non-Executive
Directors
Senior Independent
Director
Group Executive
Directors
Jeff Bell
Margherita Della Valle, Joan Gillman,
Stephen Hester, Lesley Knox, Carlos Pascual,
Steve Pusey, Scott Wheway
Stephen Hester
Mark Hanafin, Mark Hodges
Recruitment
A rigorous process is followed for the appointment of each
new Director to the Board, which is led by the Chairman.
The Nominations Committee used the services of executive
search agents to assist in the search for Non-Executive Directors.
The agents engaged during 2016 were JCA Group and
Heidrick & Struggles.
The Committee considered the candidates against an objective
criteria, having due regard for the benefits of Board diversity.
None of the executive search agents listed above provide
any other services to the Company.
Appointments
During the year under review, there were a number of changes
to the Board.
Joan Gillman, Stephen Hester and Scott Wheway were
appointed as Directors of the Company with effect from
11 October 2016, 1 June 2016 and 1 May 2016 respectively.
As announced in July 2016, Stephen Hester succeeded
Ian Meakins to become the Company’s Senior Independent
Director with effect from 1 October 2016.
Mike Linn and Ian Meakins resigned as Directors of the Company
with effect from 18 April and 1 October 2016, respectively.
Board evaluation
In accordance with the Code, we conduct an annual evaluation
of Board performance, which is facilitated by an independent
third party at least once every three years. As reported last
year, we considered conducting the third party evaluation during
2016, a year earlier than required by the Code. On reflection
however, with three new Directors appointed in 2016 and the
newly established Committee structure still bedding in, we felt
it would be more valuable to have the third party evaluation
in the second half of 2017.
Responsible for the leadership and management of the Board. In doing so,
he is responsible for promoting high ethical standards, ensuring the effective
contribution of all Directors and, with support from the Group General
Counsel & Company Secretary, best practice in corporate governance.
Responsible for the executive leadership and day-to-day management of the
Company, to ensure the delivery of the strategy agreed by the Board.
Responsible for providing strategic financial leadership of the Company and
day-to-day management of the finance function.
Responsible for contributing sound judgement and objectivity to the Board’s
deliberations and overall decision-making process, providing constructive
challenge and monitoring the Executive Directors’ delivery of the strategy
within the Board’s risk and governance structure.
Acts as a sounding board for the Chairman and serves as a trusted
intermediary for the other Directors, as well as shareholders, as required.
Responsible for executive leadership and day-to-day management of relevant
business units in support of the Group Chief Executive and the delivery of the
strategy agreed by the Board.
The internal evaluation was conducted in December 2016,
via online questionnaires and interviews with the Chairman.
The Senior Independent Director, Stephen Hester, conducted
the evaluation of the Chairman’s performance through a series
of individual discussions with Directors and senior executives.
The results of the evaluation exercises were reviewed by the
Board and Committees in February 2017. Overall, the Board
was considered to be performing well, with high scores
recorded across the range of performance measures. In terms
of enhancements, Directors identified some common areas
where more information and discussion would be beneficial;
in particular, in relation to the Group’s new growth markets and
to competitor benchmarking. In both areas, Directors felt the
need for more attention reflected the rapid developments in
those markets and in the competitive landscape rather than
a significant gap in the Board’s agenda. Opportunities to
review these topics in depth have been built into the 2017
Board programme.
Balance and independence of the Board
The Board considers the balance of skills, knowledge,
experience and independence to ensure the Board and
Committees effectively discharge their duties and responsibilities.
As part of its annual review of corporate governance, the Board
considered the independence of each Non-Executive Director,
other than the Chairman, against the criteria in the Code
and determined that each Non-Executive Director
remained independent.
Balance of Non-Executive and Executive Directors
Non-Executive
66.6%
Executive
33.3%
Centrica plc Annual Report and Accounts 2016
71
GOVERNANCE
DIRECTORS’ AND CORPORATE GOVERNANCE REPORT
Directors’ and Corporate Governance Report
continued
Board diversity
Centrica recognises the benefits of diversity in all its forms,
at Board level and throughout the Group. As at 31 December
2016, 25% of the Board were women, this is an increase compared
to 31 December 2015 where females represented 18% of the
Board. Centrica supports the updated recommendations of the
Davies review and is continuing to increase the skills, experience
and knowledge of a diverse pipeline of talent. Just as importantly,
we have also sought to promote a diverse blend of skills,
backgrounds and nationalities on the Board.
Tenure %
Nationality %
16.5
16.5
8
25
67
67
0–3 years – 8 directors
3–6 years – 2 directors
6–9 years – 2 directors
9+ years – 0 directors
UK – 8 directors
North America – 3 directors
Mainland Europe – 1 directors
Rest of the World – 0 directors
Breakdown by gender %
Board
25
18
Senior
Management
Other
employees
26
27
27
29
82
75
73
74
71
73
2016 Male
2016 Female
2015 Male
2015 Female
72
Employee and senior management diversity
Our employment policies and practices reflect a culture where
decisions are based on individual ability and potential in relation
to the business’ needs. We are committed to promoting equal
opportunities and diversity as part of creating an inclusive working
environment that attracts and retains the best people and that
enables everyone in Centrica to fulfil their potential. Individuals
are treated in a non-discriminatory manner at all stages of
their employment, including recruitment and selection, reward,
training and development and promotion and career development.
By delivering on our commitment to diversity and inclusion
we are able to:
• attract a diverse range of talent which we believe is the
‘fuel’ for the company of the future;
• create an inclusive environment so that everyone can bring
their ‘whole self’ to work, to be themselves, have their voice
heard and contribute to innovation and ideas; and
• ensure people receive career opportunities based on merit
so that we have the right people in the right jobs.
At senior management level, 26% are female, and 27% of
employees excluding the Board and senior management are
female. Centrica has a range of initiatives in place including
coaching and mentoring of diverse talent and our participation
in the 30% Club’s cross-company, cross-sector mentoring
scheme for mid-career women who will benefit from
mentoring at their current stage of career.
Two of our global businesses are taking part in a pilot focused
on increasing diversity and gender parity. The leadership teams
have set themselves internal goals to achieve these measures
by challenging internal and external recruiters to present line
managers with a more diverse candidate list at all stages of the
recruitment process. In addition they will also be taking part in
a reverse mentoring programme which will see the leadership
team members being mentored by more junior and diverse
talent from across the business.
Our employee networks, which include Women, Carers,
Parents and Lesbian, Gay, Bi-Sexual & Transgender (LGBT)
continue to grow, giving us that sense of energy that comes from
having a broader group of people contributing to ideas and issues
across our organisation. In recognition of Centrica’s commitment
to LGBT inclusion, Iain Conn was ranked as one of the Top 30
Ally Executives in the Financial Times’ 2016 OUTstanding Leading
LGBT+ & Ally Executives and LGBT+ Future Leaders Lists.
We fully support the Government’s intention to introduce
measures in the future to require companies to report on the
gender pay gap, as we believe that transparent reporting
drives positive intervention within organisations.
BOARD EFFECTIVENESS
Directors’ attendance
Directors are expected to attend all Board and relevant
Committee meetings. Details of attendance by Directors at
Board and Committee meetings during 2016 are set out in the
table opposite. Where a Director was not in attendance, this was
due to other prior work commitments. Directors who were unable
to attend specific Board or Committee meetings reviewed the
relevant papers and provided their comments to the Chairman of
the Board or Committee, as appropriate. In addition, any Director
who is unable to attend a meeting will, as a matter of course,
receive the minutes of that meeting for their reference.
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Board and Committee meetings and attendance
during the year
Board
Audit
Committee
Remuneration
Committee
Nominations
Committee
Safety, Health,
Environment,
Security
and Ethics
Committee
(SHESEC)
Rick
Haythornthwaite
Iain Conn
Jeff Bell
Margherita
Della Valle
Joan Gillman
Mark Hanafin
Stephen Hester
Mark Hodges
Lesley Knox
Mike Linn
Ian Meakins
Carlos Pascual
Steve Pusey
Scott Wheway
9/9
9/9
9/9
9/9
2/2
9/9
5/5
9/9
9/9
3/3
5/7
9/9
9/9
5/5
N/A
N/A
N/A
6/6
N/A
N/A
3/3
N/A
6/6
N/A
3/4
N/A
6/6
N/A
N/A
N/A
N/A
4/4
N/A
N/A
N/A
N/A
4/4
3/3
3/3
4/4
N/A
1/1
6/6
N/A
N/A
6/6
1/1
N/A
3/3
N/A
5/6
2/3
1/5
6/6
6/6
3/3
N/A
N/A
N/A
4/5
1/1
N/A
N/A
N/A
N/A
2/2
N/A
5/5
5/5
3/3
Induction
All new Directors appointed to the Board receive a comprehensive
induction programme tailored to meet their individual needs.
The Chairman and Group General Counsel & Company Secretary
are responsible for delivering an effective induction programme
for newly appointed Directors.
During 2016, tailored induction programmes were designed for
Joan Gillman, Stephen Hester and Scott Wheway. These included
briefings from members of the Executive team on key areas of
the business including the internal audit function, an overview
of the Group’s risk management processes, the key risks facing
the business, site visits and a briefing in respect of the corporate
governance framework within Centrica.
Board governance structure
Key issues considered by the Board
During the year, the Board considers a comprehensive programme
of regular matters covering operational and financial performance
reporting, strategic reviews and updates and various governance
reports and approvals. In addition, each Board meeting features
‘deep dives’ into a specific operation or topic. In 2016, these
discussions included:
• Strategic plans for Connected Home, Distributed Energy
& Power and Liquefied Natural Gas
• Exploration & Production’s portfolio and asset pipeline review
• The Competition and Markets Authority’s report on their
investigation into the energy market
• British Gas smart metering roll-out
• Investor feedback
• The Group reputation review
• Information security
Ongoing training and development
Ongoing training and development is also provided to all Directors,
as agreed with the Chairman and supported by the executive
management. As part of this approach, two Board insight and
training sessions are held each year. In 2016, these sessions
focused on the Group’s pension arrangements and investment
strategy and increasing the Board’s awareness and understanding
of process safety and how this is managed within Centrica.
Conflicts of interest
In accordance with the Act and the Company’s Articles, Directors
are required to report actual or potential conflicts of interest to the
Board for consideration and, if appropriate, authorisation. If such
conflicts exist, Directors recuse themselves from consideration
of the relevant subject matter. The Company maintains a schedule
of authorised conflicts of interest which is regularly reviewed by
the Board.
BOARD COMMITTEES
The Board has established a number of Committees to exercise
oversight in specific areas. Our Board committee structure is set
out below, and the responsibilities, membership and key issues
considered during the year by each committee is detailed on
pages 74 to 79.
Board of Directors
Audit
Committee
Nominations
Committee
Remuneration
Committee
Safety, Health,
Environment,
Security and
Ethics Committee
Disclosure
Committee
Group Chief
Executive
Centrica plc Annual Report and Accounts 2016
73
GOVERNANCE
DIRECTORS’ AND CORPORATE GOVERNANCE REPORT
Directors’ and Corporate Governance Report
continued
AUDIT COMMITTEE
Members
• Margherita Della Valle (Chairman)
• Stephen Hester
• Lesley Knox
• Steve Pusey
MARGHERITA
DELLA VALLE
Committee Chairman
Report of the Committee Chairman
This report aims to provide you with insight into the workings
and activities of the Committee during 2016, outlining how as a
Committee we discharged our duty to provide oversight of the
adequacy and effectiveness of the Company’s internal financial
controls and internal control and risk management systems, the
considerations we gave to matters of financial risk and control
and the key accounting judgements reached.
2016 proved to be another busy year for the Committee. We
requested and received updates on risk and control environments
in North America and UK Business and on the risk implications
of the Group’s transformation programme. These reports allow
the Committee to continue to build its understanding of Centrica’s
business, including how key risks are identified and mitigated.
We also took the opportunity to put the external audit out for tender.
Additionally, the Committee met twice with the Safety, Health,
Environment, Security and Ethics (SHESEC) Committee to jointly
consider the Group’s system of internal control and risk management;
in the first quarter to assess the system’s effectiveness and in the
fourth quarter to look prospectively at any changes that need to be
made for 2017. Both committees also jointly received an in-depth
presentation on the Group’s control environment for Information
Systems and Cyber Security. Lastly, we considered an external
quality assurance (EQA) review of the Internal Audit function,
noting improvements and future areas for enhancement.
The skills and experience of our Committee membership continues
to strengthen and I believe that the Committee has performed
effectively in 2016. Compliance with the UK Corporate Governance
Code, including the risk management and the viability statement
requirements, is set out on page 64.
Role of the Committee
The role of the Committee is primarily to assist the Board in fulfilling
its corporate governance obligations in relation to the Group’s
financial reporting, internal control and risk management systems
as well as providing oversight of the internal audit function and
the external auditors.
Membership and attendance
Margherita Della Valle, as deputy group CFO of Vodafone Group
plc, is considered by the Board to have recent and relevant financial
experience as required by the Code. Stephen Hester was appointed
to the Committee on 1 June 2016. Each member of the Committee
is an independent Non-Executive Director with a wide range
of relevant business experience. Further details regarding the
Directors’ skills and experience can be found in their biographies
on pages 66 and 67. The Board is satisfied that the Committee
has the resources and expertise to fulfil its responsibilities.
Meetings of the Committee are attended by the Chairman of
the Board, the Group Chief Executive, the Group Chief Financial
Officer, the Group General Counsel & Company Secretary, the Group
Head of Corporate Finance and the Head of Internal Audit, Risk &
Control, none of whom do so as of right. Other senior executives will
attend as required to provide information on matters being discussed
74
which fall into their area of responsibility. The external auditors,
PricewaterhouseCoopers LLP (PwC), also attended each meeting.
The Committee meets individually with the external auditors,
the Group Chief Financial Officer and the Head of Internal Audit,
Risk & Controls at each meeting without Executives present.
Areas of focus and training
An annual schedule of training is designed to provide the Committee
members with practical training and insight into specific areas
of interest. In 2016, there were two training sessions focused
on understanding and assessing risks in relation to the Group’s
pension arrangements, including the current funding position
and the investment strategy, and on process safety management.
Responsibilities of the Audit Committee:
• to support the Board in fulfilling its responsibilities in relation to
maintaining effective governance and oversight of the Company’s
financial reporting, internal controls and risk management;
• to provide advice to the Board on whether the Annual Report
and Accounts, when taken as a whole, is fair, balanced and
understandable and provides all the necessary information for
shareholders to assess the Company’s performance, business
model and strategy;
• monitoring and reviewing the operation and effectiveness of
the Group’s internal audit function, including its independence,
strategic focus, activities, plans and resources;
• the appointment and, if required, the removal of the Head
of Internal Audit, Risk & Controls;
• managing the relationship with the Group’s external auditors
on behalf of the Board including the policy on the award of
non-audit services;
• to conduct a tender for the external audit contract at least every
10 years and make appointment recommendations to the Board;
• to consider and review legal and regulatory compliance issues,
specifically in relation to financial reporting and controls,
and, together with the SHESEC, maintain oversight of the
arrangements in place for the management of statutory and
regulatory compliance in areas such as financial crime; and
• to establish and oversee whistleblowing and fraud prevention
arrangements within the Group.
Key issues considered by the Audit Committee:
• reviewed the 2015 Preliminary Results, the 2015 Annual Report
and Accounts and 2016 half-year results and Interim Report;
• gave further consideration to the Code changes introduced in 2015
relating to the robust assessment of risks and the viability statement
and their application to the 2016 Annual Report and Accounts;
• the key judgements and financial reporting matters for 2016;
• in conjunction with the SHESEC Committee, assessed the
effectiveness of the system of risk management and internal controls;
• reviewed and approved the audit and non-audit fees;
• the fair, balanced and understandable test in relation to the
Annual Report and Accounts, when taken as a whole;
• the effectiveness of external auditors (PwC);
• matters highlighted in the Group Risk, Control & Assurance
Report and Group Ethics & Compliance Report;
• adherence across the Group with regulatory and compliance
requirements, including the undertakings in respect of
Centrica Storage;
• an external quality assurance (EQA) review of the Internal
Audit function;
• whether the judgements, estimates and assumptions used in
the presentation of the Financial Statements were reasonable
and consistent; and
• regular updates of cases reported to the Company’s
‘Speak Up’ helpline.
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Risk management and internal controls
Internal audit
The Committee is responsible for monitoring and reviewing the
operation and effectiveness of the Group’s internal audit function,
including its independence, strategic focus, activities, plans and
resources. The appointment and removal of the Head of Internal
Audit is also a matter for the Committee.
The Committee approved the Group’s annual Internal Audit
plan which was primarily risk-based focusing on the assurance
of core processes. As part of its consideration of the plan, the
Committee reviewed staffing levels and qualifications to ensure
these were appropriate and adequate for the delivery of the plan.
To provide the Committee with insight into the performance
of the internal audit function relative to similar functions in other
organisations, an external quality assurance (EQA) review of the
Internal Audit function was undertaken.
During the year, the Committee received regular reports
summarising the findings from the Group’s internal audit function’s
work and action plans to resolve any highlighted areas. The
Committee monitored the progress of the most significant action
plans to ensure these were completed satisfactorily.
The Board’s Review of the system of risk management
and internal controls
Each year, an extensive process of self-certification operates
throughout the Group whereby the effectiveness of internal
controls and compliance with the Group’s Business Principles
and policies are assessed. Self-certification is completed both
at the half year and full year. The results of the annual process,
together with the conclusions of the internal reviews by internal
audit, inform the annual assessment of the effectiveness of the
systems of risk management and internal controls performed
by the Audit Committee and the SHESEC Committee in 2016.
External auditors
The Committee manages the relationship with the Group’s
external auditors on behalf of the Board. The Committee considers
annually the scope, fee, performance and independence of the external
auditors as well as whether a formal tender process is required.
The Board considers it of prime importance that the external
auditors remain independent and objective and as a safeguard
against this being compromised, the Committee implemented
and monitors a policy on the independence of external auditors.
This policy details the process for the appointment of the external
auditors, the tendering policy, the provision of non-audit services,
the setting of audit fees and the rotation of audit partner and staff.
There are no contractual or similar obligations restricting the
Group’s choice of external auditors.
Effectiveness and independence of the external auditors
To assess the effectiveness and independence of the external
auditors, the Committee carried out an assessment of PwC. This
included a review of the report issued by the audit quality review
team regarding PwC and an internal questionnaire completed
by Committee members and relevant members of management
on their views of PwC’s performance. The questionnaire covered
a review of the audit partner and team, the audit scope and
approach, audit plan execution, auditor independence and
objectivity and robustness of the challenge of management.
The feedback received was reviewed by management
and reported to the Committee and the Board.
In addition, to ensure the independence of the external auditors
and in accordance with International Standards on Auditing
(UK & Ireland) 260 and Ethical Statement 1 issued by the
Accounting Practices Board and as a matter of best practice,
PwC have confirmed their independence as auditors of the
Company, in a letter addressed to the Directors. Together
with PwC’s confirmation and report on their approach to audit
quality and transparency, the Committee concluded that PwC
demonstrated appropriate qualifications and expertise and
remained independent of the Group and that the audit
process was effective.
Non-audit fees
In order to preserve the independence of the external auditor, the
Committee is responsible for the policy on the award of non-audit
services to the external auditors. A copy of this policy is available
on our website. The current cap on non-audit work is £2.75 million,
which is assessed annually for appropriateness against external
guidance and regulation. The award of non-audit work, within
permitted categories, is subject to pre-clearance by the Committee,
should the fees in a given year exceed a specified threshold. All
significant non-audit work is tendered and where PwC or Deloitte
LLP were appointed, it was considered that their skills and
experience made them the most appropriate supplier of the work.
Significant engagements undertaken during 2016 included
audit-related assurance services and advice on corporate finance
support for acquisitions and disposals. On a quarterly basis, the
Committee is provided with reports of all non-audit assignments
awarded to the external auditors and a full breakdown of non-audit
fees incurred. A summary of fees paid to the external auditors is
set out in note S9 to the Financial Statements.
Appointment of the external auditors
PwC have been the external auditor of the Group since the
demerger of Centrica in 1997. In 2016, the Committee led a
formal audit tender process. The Board and PwC mutually agreed
that PwC, having regard to the length of their tenure, would not
participate in the formal tender process. The conclusion of the
tender process was a firm recommendation to appoint Deloitte
LLP as the Company’s auditor for the financial year commencing
1 January 2017. The Board has accepted and endorsed this
recommendation, which is subject to shareholder approval at
the Annual General Meeting scheduled for 8 May 2017.
Audit information
Each of the Directors who held office at the date of approval of
the Annual Report and Accounts confirms that, so far as they are
aware, there is no relevant audit information of which PwC are
unaware and that they have taken all steps that they ought to have
taken as Directors to make themselves aware of any relevant audit
information and to establish that PwC are aware of that information.
EXTERNAL AUDITOR TRANSITION
Following a rigorous selection process Deloitte LLP was selected as
the Group’s external auditor for the financial year commencing from
1 January 2017. Shareholders will be asked to confirm their
appointment at the 2017 AGM.
The Committee, together with management, spent significant time
drawing up the assessment criteria to select the successful audit firm.
The audit tender process involved three firms who each submitted
their proposals for the audit. Each of the firms’ engagement teams met
with Centrica management teams across the Group and feedback
from these meetings was provided to the Committee to inform the
decision-making process. Additionally, the firms each presented to the
Committee, which allowed the Committee to assess the prospective
auditors’ capabilities and their proposed audit approach, in terms of
the strength of the lead partners and their leadership team, expertise,
industry experience and audit quality, as well as independence.
The Board approved the Committee’s recommendation to appoint
Deloitte LLP due to their extensive experience, particularly in a listed
environment, their audit quality and audit service quality ratings,
and their knowledge and experience of energy and utilities industries
and large-scale transformation programmes.
Centrica plc Annual Report and Accounts 2016
75
GOVERNANCE
DIRECTORS’ AND CORPORATE GOVERNANCE REPORT
Directors’ and Corporate Governance Report
continued
Key judgements and financial reporting matters in 2016
Audit Committee reviews and conclusions
IMPAIRMENT OF GOODWILL, UPSTREAM GAS AND OIL
ASSETS, POWER GENERATION ASSETS AND STORAGE
FACILITY ASSETS
The Group makes judgements and estimates in considering whether the
carrying amounts of its assets are recoverable. These judgements include
primarily the achievement of Board approved business plans, long-term
projected cash flows, generation and production levels (including reserve
estimates) and macroeconomic assumptions such as the growth and
discount rates and long-term commodity and capacity market auction
prices used in the valuation process. In the forecasts, where forward
market prices are not available, prices are determined based on
internal model inputs.
PRESENTATION OF CERTAIN RE-MEASUREMENTS
AND EXCEPTIONAL ITEMS
The Group reflects its underlying financial results in the business
performance column of the Group Income Statement. To be able to
provide this clearly and with consistent presentation, the effects of
certain re-measurements of financial instruments and exceptional
items are reported separately in a different column in the Group
Income Statement.
76
The Committee reviewed management reports detailing the carrying and
recoverable value of the assets and the key judgements and estimates
used. At the year end it concluded exceptional pre-tax impairment
write-backs of Exploration & Production gas and oil assets and reductions
to decommissioning provisions of £135 million relating to the UK,
Dutch and Norwegian gas and oil assets (£79 million) and Trinidad and
Tobago gas assets (£56 million) were required, primarily due to increased
reserves, cost savings, decommissioning reductions and, in the case
of Trinidad and Tobago, based on the proceeds agreed for the sale of
these assets. In addition to routine and immaterial impairments recorded
in business performance, predominantly in E&P, the Committee reviewed
the recoverable value of the York field and concluded a pre-tax impairment
of £63 million was required following reservoir quality issues concerning
the fourth production well which was recorded in business performance.
Following the award of a 15 year capacity contract to the previously
mothballed combined cycle gas turbine power station at Kings Lynn the
Committee concluded an exceptional pre-tax impairment write-back
of £26 million.
At the half year, the Committee had reviewed the recoverable value of the UK
gas storage assets and, following updated assumptions on asset availability
in the near term and future expenditure on asset integrity, had agreed an
exceptional pre-tax impairment of £176 million. The Committee has reviewed
the updated assumptions of the recoverable value of the UK gas storage
assets and have concluded no adjustment to this impairment is required.
There is uncertainty associated with the disposal process of the Group’s
Canadian oil and gas assets and significant judgement was required in
determining the recoverable amount of the assets, with a range of possible
outcomes. The Committee reviewed this and the recoverable amount
of all other significant balance sheet assets, and concluded their carrying
values were appropriate.
The external auditors held discussions with the Committee on the key
judgements and assumptions used in the impairment tests and provided
their own analytical report. Further detail on impairments arising, and the
assumptions used in determining the recoverable amounts, is provided
in notes 7 and S2 on pages 126 to 128 and 163 to 165.
In prior years the Committee received training on the classification
of exceptional items and certain re-measurements on the face of the
income statement. This year the Committee asked management to
present its policy for classification of items as certain re-measurements
and exceptional items. The Committee reviewed the policy along with
management reports detailing the judgements regarding the appropriate
presentation of items as certain re-measurements and exceptional items.
The Committee considered the size, nature and incidence of these items
and concluded that separate disclosure of these items was appropriate
in the Financial Statements.
Exceptional items include the E&P asset impairment write-backs in
the UK, Netherlands, Norway, and Trinidad and Tobago, impairment
write-back of the Group’s UK gas fired power station asset at Kings Lynn,
impairment of its UK gas storage assets, net release of/provisions for
onerous power procurement contracts, restructuring costs related to
the strategic review announced in 2015, pension past service credits
associated with a change to the Centrica Pension Plan, net gains on
disposal of businesses and assets and changes to E&P tax rates.
Further detail is provided in note 7 on pages 126 to 128.
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Key judgements and financial reporting matters in 2016
Audit Committee reviews and conclusions
DOWNSTREAM REVENUE RECOGNITION
The Group’s revenue for energy supply activities includes an estimate
of energy supplied to customers between the date of the last meter
reading and an estimated year-end meter reading. It is estimated through
the billing systems, using historical consumption patterns, on a customer
by customer basis, taking into account weather patterns, load forecasts
and the differences between actual meter readings being returned and
system estimates. An assessment is also made of any factors that are
likely to materially affect the ultimate economic benefits which will flow
to the Group, including bill cancellation and re-bill rates. To the extent
that the economic benefits are not expected to flow to the Group,
revenue is not recognised.
DETERMINATION OF LONG-TERM COMMODITY PRICES
The Committee has reviewed and held discussions with the external auditors
on the level of provisions made during the year. The implementation of a
new billing system in UK Business in 2014 meant that the determination
of the appropriate level of bad debt provisions last year required more
judgement than in previous years.
During 2016, improvements in billing performance, levels of cancellations/
errors and complaints backlog have continued. The review of bad debt
provisioning has continued to require more judgement. The Committee
has reviewed management reports detailing these judgements and have
concluded the level of provision is adequate. Further detail of accrued energy
income and provision for credit loss is provided in note 17 on pages 142
and 143.
Long-term commodity price forecasts are derived using valuation
techniques based on available external data. A significant number of
judgements and assumptions are used in deriving future commodity
curves. These forecasts are benchmarked against other third party
forecasts and are approved by the Group’s Executive Committee.
The long-term commodity price forecasts are used in determining the
fair values of derivative financial instruments in North America and
Europe. They are also a key input in the Group’s impairment
valuation testing.
The Committee reviewed management reports detailing the key
developments during the year and a summary of price changes and
drivers. The Committee also reviewed the proposed valuation commodity
curves versus those of external third parties. The external auditors also
provided detailed reporting and held discussions with the Committee
on the potential impact of changes in the commodity curves. More detail
on the assumptions used in determining fair valuations is provided in note
S6 on pages 176 to 178. Sensitivities of the asset impairment tests to
changes in price forecasts are provided in note 7 on pages 127 and 128.
BUSINESS COMBINATIONS
During the year, the Group acquired Ener-G Cogen’s CHP business
and Neas Energy’s energy management services and trading business.
Business combinations require a fair value exercise to be undertaken to
allocate purchase price (cost) to the fair value of the acquired identifiable
assets, liabilities, contingent liabilities and goodwill. As a result of the
nature of fair value assessments in the energy industry, this purchase
price allocation exercise requires subjective judgements based on
a wide range of complex variables at a point in time. Specifically for
these acquisitions, judgement is required in valuing the customer
relationship assets.
PENSIONS
The Committee reviewed management reports detailing the valuations
and key judgements and estimates. The Committee also approved
the disclosures in note 12. The external auditors also provided detailed
reporting and held discussions with the Committee on the key judgements
and assumptions used. Further details on business combinations are
set out in note 12 on pages 133 to 135.
The cost, assets and liabilities associated with providing benefits under
defined benefit schemes is determined separately for each of the Group’s
schemes. Judgement is required in setting the key assumptions used for
the actuarial valuation which determines the ultimate cost of providing
post-employment benefits, especially given the length of the Group’s
expected liabilities.
The Committee reviewed and approved the key assumptions and
disclosures in the Financial Statements. Independent actuaries were
consulted on the appropriateness of the assumptions and discussions
were held with the external auditors. Further details on pensions are set
out in note 22 on pages 147 to 151.
GOING CONCERN AND LIQUIDITY RISK
The Group experiences significant movements in its liquidity position
due primarily to the seasonal nature of its business and margin cash.
To mitigate this risk the Group holds cash on deposit and maintains
significant committed facilities. The Group regularly prepares an
assessment detailing these available resources to support the
going concern assumption in preparing the Financial Statements.
OFGEM CONSOLIDATED SEGMENTAL STATEMENT
The Group is required to prepare an annual regulatory statement
(Consolidated Segmental Statement (CSS)) for Ofgem which breaks
down its licensed activities for the financial year into a generation,
domestic and non-domestic, and electricity and gas result. The CSS is
reconciled to our externally reported IFRS Annual Report and Accounts.
The Group publishes the CSS at the same time as our full year Annual
Report and Accounts and the CSS is independently audited. In preparing
the CSS, judgement is required in the allocation of non-specific costs
between domestic and non-domestic and electricity and gas and the
distinction between licensed and non-licensed activities.
The Committee reviewed management’s funding forecasts and sensitivity
analysis and the impact of various possible adverse events including
significant commodity price movements and credit rating downgrades.
The external auditors also provided detailed reporting and held
discussions with the Committee. Following the review, the Committee
recommended to the Board the adoption of the going concern statement
in the Annual Report and Accounts 2016. Further details on sources of
finance are set out in note 24 on pages 153 to 156 and in the Going Concern
section of the Directors’ and Corporate Governance Report, on page 82.
The Committee reviewed the Ofgem CSS and the key judgements and
disclosures made in its preparation. The external auditor also provided a
detailed report and held discussions with the Committee. The full CSS and
the independent audit opinion approved by the Committee for publication
are set out on pages 203 to 215.
Centrica plc Annual Report and Accounts 2016
77
GOVERNANCE
DIRECTORS’ AND CORPORATE GOVERNANCE REPORT
Directors’ and Corporate Governance Report
continued
SAFETY, HEALTH, ENVIRONMENT,
SECURITY AND ETHICS COMMITTEE
(SHESEC)
Members
• Steve Pusey (Chairman)
• Margherita Della Valle
• Joan Gillman
• Carlos Pascual
• Scott Wheway
NOMINATIONS COMMITTEE
Members
• Rick Haythornthwaite (Chairman)
• Margherita Della Valle
• Joan Gillman
• Stephen Hester
• Lesley Knox
• Carlos Pascual
• Steve Pusey
• Scott Wheway
RICK
HAYTHORNTHWAITE
Committee Chairman
STEVE
PUSEY
Committee Chairman
Report of the Committee Chairman
2016 was a busy year for the Nominations Committee.
We reviewed the succession plans in place for the Board, the
Executive and senior management. Given the Group’s strategy
and with the assistance of our skills matrix, we identified digital,
retail, North America and financial services as additional business
experience and expertise that new Board members could bring
to complement those of our existing Board. We considered and
appointed Scott Wheway, Stephen Hester and Joan Gillman
as Non-Executive Directors.
Role of the Committee
The Committee ensures there is a formal and appropriate
procedure for the appointment of new Directors to the Board.
The Committee is responsible for leading this process and
making recommendations to the Board.
Membership and attendance
The Committee is chaired by the Chairman of the Board. Scott
Wheway, Stephen Hester and Joan Gillman were appointed to
the Committee on 1 May 2016, 1 June 2016 and 11 October 2016
respectively. During the year, the Group Chief Executive attended
all Committee meetings, as do other key executives.
Each member of the Committee is an independent Non-Executive
Director who has a wide range of relevant business experience.
Key issues considered by the Nominations Committee:
• Review of Committee membership;
• The appointments of Scott Wheway, Stephen Hester
and Joan Gillman;
• Consideration of exposure to loss of key personnel;
• Succession planning for the Senior Independent Director,
the Non-Executive Directors, the Executive and senior
management; and
• The skills of each of the Directors and the independence of
each of the independent Non-Executive Directors prior to the
2016 AGM and recommendation that each of them be subject
to election and re-election at the 2016 AGM.
Report of the Committee Chairman
2016 was the first full year of operation for the Safety, Health,
Environment, Security and Ethics Committee (SHESEC). We spent
a lot of time formalising the Committee’s forward agenda to ensure
its focus was aligned with those principal risks considered to have
a potentially significant impact on the Group.
We decided that Health, Safety and Resilience were areas that we
wanted to focus on particularly given the Group’s exposure to these
risks across all of our businesses. We received regular reports from
management on Health and Safety performance, covering both
personal safety and process safety, as well as business resilience
and provided appropriate challenge and support as required.
We also received updates on the Ethics & Compliance programme
intended to provide effective structures for overseeing Ethics &
Compliance within Centrica. Sourcing and supplier management
was another area that we focused on, which included receiving
regular updates on the programmes to streamline and globalise the
Procurement function and to implement the Group’s compliance
with the UK’s Modern Slavery Act.
During the year we met twice with the Audit Committee to jointly
consider the Group’s system of internal control and risk management;
in the first quarter to assess the system’s effectiveness and in the
fourth quarter to look prospectively at any changes that needed
to be made for 2017.
Role of the Committee
The Committee has responsibility for the oversight of the adequacy
and effectiveness of the Group’s internal controls and risk
management systems in respect of certain principal risks identified
by the Group. These are as follows and the Committee considers
each one in terms of their ethical and compliance implications:
• Health, Safety, Environment and Security;
• People: engagement, culture and behaviours;
• Sourcing and supplier management;
• Information Systems Security; and
• Legal, Regulatory, Ethical Standards and Compliance matters.
Membership and attendance
The Committee is chaired by Steve Pusey, an independent
Non-Executive Director. Scott Wheway and Joan Gillman were
appointed to the Committee on 1 May 2016 and 11 October 2016
respectively. The Board has determined that each member of
the Committee is independent. During the year, the Chairman
of the Board and the Group Chief Executive attended all
Committee meetings, as do other key executives.
Key issues considered by SHESEC:
• Health and safety matters relating to asset integrity;
• Developing the priority risk focus for the Committee’s forward
agenda programme;
• Sourcing and supplier management;
• Modern Slavery Act compliance;
• Cyber and data security; and
• Business resilience.
78
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION REMUNERATION COMMITTEE
Members
• Lesley Knox (Chairman)
• Margherita Della Valle
• Carlos Pascual
• Scott Wheway
DISCLOSURE COMMITTEE
Members
• Iain Conn (Chairman)
• Jeff Bell
• Grant Dawson
LESLEY
KNOX
Committee Chairman
IAIN
CONN
Committee Chairman
Role of the Committee
The Disclosure Committee is responsible for the implementation
and monitoring of systems and controls in respect of the
management and disclosure of inside information and for
ensuring that regulatory announcements, shareholder circulars,
prospectuses and other documents issued by the Company
comply with applicable legal or regulatory requirements.
Membership and attendance
The Committee is chaired by Iain Conn, the Group Chief Executive.
Responsibilities of the Disclosure Committee:
• Review the preliminary results announcement, the half-year
results and the trading statements;
• Consideration of the release of regulatory and
industry announcements;
• Review announcements regarding key management changes; and
• Consideration of announcements in respect of specific projects.
Key issues considered by the Disclosure Committee:
• The proposed final dividend and the final preliminary
results announcement;
• The trading updates and approval of the final draft of the
announcements;
• The interim dividend and the announcement in respect of
the interim results for the six months to 30 June 2016; and
• The changes implemented by the EU Market Abuse Regulations
and the impact of these changes on the Company’s share
dealing code.
Set out below is an overview of the Remuneration Committee
including its role and membership during 2016. The full Remuneration
Report can be found on page 83 which contains our statutory
remuneration disclosures as well as more detail on the main areas
of focus for the Committee during the year.
Role of the Committee
The role of the Committee is to determine and make
recommendations to the Board on the Company’s framework
and policy for the remuneration of the Chairman of the Board,
the Company’s Executive Directors and other senior executives.
Membership and attendance
The Committee is chaired by Lesley Knox, an independent
Non-Executive Director. Scott Wheway was appointed to the
Committee on 1 May 2016. Each member of the Committee is
independent. No Director is involved in the determination of,
or votes on, any matters relating to his or her own remuneration.
Meetings of the Committee are attended by the Chairman of the
Board, the Group Chief Executive, the Group General Counsel
& Company Secretary, the Group HR Director and the Deputy
Group HR Director & Group Head of Reward.
Responsibilities of the Remuneration Committee:
• Determine total individual remuneration packages and terms and
conditions for the Executive Directors and Executive Committee;
• Approve the design of, and determine targets for, any performance
related pay schemes for the Executive Directors and the Executive
Committee and approve the total annual and long-term
incentive plan payments;
• Review the design of all share incentive plans for approval
by the Board and the Company’s shareholders; and
• Prepare and recommend to the Board for approval each year
a report on remuneration policy and a separate report on the
implementation of the policy in the last financial year.
Key issues considered by the Remuneration Committee:
• The approval of the individual strategic objectives and the
financial targets for the short and long-term incentive awards
granted in 2016 to Executive Directors and Executive
Committee members;
• Review of base pay for Executive Directors and Executive
Committee members;
• The approval of the terms of appointment for two new
Executive Committee members;
• Developments and trends in executive remuneration with the
independent external remuneration committee adviser; and
• Evaluation of the achievement against the objectives set for
the vesting of the second tranche of the Group Chief
Executive’s recruitment award.
Centrica plc Annual Report and Accounts 2016
79
GOVERNANCE
DIRECTORS’ AND CORPORATE GOVERNANCE REPORT
Directors’ and Corporate Governance Report
continued
OTHER STATUTORY INFORMATION
The Directors submit their Annual Report and Accounts for
Centrica plc, together with the consolidated Financial Statements of
the Centrica group of companies, for the year ended 31 December
2016. The directors’ report required under the Companies Act
2006 (the Act) comprises this Directors’ and Corporate Governance
Report, the Remuneration Report and the Responsible Business
section for disclosure of our greenhouse gas emissions in the
Strategic Report.
The management report required under Disclosure and Transparency
Rule 4.1.5R comprises the Strategic Report, (which includes the risks
relating to our business), Shareholder Information and details of
acquisitions and disposals made by the Group during the year in
note 12. This Directors’ and Corporate Governance Report fulfills
the requirements of the corporate governance statement required
under Disclosure & Transparency Rule 7.2.1.
Future developments
A description of future developments can be found in the Strategic
Report. A description of the Group’s exposure and management
of risks is provided in the Strategic Report on pages 56 to 64.
Results and dividends
The Group’s results and performance summary for the year are
set out on page 3. Dividends paid and proposed are set out in
note 11 to the Financial Statements on page 133.
Financial instruments
Full details of the Group’s financial instruments can be found in
notes 19, S3 and S6 on pages 143 and 144, 169 to 173 and 176 to
178 respectively.
Articles of Association (Articles)
The Company’s Articles were adopted at the 2010 AGM and
were amended at the 2016 AGM. They may only be amended
by a special resolution of the Shareholders.
Directors
The names of the Directors who held office during the year are
set out on pages 66 and 67, with the exception of Mike Linn
and Ian Meakins who retired from the Board on 18 April 2016
and 1 October 2016 respectively.
Details of the authority, role and powers of Directors are set out
within this Directors’ and Corporate Governance Report.
Directors’ indemnities and insurance
In accordance with the Articles, the Company has granted a
deed of indemnity, to the extent permitted by law, to Directors
and members of the Executive Committee. Qualifying third-party
indemnity provisions (as defined by section 234 of the Act) were
in force during the year ended 31 December 2016 and remain
in force. The Company also maintains directors’ and officers’
liability insurance for its Directors and officers.
Employment policies
Employee involvement
We remain committed to employee involvement throughout the
business. Employees are kept well informed of the performance
and strategy of the Group through personal briefings, regular
meetings, email and broadcasts by the Group Chief Executive
and members of the Board at key points in the year.
The Company’s all-employee share schemes are a long-established
and successful part of our total reward package, encouraging and
supporting employee share ownership. In the UK we offer both
Sharesave, HMRC’s Save as You Earn Scheme, and the Share
Incentive Plan (SIP) with good levels of take-up across the Group.
Currently, 57% of eligible UK employees participate in Sharesave
and 35% of eligible UK employees participate in the SIP. Details of
both schemes are set out in the Remuneration Report on page 89.
Equal opportunities
The Group is committed to an active equal opportunities policy
from recruitment and selection, through training and development,
performance reviews and promotion to retirement. It is our policy
to promote an environment free from discrimination, harassment
and victimisation, where everyone receives equal treatment
regardless of gender, colour, ethnic or national origin, disability,
age, marital status, sexual orientation or religion. All decisions
relating to employment practices will be objective, free from
bias and based solely upon work criteria and individual merit.
READ MORE ON PAGE 72
Employees with disabilities
It is our policy that people with disabilities should have full and
fair consideration for all vacancies. During the year, we continued
to demonstrate our commitment to interviewing those people
with disabilities who fulfil the minimum criteria, and endeavour
to retain employees in the workforce if they become disabled
during employment.
Human rights
As an international company we have a responsibility and are
committed to uphold and protect the human rights of individuals
working for us in the communities and societies where we
operate. We take steps to ensure that our people working in
countries with a high risk to human rights are safeguarded,
as set out in our Business Principles and Human Rights Policy.
We also recognise the opportunity we have to contribute
positively to global efforts to ensure human rights are
understood and observed.
Political donations
Centrica’s political donations policy states that Centrica operates
on a politically neutral basis. No political donations were made
by the Group for political purposes during the year. However, in
accordance with the United States Federal Election Campaign Act,
a Political Action Committee (PAC) called Direct Energy Employee
Political Action Committee (DEEPAC) was formed to facilitate
voluntary political contributions by its US employees. DEEPAC is
controlled by neither Centrica nor Direct Energy but instead by a
governing board of individual employee members of DEEPAC on a
voluntary basis. Direct Energy, as authorised by law, has provided
limited administrative support to DEEPAC. DEEPAC has been
organised to provide a vehicle to dispense voluntary contributions
from eligible employees. Participation in DEEPAC is entirely
voluntary for eligible employees, and political donations from
DEEPAC are determined by a governing board of DEEPAC
members. In 2016, contributions to DEEPAC by employees
amounted to $78,624, and DEEPAC made 54 political donations
totalling $29,000.
Relations with shareholders
The Board recognises and values the importance of maintaining
an effective investor relations and communication programme.
The Board is proactive in obtaining an understanding of
shareholder views on a number of key matters affecting the
Group and receives formal investor feedback regularly.
In 2016, Centrica’s shareholder engagement programme included:
• formal presentations for the announcement of the Group’s 2015
preliminary and 2016 interim results;
• meetings between the Group Chief Executive and Group
Chief Financial Officer and the Company’s major shareholders
during the year;
• the Chairman of the Remuneration Committee meeting with
a number of the Company’s major shareholders during the
year to discuss the Company’s remuneration arrangements;
80
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION • the Chairman and Senior Independent Director meeting with
major institutional shareholders in order to gain a first-hand
understanding of their concerns and key issues and provide
regular updates of these to the Board; and
• a meeting with our largest investors and leading proxy advisers
to provide insight into the key focus and considerations of the
Board and its Committees and a better understanding of the
governance measures operating across the business.
The Company’s AGM provides all shareholders with the
opportunity to develop further their understanding of the Company.
Shareholders can ask questions of the full Board on the matters
put to the meeting, including the Annual Report and Accounts and
the running of the Company generally. The Company intends to
send the Notice of AGM and any related papers to shareholders
at least 20 working days before the meeting. All Directors,
including Committee Chairmen, are in attendance at the AGM
to take questions.
At the AGM, the Chairman and the Group Chief Executive present
a review of the Group’s business. A poll is conducted on each
resolution at all Company general meetings. All shareholders
have the opportunity to cast their votes in respect of proposed
resolutions by proxy, either electronically or by post. Following
the AGM, the voting results for each resolution are published
and are available on our website.
Stephen Hester, the Senior Independent Director, is available
to shareholders if they have concerns that contact through
the normal channels has failed to resolve.
Our website contains up-to-date information for shareholders
and other interested parties including annual reports, shareholder
circulars, share price information, news releases, presentations to
the investment community and information on shareholder services.
Material shareholdings
At 31 December 2016, Centrica had received notification of
the following material shareholdings pursuant to the Disclosure
& Transparency Rules:
BlackRock, Inc.
Schroders Investment Management Limited
Newton Investment Management Limited
Schroders plc
Invesco Limited
Aberdeen Asset Managers Limited
31 December 2016
% of share
capital*
5.88
5.72
5.02
5.00
4.95
4.91
*
Percentages are shown as a percentage of the Company’s issued share
capital when the Company was notified of the change in holding.
As at 23 February 2017, there were no changes in the details
shown in the above table.
Share capital
The Company has a single share class which is divided
into ordinary shares of 614/81 pence each. The Company was
authorised at the 2016 AGM to allot up to 1,690,057,192 ordinary
shares as permitted by the Act. A renewal of this authority will be
proposed at the 2017 AGM. The Company’s issued share capital
as at 31 December 2016, together with details of shares issued
during the year, is set out in note 25 to the Financial Statements.
Rights attaching to shares
Each ordinary share of the Company carries one vote. Further
information on the voting and other rights of shareholders is set out
in the Articles and in explanatory notes which accompany notices
of general meetings, all of which are available on our website.
Repurchase of shares
As permitted by the Articles, the Company obtained shareholder
authority at the 2016 AGM to purchase its own shares up to a
maximum of 507,017,158 ordinary shares. No shares were
purchased under this authority in 2016.
As at 31 December 2016, 50,833,460 shares were held as
treasury shares. These shares held in treasury represent 0.93%
of the Company’s issued share capital. Dividends are waived
in respect of shares held in the treasury share account.
Issued share capital
In May 2016 the Company conducted an equity placing of
350,000,000 ordinary shares of 614/81 pence each at a price
of 200.00 pence per share, a discount of 13.5%, to raise a total
of £700 million before expenses (£694 million net of expenses).
The proceeds from the equity placing allowed the acceleration
of the Group’s customer-facing strategy through two attractive
and prioritised acquisitions, ENER-G Cogen and Neas Energy,
and also allowed the Group to further lower its level of net debt
in an uncertain external environment, reducing pressure on
the Group’s targeted strong investment grade credit ratings.
Shares held in employee benefit trusts
The Centrica plc Employee Benefit Trust (EBT) is used to purchase
shares on behalf of the Company for the benefit of employees,
in connection with the Deferred and Matching Share Scheme,
the Restricted Share Scheme and the On Track Incentive Plan.
The Centrica plc Share Incentive Plan Trust (SIP Trust) is used
to purchase shares on behalf of the Company for the benefit of
employees, in connection with the SIP. Both the Trustees of the
EBT and the SIP, in accordance with best practice, have agreed
not to vote any unallocated shares held in the EBT or SIP at any
general meeting and dividends are waived in respect of these
shares. In respect of allocated shares in both the EBT and the
SIP Trust, the Trustees shall vote in accordance with participants’
instructions. In the absence of any instruction, the Trustees shall
not vote.
Significant agreements – change of control
There are a number of agreements to which the Company is
party that take effect, alter or terminate upon a change of control
of the Company following a takeover bid. The significant agreement
of this kind relates to 2009, when Centrica entered into certain
transactions with EDF Group in relation to an investment in the
former British Energy Group, which owned and operated a fleet of
nuclear power stations in the UK. The transactions include rights
for EDF Group and Centrica to offtake power from these nuclear
power stations. As part of the arrangements, on a change of
control of Centrica, the Group loses its right to participate on the
boards of the companies in which it has invested. Furthermore,
where the acquirer is not located in certain specified countries,
EDF Group is able to require Centrica to sell out its investments
to EDF Group.
Related party transactions
Related party transactions are set out in note S8 to the
Financial Statements.
Events after the balance sheet date
Events after the balance sheet date are disclosed in note 26
to the Financial Statements.
Centrica plc Annual Report and Accounts 2016
81
GOVERNANCE
DIRECTORS’ AND CORPORATE GOVERNANCE REPORT
Directors’ and Corporate Governance Report
continued
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 2016,
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 64 together with
the Directors’ and Corporate Governance Report on pages 65
to 99, 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 75, 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.
By order of the Board
Grant Dawson
Group General Counsel & Company Secretary
23 February 2017
Disclosures required under Listing Rule 9.8.4R
The Company is required to disclose certain information under
Listing Rule 9.8.4R in the Directors’ Report or advise where such
relevant information is contained. All such disclosures are included
in this Directors and Corporate Governance report, other than the
following sections of the Annual Report and Accounts 2016.
Information
Directors’
compensation
Capitalised interest
(borrowing costs)
Details of long-term
incentive schemes
Location in
Annual Report
Page(s)
Remuneration Report
83 to 99
Financial Statements
129, note 8
Remuneration Report
84
Going concern
Accounting standards require that Directors satisfy themselves
that it is reasonable for them to conclude whether it is appropriate
to prepare the financial statements on a going concern basis.
The Group’s business activities, together with factors that are
likely to affect its future development and position, are set out in
the Group Chief Executive’s statement on pages 6 to 9 and the
Business Reviews on pages 36 to 51. After making enquiries,
the Board has a reasonable expectation that the parent company
and the Group as a whole have adequate resources to continue
in operational existence for the foreseeable future. For this reason,
the Board continues to adopt the going concern basis in preparing
the Financial Statements. Further details of the Group’s liquidity
position are provided in notes 24 and S3 to the Financial Statements.
Directors’ responsibilities statement
The Directors, who are named on pages 66 and 67, 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.
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STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION REMUNERATION REPORT
Remuneration Report
On behalf of the Board, I am pleased to present the
Remuneration Committee’s report for 2016.
OVERVIEW
During 2016 we operated our Policy, approved by shareholders
in April 2015, for the second of the intended three-year period.
We were pleased to receive votes in support of our 2015
Implementation Report from over 85% of our shareholders
notwithstanding some expressed concerns about the one-off
recruitment awards granted to Iain Conn. The awards were
granted as compensation for the forfeiture of unvested long-term
incentive plan awards from his previous employer and were a
critical part of securing his employment in the face of significant
competition for his services. Set out in detail on page 95 of this
report is the Committee’s assessment of Iain’s performance
against the targets that were set in respect of the second and
final tranche of shares.
PERFORMANCE FOR THE YEAR
The Board believes that the Executive Team has successfully
repositioned the strategy, organisation and priorities of the Group.
The Board established targets for the year, the achievement
of which would enable delivery of the strategy over the medium
term, in the knowledge that these would be very stretching for
the Group as a whole and successful achievement would
require exceptional leadership.
I am able to report that all targets have been achieved or
exceeded and the pace of change has resulted in greater
progress along the transformation journey than the Board
could have reasonably expected. A summary of the individual
assessment of each Executive Director against the demanding
personal objectives that were set for the year is set out on
page 93 of this report.
Following the plan for 2016 being set towards the end of 2015,
average commodity prices have fallen by 15% – 30%, driven
by lower demand in Asia, US shale gas resilience, natural gas
oversupply and continued high production by OPEC member
states. Whilst some of this price fall has been offset through
planned hedging, the impact on the Group was significant.
However, underlying performance, which is a key consideration
in assessing Group operating cash flow growth, was very strong.
The key drivers were above plan delivery in the transformation
and efficiency programme across the Group somewhat offsetting
gross margin pressures, most notably in UK Energy Supply &
Services, Exploration & Production, Energy Marketing & Trading
gross margin generation in trading and the gas asset book,
and significant improvements in working capital management.
In reaching a view on financial performance, the Committee
satisfied itself that working capital recovery was not the driver
of out-performance and the benefit of foreign exchange as the
pound sterling weakened over the year was more than offset
by the commodity price impact. The Committee considered
management behaviour including non-financial metrics. Safety
outputs missed stretching objectives but personal and customer
safety improved materially versus 2015 and process safety was
stable. Employee engagement scores from a full survey taken
during the most material organisational change period fell back,
particularly in the areas of greatest change. The Committee also
considered the communications and investor reaction to the equity
placing and post-placing developments. Having considered all
of these factors, overall the Committee concluded that financial
performance as reported was a fair reflection of management
performance in the year.
For past performance over the three-year performance period
ending with 2016, the Group Economic Profit target applying
in both long-term incentive plans operated under the previously
approved policy (the Long Term Incentive Scheme and the
Deferred and Matching Share Scheme) was not met, therefore
there will be no vesting in 2017 and all of the awards made in
April 2014 will be forfeit.
TOTAL REMUNERATION
As there were a number of Executive Directors appointed part
way through the prior year and 2016 has seen very strong in-year
performance, this Implementation Report will include materially
increased total remuneration figures when compared to the prior
year figures. The Committee is satisfied that the remuneration
determined for each Executive is appropriate in the context of the
approved Policy and the significant in-year performance delivered.
LOOKING FORWARD
In preparation for presentation of a remuneration policy to
shareholders at the AGM in 2018 the Committee plans to fully
review executive remuneration during the forthcoming year
taking into consideration the strategic direction of the Group,
appropriate ongoing alignment with that strategy and the
continuing development of all stakeholders’ views regarding
executive pay. The Committee expects to consult with major
shareholders on any proposals in the latter months of the year.
Lesley Knox
Chairman of the Remuneration Committee
23 February 2017
“ The Board believes that the
Executive Team has successfully
repositioned the strategy,
organisation and priorities
of the Group.”
Lesley Knox
Chairman of the Remuneration Committee
Centrica plc Annual Report and Accounts 2016
83
GOVERNANCE
REMUNERATION SUMMARY FOR 2016
Remuneration Summary for 2016
SHORT-TERM AND LONG-TERM INCENTIVE PERFORMANCE 2016
The charts below set out the measures and their weighting (inner circle) and the performance achieved against the maximum (outer circle)
for both the short-term (Annual Incentive Plan) and long-term (Long Term Incentive Scheme and Deferred and Matching Share Scheme)
incentive arrangements operated during the year.
Short-term incentive targets
Group financial performance – adjusted operating cash flow of £2,610 million was required for target achievement and £2,741 million
for maximum. The threshold level was £2,349 million.
Individual strategic objectives – achievement against strategic objectives aligned to the Group’s strategic priorities, measured in line with
the Group’s performance management process.
Short-term incentive outcome
Figures in the charts below represent percentage of base salary for each Executive Director. Achievement against individual strategic
objectives is set out on page 93.
Iain Conn
Jeff Bell
Mark Hanafin
Mark Hodges
60
75
75
50
75
50
70
75
125
104
125
104
125
104
125
104
Adjusted operating cash flow
Adjusted operating cash flow
Adjusted operating cash flow
Adjusted operating cash flow
Strategic objectives
Strategic objectives
Strategic objectives
Strategic objectives
Long-term incentive targets
Long-term incentive outcome
For the Long Term Incentive Scheme (LTIS) and the Deferred
and Matching Share Scheme (DMSS), performance against
Group Economic Profit (EP), Adjusted Earnings per Share (EPS)
and non-financial KPIs was measured over a three-year period
ending with 2016. In addition, a positive or negative TSR multiplier
is applied to any vesting outcome under the LTIS.
The EP and EPS performance targets have not been achieved.
Performance against the non-financial KPI dashboard across
the three-year period was strong, however, as a result of the
EP target not being met, the non-financial KPI portion of
the LTIS award will not vest.
Neither of the long-term incentive plans ending with the 2016
performance year will vest and therefore there will be no payout
in 2017. Full details of the performance outcomes are set out
on page 94.
Jeff Bell
Mark Hanafin
13
19
23
58
17
24
28
48
Group EP
EPS
Group EP
EPS
Non-financial KPIs
Non-financial KPIs
84
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION MAXIMUM TOTAL REMUNERATION OPPORTUNITY AND TOTAL REMUNERATION RECEIVED IN 2016
The chart below sets out the total remuneration received for the year for each Executive Director on the Board during 2016, prepared
on the same basis as the single figure for total remuneration table set out on page 92. In addition, for comparison purposes, the chart
provides an indication of minimum, on-target and maximum total remuneration opportunity, prepared on the same basis.
Iain
Conn
Jeff
Bell
Mark
Hanafin
Mark
Hodges
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
£000
Opportunity
Minimum total pay
On-target total pay
Maximum total pay
2016 Actual(i)
2015 Actual
Opportunity
2016 Actual
2015 Actual(ii)
Opportunity
2016 Actual
2015 Actual
Opportunity
2016 Actual
2015 Actual(iii)
Minimum
total pay
On-target total pay
Maximum total pay
Minimum
total pay
Minimum
total pay
On-target total pay
Maximum total pay
On-target total pay
Maximum total pay
Fixed remuneration
Short-term incentive
Recruitment award
(i) Achievement against the performance conditions set for the final tranche of the recruitment award is disclosed on page 95.
Jeff Bell was appointed to the Board on 1 August 2015. His 2015 remuneration therefore represents 42% of a full year.
(ii)
(iii) Mark Hodges was appointed to the Board on 1 June 2015. His 2015 remuneration therefore represents 58% of a full year.
2016 %
2015 %
0.08
0.05
33
36
34
35
2016 CASH FLOW DISTRIBUTION TO STAKEHOLDERS
The Committee monitors the relationship between the Directors’
total remuneration and cash outflows to other stakeholders.
As demonstrated by the chart, the Directors’ aggregate total
remuneration for the year equates to 0.08% (2015: 0.05%)
of the Group’s operating cash flow.
12
19
9
22
To staff
To government
To shareholders
Investing activities
To Directors
To staff
To government
To shareholders
Investing activities
To Directors
Centrica plc Annual Report and Accounts 2016
85
GOVERNANCE
REMUNERATION POLICY
Remuneration Policy
Set out over the following pages is a summary of the Remuneration
Policy that was approved by shareholders on 27 April 2015. The full
Remuneration Policy can be found at centrica.com.
EXECUTIVE DIRECTORS’ REMUNERATION
The Committee believes that the remuneration arrangements are
completely aligned with the Executives’ underlying commitment to
act in the best interests of sustainable shareholder value creation,
whilst ensuring behaviours remain consistent with the governance
and values of the business.
Key objectives of reward framework
The Policy aims to deliver a remuneration package:
• to attract and retain high calibre Executives in a challenging
and competitive business environment;
• that delivers an appropriate balance between fixed and variable
compensation for each Executive;
• that places a strong emphasis on performance, both the short
term and long term;
• strongly aligned to the achievement of strategic objectives
and the delivery of sustainable value to shareholders; and
• that seeks to avoid creating excessive risks in the achievement
of performance targets.
Reward framework
The core design of the total remuneration framework for Executives
ensures that a substantial portion of the maximum opportunity
is dependent upon performance as indicated in the chart below.
Total remuneration comprises fixed pay and variable performance
related pay, which is further divided into short-term incentive
(with a one-year performance period) and long-term incentive
(with a three-year performance period).
Short-term incentives relate to awards under the Annual Incentive
Plan (AIP) which is described on page 87. Long-term incentives
relate to awards under the Long Term Incentive Plan (LTIP) which
is described on page 88.
KPIs have been selected that align with our purpose: to deliver
energy and services to satisfy the changing needs of our customers,
and also support our long-term financial goals. In addition, our
underlying principles of operating safely and with an engaged
workforce are included.
The KPIs, set out in detail on pages 18 and 19, influence the design
and underpin the selection of performance criteria used within the
incentive arrangements as demonstrated in the KPIs and incentives
table below. If overall performance is not deemed satisfactory,
the award for any year may be reduced or forfeited, at the
discretion of the Committee.
In addition, Executives are subject to a minimum shareholding
guideline. Under the LTIP there are mandatory holding periods
of three to five years from grant or award date, to provide further
alignment with the returns to our shareholders.
Remuneration principles
• the potential maximum remuneration that Executives could
receive is a key consideration when agreeing the level of
base pay and the performance related elements of the
remuneration package;
• the Committee takes account of, and is sensitive to, shareholder
views, market changes, skills availability, competitive pressure
and/or the economic climate when considering Executive
remuneration. In so doing, the Committee follows similar
principles that apply when remuneration is considered for all
other employees within the Group; and
• benchmarking against UK cross-industry comparator organisations
of similar size and complexity is used to assist the Committee
in evaluating market movement and the relative competitive
position of Executive remuneration to ensure that packages
offered support the attraction and retention of high
calibre individuals.
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Fixed
remuneration
Short-term
incentive
Long-term
incentive
Cash
Shares
KPIs and incentives
KPI
Adjusted operating cash flow (AOCF)
Adjusted operating profit
Incentive link
AIP primary financial measure
LTIP EP three-year measure
Adjusted basic earnings per share (EPS)
LTIP EPS growth measure
Total shareholder return (TSR)
AIP deferred share investment and minimum shareholding requirement
Lost time injury frequency rate (LTIFR)
Process safety
Customer satisfaction
Employee engagement
LTIP non-financial KPI dashboard
LTIP non-financial KPI dashboard
LTIP non-financial KPI dashboard
LTIP non-financial KPI dashboard
86
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Remuneration Policy table
The table below sets out the Remuneration Policy that was approved at the AGM on 27 April 2015 and applies to Executives.
Purpose and
link to strategy
BASE PAY/SALARY
Reflects the scope
and responsibility of
the role and the skills
and experience of
the individual.
Salaries are set at
a level sufficient to
allow the Company
to compete for
international talent
and to recruit,
motivate and retain
individuals of the
correct calibre to
execute our strategy.
SHORT-TERM
INCENTIVE PLAN
Designed to reward
the delivery of key
strategic priorities
for the year.
These priorities
position the Group
for strong short-term
financial performance,
in service of longer-
term strategic goals.
Operation and clawback
Maximum opportunity
Base salaries are reviewed annually, taking account of
performance, market conditions and pay in the Group
as a whole. Changes are usually effective from 1 April
each year.
This is consistent with the previously approved policy.
The AIP, together with the LTIP, replaces the previous
Annual Incentive Scheme (AIS), Deferred and Matching Share
Scheme (DMSS) and Long Term Incentive Scheme (LTIS).
The AIP is designed to incentivise and reward the
achievement of demanding financial and individual
strategically aligned performance objectives.
Following measurement of the performance outcome, half
of the AIP award is paid in cash. The other half is required
to be deferred into shares, two-thirds of which are released
after three years and the remaining third after four years.
Dividends are payable on the shares during the
restricted period.
If overall business performance is not deemed satisfactory,
an individual’s AIP payment for the year may be reduced
or forfeited, at the discretion of the Committee.
Malus and clawback apply to the cash and share awards
(see policy table notes on page 90).
Ordinarily, base salary increases
in percentage terms will be in line
with increases awarded to other
employees of the Group.
Increases may be made above this
level to take account of individual
circumstances such as a change
in responsibility, progression in
the role or a significant increase
in the scale or size of the role.
The base salary for an Executive
will not exceed £1 million per
annum.
This is consistent with the
previously approved policy.
Maximum of 200% of base salary.
Half the maximum is payable
for on-target performance.
The minimum award is 0%.
The maximum was 180% of
base salary under the previously
approved policy.
The 20% of base salary increase
in maximum opportunity is offset
by the 80% of base salary
reduction in maximum long-term
incentive opportunity and longer
deferral periods.
Performance
measures
Not applicable.
Up to 75% of base
salary based on
individual strategic
objectives aligned to
the Group’s strategic
priorities, with the
remainder based on
adjusted operating
cash flow.
Assessed over
one financial year.
Up to 72% of base
salary was based
on individual strategic
objectives under
the previously
approved policy.
AIP timeline
50% paid in cash
Performance period
Period subject to clawback
50% awarded in shares
2/3 of shares released
1/3 of shares released
Performance period
Period subject to malus
Period subject to
malus/clawback
Period subject
to clawback
Award date
Year 1
Year 2
Year 3
Year 4
Year 5
Centrica plc Annual Report and Accounts 2016
87
GOVERNANCE
REMUNERATION POLICY
Remuneration Policy
continued
Operation and clawback
Maximum opportunity
Maximum of 300% of base
salary plus dividend equivalents.
The minimum vesting level is 0%.
The maximum was 380%
of base salary plus dividend
equivalents under the
previously approved policy.
The LTIP simplifies the previous long-term incentive
arrangements which were delivered under two
separate schemes.
LTIP awards are granted to Executives each year based
on a percentage of base salary at the point of award.
Shares vest at the end of a three-year performance
period, depending on the achievement against the
Company performance targets, but are not released
until the fifth anniversary of the award date.
LTIP awards are usually delivered as conditional shares
which vest at the end of the three-year performance
period. Awards may also be granted as nil-cost options
with a seven-year exercise period. It is a requirement of
the LTIP that the net shares are held for a further two years
following the vesting date. Malus applies to the shares
during the three-year performance period and clawback
applies to the shares during the two-year retention period
(see policy table notes on page 90).
Dividend equivalents are calculated at the end of the
performance period on any conditional LTIP share awards
or nil-cost options. Dividend equivalents are paid as
additional shares or as cash.
If overall performance is not deemed satisfactory, the award
for any year may be reduced or forfeited, at the discretion
of the Committee.
Performance
measures
One-third based
on EPS over
the three-year
performance period.
One-third based on
absolute aggregate
EP over the three-year
performance period.
One-third based
on non-financial
KPI dashboard.
Where performance
falls between stated
points, vesting is
calculated on a
straight-line basis.
The weighting to
non-financial KPIs has
marginally increased
from 30% to 33.3%
compared with the
long-term incentive
arrangements in
the previously
approved policy.
This reflects the
Committee’s view
of the appropriate
balance between
financial and
non-financial
measures at
two-thirds/one-third
respectively.
Purpose and
link to strategy
LONG-TERM
INCENTIVE PLAN
Assists with
Executive retention
and incentivises an
appropriate balance
between short-term
performance and
long-term value
creation for
shareholders.
Encourages
sustainable high
performance.
Provides a direct
link between
remuneration and
KPIs, reinforcing
the desire for
sustainable high
performance over
the long term.
LTIP timeline
Award granted
Performance tested and award vests
Shares released
Period subject to malus
Period subject to clawback
Three-year performance period
Two-year holding period
Award date
Year 1
Year 2
Year 3
Year 4
Year 5
88
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Purpose and
link to strategy
PENSION
Positioned to
provide a competitive
post-retirement
benefit, in a way that
manages the overall
cost to the Company.
BENEFITS
Positioned to ensure
competitiveness with
market practice.
RELOCATION
AND EXPATRIATE
ASSISTANCE
To enable the Group to
recruit or promote the
right individual into a
role, to retain key skills
and to provide career
opportunities.
ALL-EMPLOYEE
SHARE PLANS
Provide an opportunity
for employees to
voluntarily invest in
the Company.
Performance
measures
Not applicable.
Operation and clawback
Maximum opportunity
Incoming Executives are entitled to participate in a
Company money purchase pension arrangement or to take
a fixed salary supplement (calculated as a percentage of
base salary, which is excluded from any bonus calculation)
in lieu of pension entitlement.
The Group’s policy is not to offer defined benefit
arrangements to new employees at any level, unless this
is specifically required by applicable legislation or an
existing contractual agreement.
This is consistent with the previously approved policy.
Executives employed prior to 2013 are entitled to participate
in a Centrica pension arrangement or to receive a fixed
salary supplement in lieu of pension entitlement in
accordance with the terms of their contracts.
Mark Hanafin is entitled to receive a salary supplement equal
to 40% of his base salary in lieu of pension or to participate
in a Company money purchase pension arrangement.
We would continue to honour defined benefit pension
arrangements in the event of an individual being promoted
to the Board who retains a contractual entitlement to such
a pension benefit.
This is consistent with the previously approved policy.
30% salary supplement for
Chief Executive and 25%
salary supplement for all
other Executives.
This is consistent with the
previously approved policy.
40% salary supplement for
Executives employed prior
to 2013.
This is consistent with the
previously approved policy.
The Group offers Executives a range of benefits including
some or all of:
• a company-provided car and fuel, or a cash allowance
in lieu;
• life assurance and personal accident insurance;
• health and medical insurance for the Executive and
their dependants;
• health screening; and
• a contribution towards financial planning advice.
This is consistent with the previously approved policy.
Cash allowance in lieu of
company car – £22,000
per annum.
The benefit in kind value of
other benefits will not exceed
5% of base salary.
This is consistent with the
previously approved policy.
Not applicable.
Assistance may include (but is not limited to) removal
and other relocation costs, housing or temporary
accommodation, education, home leave, repatriation
and tax equalisation.
This is consistent with the previously approved policy.
Maximum of 100% of base salary.
Not applicable.
This is consistent with the
previously approved policy.
UK-based Executives are entitled to participate in the
HMRC-approved Sharesave and Share Incentive Plan (SIP)
on the same terms as all other eligible employees. The
Sharesave plan offers a three or five-year savings period,
with up to a 20% discount to the market value of the
shares at the point of grant.
The SIP currently offers partnership and matching shares.
Dividends paid on SIP shares may be reinvested in the plan.
This is consistent with the previously approved policy.
Not applicable.
Maximum contribution limits
are set by legislation. Levels of
participation allowed by the Board
are within these limits and apply to
all participants. The SIP currently
awards one free matching share
for every two partnership shares
purchased, up to a maximum of
22 matching shares per month,
although the plan allows for
higher levels of matching award.
This is consistent with the
previously approved policy.
Centrica plc Annual Report and Accounts 2016
89
GOVERNANCE
REMUNERATION POLICY
Remuneration Policy
continued
Policy table notes
The Committee reserves the right to make any remuneration payments
and payments for loss of office, notwithstanding that they are not in
line with the Remuneration Policy set out above, where the terms of
the payment were agreed before the policy came into effect, at a time
when the relevant individual was not an Executive of the Company or,
in the opinion of the Committee, the payment was not in consideration
for the individual becoming an Executive of the Company. For these
purposes payments include the amounts paid in order to satisfy awards
of variable remuneration and, in relation to an award over shares,
the terms of the payment are agreed at the time the award is granted.
The Committee may make minor amendments to the policy set out
above (for regulatory, exchange control, tax or administrative purposes
or to take account of a change in legislation) without obtaining
shareholder approval for that amendment.
PENSION ARRANGEMENTS APPLYING TO EXECUTIVES
Centrica Unfunded Pension Scheme (CUPS)
All registered scheme benefits are subject to HMRC guidelines
and the Lifetime Allowance.
The CUPS defined contribution (DC) section provides benefits for
individuals not eligible to join the CUPS defined benefit (DB) section
and for whom registered scheme benefits are expected to exceed
the Lifetime Allowance. The CUPS DC section is offered as a direct
alternative to a cash salary supplement.
The CUPS DB section was closed to new members in October 2002.
CUPS is unfunded but the benefits are secured by a charge over
certain Centrica assets. An appropriate provision in respect of the
accrued value of these benefits has been made in the Company’s
balance sheet.
PERFORMANCE MEASURES
Adjusted earnings per share (EPS)
EPS is the Company’s basic earnings per share adjusted for
exceptional items and certain re-measurements net of taxation.
Adjusted operating cash flow (AOCF)
AOCF is the net cash flow from operating activities (which includes
taxes paid) adjusted to include dividends received from joint ventures
and associates and to exclude payments relating to exceptional items,
UK defined benefit pension deficit contributions and movements in
variation margin and cash collateral that are included in net debt.
Economic profit (EP)
EP is adjusted operating profit (after share of joint venture interest) less
a tax charge based on the tax rate relevant to the different business
segments and after deduction of a capital charge. The capital charge
is calculated as capital employed multiplied by the Group’s weighted
average cost of capital.
Where appropriate, expenditure on assets (and related costs) that are
not yet in use (pre-productive capital) is excluded from capital employed.
Further details of these performance measures are provided in notes 2,
4(f) and 10 of the financial statements.
Non-financial KPI dashboard
The non-financial KPI dashboard is designed to reward sustained high
performance over the entire three-year performance period. The equally
weighted measures are:
• lost time injury frequency rate (LTIFR);
• significant process safety event;
• British Gas net promoter score (NPS);
• Direct Energy NPS; and
• employee engagement.
Employee engagement survey data is collected by an external provider
and compared against an independent benchmark database.
Deloitte LLP reviewed the non-financial KPIs linked to executive
remuneration and provided limited assurance using the International
Standard on Assurance Engagements ISAE 3000 (Revised). The 2016
assurance statement and the Basis of Reporting, are available at
centrica.com/assurance.
For each measure, three performance zones have been established,
represented by the following indicators:
High performance zone
Median performance zone
Low performance zone
MALUS AND CLAWBACK
The Committee can apply malus (that is reduce the number of shares
in respect of which an award vests) or delay the vesting of awards if
it considers it appropriate where a participant has engaged in gross
misconduct or displayed inappropriate management behaviour which fails
to reflect the governance and values of the business or where the results
for any period have been restated or appear inaccurate or misleading.
Where an award has vested, the resulting shares will generally be held
for a period during which they may be subject to clawback in the event
that the Committee determines that one or more of the circumstances
above has occurred.
90
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION NON-EXECUTIVE DIRECTORS’ REMUNERATION
Remuneration Policy
Centrica’s policy on Non-Executive Directors’ (Non-Executives) fees takes into account the need to attract high quality individuals,
their responsibilities, time commitment and market practice.
Terms of appointment
Non-Executives, including the Chairman, do not have service contracts. Their appointments are subject to Letters of Appointment
and the Articles of Association.
Maximum opportunity
Performance
measures
The maximum level of fees
payable to Non-Executives,
in aggregate, is set out in
the Articles of Association.
Not applicable.
Remuneration Policy table
Purpose and
link to strategy
Operation
CHAIRMAN AND
NON-EXECUTIVE
DIRECTOR FEES
Sufficient level to
secure the services
of individuals
possessing the skills,
knowledge and
experience to support
and oversee the
Executive Directors
in their execution of
the Board’s approved
strategies and
operational plans.
The fee levels for the Chairman are reviewed every
two years by the Remuneration Committee.
The fee levels of the Non-Executives are reviewed
every two years by the Executive Committee.
Non-Executives are paid a base fee for their services.
Where individuals serve as Chairman of a Committee
of the Board, additional fees are payable. The Senior
Independent Director also receives an additional fee.
Fee levels from 1 January 2016:
Base fee £72,500 per annum.
The following additional fees apply:
• Chairman of Audit Committee – £25,000 per annum;
• Chairman of Remuneration Committee – £20,000
per annum;
• Chairman of Safety, Health, Environment, Security
and Ethics Committee – £20,000 per annum; and
• Senior Independent Director – £20,000 per annum.
Fee levels from May 2010 to 31 December 2015:
Base fee £65,000 per annum.
The following additional fees applied:
• Chairman of Audit Committee – £23,000 per annum;
• Chairman of Remuneration Committee – £20,000
per annum;
• Chairman of Corporate Responsibility Committee –
£20,000 per annum;
• Chairman of Safety, Health, Environment, Security
and Ethics Committee (established July 2015) –
£20,000 per annum; and
• Senior Independent Director – £20,000 per annum.
The Company reserves the right to pay a Committee
membership fee in addition to the base fees.
Non-Executives are able to use 50% of their fees, after
appropriate payroll withholdings, to purchase Centrica
shares. Dealing commission and stamp duty is paid by
the Non-Executive.
The Non-Executives, including the Chairman, do not
participate in any of the Company’s share schemes,
incentive plans or pension schemes.
Non-Executives will be reimbursed for business expenses
relating to the performance of their duties including travel,
accommodation and subsistence. In certain circumstances
these, or other incidental items, may be considered a
‘benefit in kind’ and if so may be grossed up for any tax due.
Centrica plc Annual Report and Accounts 2016
91
GOVERNANCE
DIRECTORS’ ANNUAL REMUNERATION REPORT
Directors’ Annual Remuneration Report
DIRECTORS’ REMUNERATION IN 2016
This report sets out information on the remuneration of the Directors for the financial year ended 31 December 2016.
Single figure for total remuneration (audited)
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
2016
2015
Salary/
fees
Salary/
fees
Bonus
(cash)
Bonus
(cash)
Bonus
(deferred)
Bonus
(deferred)
Benefits
(viii) Benefits
LTIPs
(ix)
LTIPs
925
550
625
625
925
229
621
365
759
424
481
544
581
116
361
230
759
424
481
544
581
116
361
230
29
26
25
82
29
10
24
20
495
495
98
16
47
93
28
70
73
87
48
88
–
–
85
73
85
65
49
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£000
Executives
Iain Conn
Jeff Bell (i)
Mark Hanafin
Mark Hodges (ii)
Non-Executives
Rick
Haythornthwaite
Margherita
Della Valle
Joan Gillman (iii)
Stephen Hester (iv)
Lesley Knox
Mike Linn (v)
Ian Meakins (vi)
Carlos Pascual
Steve Pusey
Scott Wheway (vii)
Total
Recruit-
ment
award
(x)
Recruit-
ment
award
(xi)
1,402
632
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Pension
(xii)(xiii) Pension
Total
(restated)
Total
277
140
267
156
277
4,151
3,025
58 1,564
529
249 1,879
1,616
91 1,951
936
9,545
6,106
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
495
495
98
16
47
93
28
70
73
87
48
88
–
–
85
73
85
65
49
–
1,055
940
10,600
7,046
(i)
Jeff Bell was appointed as an Executive Director on 1 August 2015. His 2015 remuneration therefore represents 42% of a full year.
(ii) Mark Hodges was appointed as an Executive Director on 1 June 2015. His 2015 remuneration therefore represents 58% of a full year.
(iii) Joan Gillman was appointed as a Non-Executive Director on 11 October 2016.
(iv) Stephen Hester was appointed as a Non-Executive Director on 1 June 2016.
(v) Mike Linn resigned as a Non-Executive Director on 18 April 2016.
(vi)
Ian Meakins resigned as a Non-Executive Director on 1 October 2016.
(vii) Scott Wheway was appointed as a Non-Executive Director on 1 May 2016.
(viii) Taxable benefits include car allowance, health and medical benefits and financial planning advice. Non-taxable benefits include matching shares received under the SIP.
Benefits paid to Mark Hodges in 2016 include relocation support paid in line with Centrica’s relocation policy.
(ix) The long-term incentives include the value of the LTIS and DMSS matching awards due to vest in April 2017, relating to the three-year performance period ending in 2016.
The performance targets have not been met and these awards therefore will not vest. Details of the performance outcomes are set out on page 94.
(x) The recruitment award shares vesting in April 2017 have been valued to calculate an estimated payout using the share price at 31 December 2016 which was 234.1p.
The value of the estimated dividend equivalent shares has been included. The shares will be held until April 2018.
(xi) The value of the recruitment award shares vesting in April 2016 has been recalculated based on the share price on the date of vest which was 223.5p. The previous disclosure
in the 2015 single figure table used an estimated share price.
(xii) Notional contributions to the CUPS DC scheme for Mark Hanafin and Jeff Bell (less an allowance for CPI inflation on this opening balance of 1.3% in 2015, no allowance
applicable in 2016) have been included in this table as if CUPS DC were a cash balance scheme.
(xiii) Iain Conn and Mark Hodges are entitled to receive a salary supplement of 30% and 25% of base pay respectively.
92
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Base salary/fees
Base salaries for Executives were reviewed on 1 April 2016 and
were not increased. The salaries will be reviewed during the course
of 2017 as part of the normal annual cycle.
Base fees for Non-Executives were reviewed in November 2015
and were increased on 1 January 2016 from £65,000 to £72,500
per annum. The additional fee for the Chairman of the Audit
Committee was also increased from £23,000 to £25,000 per
annum. The increases were in line with the Remuneration Policy.
Prior to this increase, Non-Executives’ fees had been at the
same level since 2010.
Bonus – Annual Incentive Plan (AIP)
The financial performance targets for the 2016 AIP are set out
in the Remuneration Summary. The charts on page 84 under
short-term incentive outcomes indicate the extent of achievement
for each Executive receiving a payment relating to 2016, for each
component of the AIP.
Performance against individual strategic objectives in 2016
In line with the Group’s annual performance management process,
each Executive had a set of stretching individual objectives aligned
to the Group’s strategic priorities, for 2016. Set out below is the
Committee’s assessment of the achievement against these
objectives for each Executive.
Iain Conn
Iain Conn delivered an outstanding performance, laying the agreed
strategic foundation for growth at a pace and to an extent that far
exceeded the stretching expectations of the Board while ensuring
that all financial outputs were met or exceeded in a year when
commodity prices continued to be a strong drag on cash flows.
Iain has established a strong leadership tone in matters of safety,
ethics, compliance and management discipline with a commensurate
improvement in the performance potential, resilience and risk profile
of Centrica. This underpinned delivery of very strong momentum
in the drive for greater efficiency resulting in greater than planned
cost reductions and the leeway to follow differentiated strategies
in the customer-facing businesses.
Under his guidance, material progress has been made in repositioning
the portfolio with a focus on creating a future pathway for Exploration
& Production and the establishment of strong momentum in the
new customer-facing business units. The repositioning required
shifts in organisation, capabilities, systems, processes and culture
of a scale that required very considerable skill, diligence and
imagination to achieve. Although employee engagement suffered
modestly during this difficult period of change, personnel safety
levels, customer satisfaction and complaints levels all started
to strongly move in the right direction.
Iain is proving to be a very strong CEO, well suited to the challenges
faced by Centrica in terms of its need to adapt rapidly to deliver
profitable growth in a significantly changed strategic context while
establishing a reputation as a company that is fully in tune with
the expectation of its stakeholders and society at large.
Jeff Bell
Jeff Bell played a key role in delivering against the financial targets
and accelerating the realisation of the group cost efficiency targets.
Along with the improvements in the debt position, and working
capital recovery, he also engaged proactively with the rating
agencies with the result that strong investment grade credit
ratings were maintained.
He led a tightening up of core finance management processes and
improved the capability of the Finance function through a number
of critical senior appointments. Jeff has made real progress in
implementing and leading new performance management and
review processes, with added functional quarterly performance
reviews, new KPIs for internal and external use, a new Group
Performance Report and improved quality of management
information generally.
Through his leadership of the Centrica Pensions Committee
the triennial pensions valuation process reached a successful
conclusion within the proposed boundary conditions.
Overall, Jeff has grown confidently into his role as Chief
Financial Officer and exceeded expectations in what was
a very challenging year.
Mark Hanafin
Mark Hanafin expertly guided the successful establishment of
the new global Distributed Energy & Power business and ensured
a strong set-up for the future with some excellent hires and the
acquisition of ENER-G Cogen.
Energy Marketing & Trading beat its plan by some margin.
The new organisation following a smooth relocation is working well,
and material growth was delivered through the Neas Energy
acquisition and the expansion of the LNG book.
Mark showed skilled handling of strategic disposals and acquisitions.
As well as the two key acquisitions, both wind farms and Trinidad
and Tobago have been successfully divested, with Canada also
on track for sale.
Mark’s overall portfolio exceeded its cash flow targets. This was
particularly impressive in Exploration & Production which experienced
the most challenging environment in 20 years.
He ensured that cost efficiency targets were met or exceeded.
There was excellent progress in reducing E&P lifting and other
cash production costs.
Strong safety standards were maintained and significant progress
was made in tightening discipline, improving reporting and
developing capability.
Overall, Mark made significant progress in reshaping the
business in line with the Group Operating Model against a
difficult market backdrop.
Mark Hodges
Mark Hodges has more than delivered on all fronts, managing
by far the largest change agenda in the Group’s history, delivering
excellent financial outcomes, building capability and changing the
organisation, behaviours and mind-set. His leadership style has
been pragmatic, Group-minded and delivery-oriented.
Mark has effectively grasped the challenges and helped to ensure
an enhanced customer experience at reduced cost, with significant
efficiencies delivered and customer outcomes improved materially,
with complaints down 31% in UK Home and 22% in UK Business.
A new business-to-consumer participation strategy was agreed
with clear pathways established for the growth of Hive and our
wider technological capability. Downstream profits were maintained
during delivery of the cost efficiency programme, despite a
reduction in customer holdings and gross margin compression.
He showed strong leadership in the drive towards an incident free
workplace, with employee injury frequency rates and customer
injuries both declining significantly.
Under Mark’s direction, Connected Home has been successfully
established as a rapidly growing global business unit with a
NPS of +65 for customers with multi-connected products. Overall,
Mark has exceeded the financial plan for his portfolio in a challenging
environment, as well as building a constructive relationship with
our regulators and reinforcing British Gas as a responsible
market participant.
Centrica plc Annual Report and Accounts 2016
93
GOVERNANCE
DIRECTORS’ ANNUAL REMUNERATION REPORT
Directors’ Annual Remuneration Report
continued
Long-term incentive plans vesting in 2017
Performance conditions
The performance conditions relating to the LTIS awards vesting in 2017 are set out below, together with an explanation of the
achievement against these performance conditions.
Vesting criteria
Performance conditions over three-year period
35% on EPS growth against RPI growth
Full vesting for EPS growth exceeding RPI growth by 30%
Zero vesting if EPS growth does not exceed RPI growth by 9%
Vesting will increase on a straight-line basis between 25% and 100% between these points
35% on absolute aggregate EP
Full vesting for aggregate EP of £3,400 million
Zero vesting if aggregate EP is below £2,600 million
Vesting will increase on a straight-line basis between 25% and 100% between these points
30% on non-financial KPI dashboard
As disclosed below
Positive/negative multiplier on TSR
performance against the FTSE 100 Index
0.667 multiplier for Index -7% per annum and 1.5 multiplier for Index +7% per annum, subject to
a cap at the face value of the award. Where performance falls between stated points, vesting is
calculated on a straight-line basis
Performance outcome
Earnings per share (EPS)
EPS growth during the three-year period ending with 2016 did not
exceed RPI growth by 9%. Consequently, the EPS portion of the
2014 LTIS award will not vest.
Economic Profit (EP)
Aggregate EP achieved during the three-year period ending
with 2016 was £1,891 million when compared to a threshold
level of £2,600 million and a maximum level of £3,400 million.
Consequently, the EP portion of the 2014 LTIS awards,
and the DMSS matching awards, will not vest.
LTIS non-financial KPI dashboard
Throughout each three-year performance period, for each median
performance zone outcome, 5% of the KPI shares will be forfeited
and for each low performance zone outcome, 10% of the
KPI shares will be forfeited.
High performance zone
Median performance zone
Low performance zone
The non-financial KPI results in 2014, 2015 and 2016 are as follows:
Performance period – LTIS awards granted
in 2014 and due to vest in 2017
Year 1
2014
Year 2
2015
Year 3
2016
Measure
Lost time injury
frequency rate (LTIFR)
Significant process
safety event
British Gas net promoter
score (NPS)(i) (ii)
Direct Energy NPS(ii)
Employee engagement
Performance against the non-financial KPI dashboard for the
three-year period ending with 2016 resulted in 70% of the KPI
portion of the 2014 LTIS award becoming eligible for vesting.
As a result of the EP performance target not being met for the
three-year period ending with 2016, the KPI portion of the 2014
LTIS award will not vest. There will therefore be no payout
under the LTIS in 2017.
READ MORE ABOUT OUR KPIS ON PAGES 18 AND 19
94
Non-financial KPI update for long-term incentive plans
vesting in future years
KPI performance under the LTIP
Set out below is the achievement against the KPI dashboard
for the first two years of measurement for LTIP awards granted
in 2015 and 2016.
Performance period – LTIP awards granted
in 2015 and due to vest in 2018
Year 1
2015
Year 2
2016
Year 3
2017
Performance period – LTIP awards granted
in 2016 and due to vest in 2019
Year 1
2016
Year 2
2017
Year 3
2018
Measure
Lost time injury
frequency rate (LTIFR)
Significant process
safety event
British Gas net promoter
score (NPS)(i) (ii)
Direct Energy NPS(ii)
Employee engagement
Measure
Lost time injury
frequency rate (LTIFR)
Significant process
safety event
British Gas net promoter
score (NPS)(i) (ii)
Direct Energy NPS(ii)
Employee engagement
(i)
In 2015, British Gas NPS methodology changed to focus on experiences at the
end of key customer journeys which is the LTIP NPS KPI. In 2016, British Gas
journey NPS decreased to -1 (low performance zone), from an originally reported
2015 score of +4 (median performance zone) which has subsequently been
restated to +1 following survey changes that refocused measurement on key
customer journeys. The outgoing British Gas methodology based on contact and
brand scores used under the former LTIS, with the last cycle ending in 2016, was
+25 (median performance zone), down from +28 (high performance zone). For
Direct Energy NPS, under both LTIP and LTIS, performance rose strongly to +43
(high performance zone), from +37 (high performance zone).
(ii) The NPS disclosed on this page are the former metrics, used for executive
remuneration, and differ from the new Brand NPS reported elsewhere in the
Annual Report and in financial reporting (see page 19 for more information). The
new Brand NPS are seen as important operational metrics and they improved
across all geographies in 2016.
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Group Chief Executive recruitment award granted
in 2015
In accordance with the Company’s approved recruitment policy
and as previously announced, the Committee agreed to provide
compensation to Iain Conn for the forfeiture of existing unvested
long-term incentive awards in the form of conditional Centrica shares.
Two awards of conditional shares were granted to Iain Conn in
April 2015 (see below), the first with a face value equal to £925,000
vesting on the first anniversary of the award date and the second
with a face value equal to £1,850,000 vesting on the second
anniversary of the award date and released in April 2018.
First award – 282,634 shares vested in April 2016
Second award – 718,223 shares due to vest April 2017, subject to
performance achievement
In accordance with the minimum shareholding guidelines, any shares
released (following the sale of sufficient shares to cover the income
tax and National Insurance contributions due on vesting) will be held
until his shareholding is above the minimum guideline for Executives.
The vesting of both awards is subject to the achievement of
personal strategic objectives. Three-quarters of each award will vest
if the Committee is satisfied that Iain Conn’s performance, in relation
to the objectives set, has at least matched the expectations of
the Board. Each award may vest in full if the Committee considers
his performance to have significantly exceeded expectations.
If the Committee considers his performance to have been below
expectations, the shares will not vest and the award will be forfeit.
In reviewing Iain Conn’s performance, the Committee stated that
it would consider progress against the following objectives:
• strategy: to establish a sustainable growth strategy for Centrica
that is attractive to and earns the support of all key stakeholders
(expected by end Q3 2015);
• organisational structure: to consider organisational structure,
processes, systems, culture and costs and effect any change
deemed appropriate (expected by end Q4 2015);
• capability: to ensure that all the capabilities crucial to the
success of the growth strategy have robust development plans
that can be delivered at a pace commensurate with competitive
demands (expected by end Q2 2016); and
• reputation: to build relationships with society necessary to
achieve a demonstrable improvement in the external belief in
Centrica as a consumer-centric company, UK national leader,
influential in Europe and North America and a responsible
market participant (expected by end Q4 2016).
These measures are in addition to but complement the objectives
set in respect of the AIP.
Performance achievement
As previously explained, the Committee made a two-part award
as part of the CEO recruitment process in order to secure the
appointment of the Board’s strongly favoured candidate. The
Committee considered carefully investor feedback on the use of
subjective criteria in respect of these awards. After reflection the
Committee believes that in this case they have served their purpose
as intended. However, although Iain Conn’s performance since
his appointment has surpassed expectations, we have determined
the vesting level in deference to the external sensitivity to the
making of such awards and total remuneration for the year.
Under Iain’s leadership, a new organisational model was developed
for the whole Group, including the move to three new global growth
business units and more centralised functions. He has led the
recruitment of a number of key individuals and overall capability
was materially repositioned during the year to drive the new
Group strategy. Improved succession plans have also been put
in place.
Gaps in capability in the areas of Technology & Engineering,
Group Marketing, and Ethics and Compliance were identified
and these functions established. The need to establish a Group
Information Systems (IS) function with digital capability was
identified, resulting in centralisation of IS.
In the business unit that will now be known as the Centrica
Consumer division British Gas has been completely reorganised,
the largest restructuring since Centrica was incorporated in 1997,
and significant efficiency, cultural and capability changes have
been identified and delivered, all heavily influenced by Iain’s focus
on satisfying the changing needs of the customer and founded
on a new common operating model. A new leadership structure
was established and new senior hires made. Connected Home
was established as a global business unit and capability built for
the technology pipeline and business development including
the successful acquisition of Flowgem.
The business unit that will now be known as the Centrica
Business division has also seen fundamental redesign, with the
establishment of Distributed Energy & Power and reshaping of
Energy Marketing & Trading. With direction from Iain, targeted
strategic acquisitions were pursued and secured, including
Panoramic Power, ENER-G Cogen and Neas Energy.
Iain established a new reputation framework during the year,
which was reviewed by the Board. Quarterly standardised
reputation measurement was put in place with the Reputation
Institute, and the Group now has a clear Corporate Affairs
Engagement Plan to drive reputation.
There has been a demonstrable improvement in the external
belief in Centrica as a consumer-centric company as evidenced
by higher net promoter scores, significant interest in partnering
from high profile competitors and the ability to attract talent
in customer-focused areas.
Engagement with the UK Government, regulators and opinion
formers has been very proactive and Iain has personally
participated through bilateral meetings, speeches, blogs on
subjects such as energy policy, the EU, Brexit and industrial
strategy, all of this is building Centrica’s reputation as a leading,
serious, professional and forward-thinking company.
Under Iain’s guidance, we continue to develop an open and
constructive relationship with our key regulators. The two-year
CMA investigation into the UK energy market was handled with
huge effort and expertise, underlining the Group’s role as a
responsible market participant.
In the energy supply business, our shift in pricing stance and
focus on improved customer service has resulted in a material
reduction in complaints and NPS results at or exceeding plan.
Iain has also driven an increased focus on our work with vulnerable
customers and our apprenticeship and recruitment schemes.
Investors are supportive of the Group strategy. Communication
regarding the equity placing was not as well managed as it
should have been but feedback from investors suggests that
they remain positive about the Group’s direction and progress.
In light of these achievements, the Committee is satisfied that
Iain Conn has met the expectations of the Board as set out
in the objectives and as a result 75% (the “on-target” level) of
the second and final tranche of the recruitment award will vest.
The shares will vest in April 2017 and will be released in April 2018.
The estimated value of the shares due to vest, including dividend
equivalents, has been included in the single figure table on page 92.
Centrica plc Annual Report and Accounts 2016
95
GOVERNANCE
DIRECTORS’ ANNUAL REMUNERATION REPORT
Directors’ Annual Remuneration Report
continued
Pension
Iain Conn and Mark Hodges elected to receive salary supplements of 30% and 25% of base salary respectively, in lieu of participating
in a Centrica pension plan. These salary supplements are included in the single figure for total remuneration table on page 92.
Jeff Bell is entitled to receive a salary supplement of 25% of base pay or participate in the CUPS DC Scheme. As Mark Hanafin was
an Executive prior to 2013, he is entitled to receive a salary supplement of 40% of base pay or participate in the CUPS DC Scheme.
During the year, they both participated in the CUPS DC Scheme and received an unfunded promise equal to 25% and 40% of base
pay respectively.
Notional contributions to the CUPS DC Scheme have been included in the single figure for total remuneration table as if it was a cash
balance scheme and therefore notional investment returns for the year have been included. The notional pension fund balances are
disclosed below.
Pension benefits earned by Directors in the CUPS DC Scheme (audited)
CUPS DC Scheme(i)
Jeff Bell
Mark Hanafin
(i)
The retirement age for the CUPS DC Scheme is 62.
Awards granted in 2016
LTIP awards granted in 2016 (audited)
Iain Conn
Jeff Bell
Mark Hanafin
Mark Hodges
Total notional
pension fund
as at
31 December
2016
£
197,101
1,085,701
Total notional
pension fund
as at
31 December
2015
£
57,600
818,860
Number
of shares
1,221,498
726,296
825,336
825,336
Value
£000
(i) (ii)
2,775
1,650
1,875
1,875
Vesting date
April 2019
April 2019
April 2019
April 2019
(i) Awards were made in 2016 to Executives based on a value of 300% of salary. The performance conditions relating to these awards are set out below.
(ii) The share price used to calculate the number of shares granted was 227.18p, being the average closing share price over five business days immediately preceding
the grant date of 1 April 2016.
LTIP performance conditions for awards granted in 2016
Vesting criteria
Performance conditions over three-year period
1/3 based on EPS growth over
the 3-year period 2016–18
Full vesting for EPS growth of 24% or more
Zero vesting if EPS growth does not exceed 9%
1/3 based on absolute aggregate EP
over the 3-year period 2016–18
Full vesting for aggregate EP of £3,500 million
Zero vesting if aggregate EP is below £1,500 million
Vesting will increase on a straight-line basis between 0% and 100% between these points
Vesting will increase on a straight-line basis between 0% and 100% between these points
1/3 based on non-financial KPI dashboard
over the 3-year period 2016–18
As disclosed on page 94
96
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION LTIP timeline
2016
2016
2017
2018
Vesting of shares based
on performance
2019
2020
2021
Award
Performance period
Holding period
Release
Directors’ interests in shares (number of shares) (audited)
The table below shows the interests in the ordinary shares of the Company of the Directors on the Board at the end of the year together
with the minimum shareholding guideline for the Executives, which is 200% of salary, and the achievement against the guideline.
Also included to provide full disclosure (but not included as part of the minimum shareholder guideline calculation) are details of shares
owned by the Executives that are subject to continued service, unvested share awards that are subject to company performance
conditions and fully vested unexercised nil-cost share options.
Executives have a period of five years from appointment to the Board, or any material change in the minimum shareholding requirement,
to meet the guideline.
Shares
owned
outright as at
31 December
2015
(i)
Shares
owned
outright as at
31 December
2016
(i)
Minimum
shareholding
guideline
(% of salary)
Achievement
as at
31 December
2016
(% of salary)
140,812
87,910
363,863
320
33,476
24,653
–
–
14,427
–
21,570
–
663,219
238,416
518,550
125,817
34,721
37,308
–
20,700
15,076
–
35,151
10,187
200
200
200
200
–
–
–
–
–
–
–
–
168
101
194
47
–
–
–
–
–
–
–
–
Unvested share
awards subject
to company
performance
conditions
(incl awards
granted in
2016) as at
31 December
2016
(iii)
Shares owned
(subject to
continued
service) as at
31 December
2016
(ii)
Fully vested
unexercised
options
as at
31 December
2016
–
2,882,733
209,962
1,333,898
–
–
99,992
2,293,203
215,261
374
1,462,506
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Executives
Iain Conn(iv)
Jeff Bell(v)
Mark Hanafin(vi)
Mark Hodges(vii)
Non-Executives
Rick Haythornthwaite
Margherita Della Valle
Joan Gillman
Stephen Hester
Lesley Knox
Carlos Pascual
Steve Pusey
Scott Wheway
(i)
These shares are owned outright by the Director or a connected person and they are not subject to continued service or performance conditions. They include shares
purchased in April 2016 with deferred Annual Incentive Plan (AIP) funds which have mandatory holding periods of 3 and 4 years.
(ii) Shares owned subject to continued service are DMSS deferred awards, SIP matching shares that have not yet been held for the 3 year holding period and for Jeff Bell,
shares that were awarded in 2014 and 2015 under the Share Award Scheme and the On Track Incentive Plan, before he was appointed to the Board.
(iii) Shares and options that are subject to the achievement of long-term performance conditions are the awards granted under the LTIS in 2014, matching awards granted under
the DMSS in 2014 and 2015, recruitment awards granted to Iain Conn, and include all awards granted in 2016 which are disclosed elsewhere in this Remuneration Report.
(iv) Shares owned outright include 100,000 shares purchased directly by Iain Conn during the year. Following the release and allotment of shares in April 2017, it is estimated
that Iain Conn will hold shares with a value equal to 330% of salary.
(v) Following the release and allotment of shares in April 2017, it is estimated that Jeff Bell will hold shares with a value equal to 207% of salary.
(vi) Following the release and allotment of shares in April 2017, it is estimated that Mark Hanafin will hold shares with a value equal to 281% of salary.
(vii) Following the allotment of shares in April 2017, it is estimated that Mark Hodges will hold shares with a value equal to 134% of salary.
Centrica plc Annual Report and Accounts 2016
97
GOVERNANCE
DIRECTORS’ ANNUAL REMUNERATION REPORT
Directors’ Annual Remuneration Report
continued
Percentage change in Group Chief Executive’s
remuneration compared with other employees
The table below shows the percentage change in base pay/salary,
taxable benefits and bonus (annual incentive) payments between
2015 and 2016 for Iain Conn, compared with a comparator group
of UK employees, over the same period of time.
Salary and fees
Taxable benefits
Annual incentive
Group
Chief Executive
% change
0.00
0.00
30.64
Employees
% change
1.75
0.99
28.57
The comparator group includes management and technical or
specialist employees based in the UK in Level 2 to Level 6 (where Level
1 is the Group Chief Executive). The employees selected have been
employed in their role throughout 2015 and 2016 to give a meaningful
comparison. The group has been chosen as the employees have
a remuneration package with a similar structure to the Group
Chief Executive, including base salary, benefits and annual bonus.
Pay for performance
The table below shows the Group Chief Executive’s total remuneration
over the last eight years and the achieved annual variable and
long-term incentive pay awards as a percentage of the plan maximum.
Group
Chief Executive
single figure
of total
remuneration
£000
Annual bonus
payout
against max
opportunity
%
Long-term
incentive
vesting against
max opportunity
%
4,151
3,025
3,272
2,235
5,709
5,047
5,322
4,627
82
63
34
50
61
50
91
92
0
0
35
0
67
59
62
73
Year
Iain Conn
2016
2015
Sam Laidlaw
2014
2013
2012
2011
2010
2009
The performance graph below shows Centrica’s TSR performance
against the performance of the FTSE 100 Index over the eight-year
period to 31 December 2016. The FTSE 100 Index has been
chosen as it is an index of similar sized companies and Centrica
has been a constituent member throughout the period.
Total return indices – Centrica and FTSE 100
220
200
180
160
140
120
100
98
Dec
2008
Dec
2009
Dec
2010
Dec
2011
Dec
2012
Dec
2013
Dec
2014
Dec
2015
Dec
2016
Centrica return index
FTSE 100 return index
Source: Datastream
Fees received for external appointments
of Executive Directors
In 2016, Iain Conn received £121,000 (£97,500 in 2015) as a
non-executive director of BT Group plc.
Relative importance of spend on pay
The following table sets out the amounts paid in dividends and
staff and employee costs for the years ended 31 December 2015
and 2016.
Dividends
Staff and
employee costs(i)
2016
£m
532
2015
£m
387
2,183
2,126
%
Change
37
3
(i) Staff and employee costs are as per note 5 in the Notes to the Financial Statements.
Payments for loss of office
During 2016, there were no payments made for loss of office.
Funding of share schemes in 2016
During 2016, market purchased shares, held in trust, were used
to satisfy outstanding allocations under DMSS (deferred and
investment shares), LTIS 2014, the Restricted Share Scheme and
the On Track Incentive Plan (conditional share plans for Centrica
employees below the executive level). Treasury shares were used
to satisfy the release of shares or exercise of options under the
DMSS, LTIS, the Share Award Scheme and On Track Incentive
Plan (conditional share plans for Centrica employees below the
executive level), and Centrica’s all-employee share plans. At
31 December 2016, 50,833,460 shares were held in treasury
(2015: 58,705,016), following the share repurchase programme
throughout 2013 and 2014.
Advice to the Remuneration Committee
The membership of the Remuneration Committee during 2016
is set out in the Directors’ and Corporate Governance Report
on page 79.
The Chairman, Group Chief Executive, Group HR Director,
Group General Counsel & Company Secretary and Deputy
Group HR Director & Group Head of Reward are normally invited
to attend each Committee meeting and provide advice and
guidance to the Committee, other than in respect of their
own remuneration.
The Committee also has access to detailed external information
and research on market data and trends from independent
consultants. Deloitte LLP (Deloitte) was appointed by the
Committee in 2011, following a competitive tender process,
as independent external adviser.
In addition, Deloitte was appointed by the Company in 2014
to provide a TSR monitoring and reporting service. The fees
for TSR reports provided to the Committee on completion of
the LTIS performance cycles during 2016 amounted to £1,200.
Deloitte also provided quarterly TSR reports and updates
to the Company which were used to keep the general LTIS
population regularly updated with TSR performance.
Deloitte has also provided advice to Centrica globally during
2016 in the areas of employment taxes, share schemes,
pensions, corporate finance, management consulting
and internal audit.
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION CHANGES SINCE 1 JANUARY 2017
Share Incentive Plan (SIP)
During the period from 1 January 2017 to 23 February 2017,
Mark Hanafin and Mark Hodges both acquired 174 shares
and Iain Conn acquired 88 shares through the SIP.
The Remuneration Report has been approved by the
Board of Directors and signed on its behalf.
Grant Dawson
Group General Counsel & Company Secretary
23 February 2017
During the year, Centrica announced its intention to tender
for the audit contract in the second half of 2016. To avoid any
independence restrictions, the Committee appointed New
Bridge Street consultants, part of Aon Consulting Ltd (Aon),
in March 2016 on an interim basis to provide training and insight
as well as independent advice to the Committee until the
outcome of the audit tender was announced.
The fees for the advice including preparation for and attendance
at Committee meetings amounted to £16,200.
Aon has also provided advice and services to Centrica globally
during 2016 in the areas of payroll and workforce administration
as well as system and process implementation.
The Committee will consider the appointment of a permanent
independent external adviser during the course of 2017.
The Committee takes into account the Remuneration Consultants
Group’s Code of Conduct when dealing with its advisers.
The Committee is satisfied that the advice it received during
the year was objective and independent and that the provision
of any other services by Deloitte and Aon in no way compromises
their independence.
2016 VOTING
At the AGM held on 18 April 2016, shareholders approved
the Directors’ Annual Remuneration Report for the year ended
31 December 2015. Below are the results in respect of the
resolution, which required a simple majority (of 50%) of the votes
cast to be in favour in order for the resolution to be passed:
Directors’ Remuneration Report
Votes for
3,082,860,058
%
Votes against
85.49
523,100,568
%
14.51
70,713,647 votes were withheld.
A full schedule in respect of shareholder voting on the above
and all resolutions at the 2016 AGM is available at centrica.com.
IMPLEMENTATION IN THE NEXT FINANCIAL YEAR
No changes to the Policy are anticipated in 2017. Awards will be
granted in line with the limits set out in the Policy table. Performance
measures and targets for the short and long-term incentive plans
align with the Group’s strategy and therefore will remain unchanged.
Adjusted operating cash flow targets are considered commercially
sensitive until the year end and will therefore be disclosed
retrospectively in the Remuneration Report for the year in question.
Base salaries for Executives will be reviewed during the course
of 2017 as part of the normal annual cycle taking account of
performance, market conditions and pay in the Group as a whole.
No changes to pensions or benefits are anticipated.
Centrica plc Annual Report and Accounts 2016
99
GOVERNANCE
INDEPENDENT AUDITORS’ REPORT
Independent Auditors’ Report
to the members of Centrica plc
REPORT ON THE FINANCIAL STATEMENTS
Our opinion
In our opinion:
• Centrica plc’s Group Financial Statements and parent Company
Financial Statements (the ‘Financial Statements’) give a true and
fair view of the state of the Group’s and of the parent Company’s
affairs as at 31 December 2016 and of the Group’s profit and
cash flows for the year then ended;
• the Group Financial Statements have been properly prepared
in accordance with International Financial Reporting Standards
(‘IFRSs’) as adopted by the European Union;
• the parent Company Financial Statements have been properly
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice; and
• the Financial Statements have been prepared in accordance
with the requirements of the Companies Act 2006 and, as regards
the Group Financial Statements, Article 4 of the IAS Regulation.
What we have audited
The Financial Statements, included within the Annual Report
and Accounts (the ‘Annual Report’), comprise:
• the Group Balance Sheet as at 31 December 2016;
• the Company Balance Sheet as at 31 December 2016;
• the Group Income Statement and Group Statement of
Comprehensive Income for the year then ended;
• the Group Cash Flow Statement for the year then ended;
• the Group Statement of Changes in Equity for the year
then ended;
• the Company Statement of Changes in Equity for the year
then ended; and
• the notes to the Financial Statements, which include a
summary of significant accounting policies and other
explanatory information.
Certain required disclosures have been presented elsewhere in the
Annual Report, rather than in the notes to the Financial Statements.
These are cross-referenced from the Financial Statements and are
identified as audited.
The financial reporting framework that has been applied in the
preparation of the Group financial statements is IFRSs as adopted
by the European Union, and applicable law. The financial reporting
framework that has been applied in the preparation of the parent
Company Financial Statements is United Kingdom Accounting
Standards, comprising FRS 101 ‘Reduced Disclosure Framework’
(United Kingdom Generally Accepted Accounting Practice), and
applicable law.
The scope of our audit and our areas of focus
We conducted our audit in accordance with International Standards
on Auditing (UK and Ireland) (‘ISAs (UK & Ireland)’).
We designed our audit by determining materiality and assessing
the risks of material misstatement in the financial statements.
In particular, we looked at where the Directors made subjective
judgements, for example in respect of significant accounting
estimates that involved making assumptions and considering
future events that are inherently uncertain. As in all of our audits
we also addressed the risk of management override of internal
controls, including evaluating whether there was evidence of bias
by the Directors that represented a risk of material misstatement
due to fraud.
The risks of material misstatement that had the greatest effect
on our audit, including the allocation of our resources and effort,
are identified as ‘areas of focus’ in the table below. We have also
set out how we tailored our audit to address these specific areas
in order to provide an opinion on the financial statements as a whole,
and any comments we make on the results of our procedures
should be read in this context. This is not a complete list of all
risks identified by our audit.
Our audit approach – overview
Materiality
Audit scope
Areas of focus
100
MATERIALITY
• Overall Group materiality is £59 million which represents 5% of 3 year average
pre-tax profit adjusted for exceptional items and certain re-measurements as
defined in the financial statements.
AUDIT SCOPE
• We conducted our audit work across the Group’s locations including the UK,
the Republic of Ireland, the Netherlands, Norway, the United States and Canada.
• Senior members of the Group audit team performed site visits across the Group’s
locations. This included North America Home in Houston, the Neas Energy
business acquired in Denmark and the significant parts of the UK business
including UK Home, UK Business and Energy Marketing & Trading.
• Taken together, the territories and functions where we performed our audit
work accounted for 94% of Group revenues and 80% of Group profit before tax.
The coverage levels have been calculated using absolute values (ie the sum of
the numerical values without regard to whether they were profit or losses for the
components). This coverage also includes business units where only specific audit
procedures have been performed.
AREAS OF FOCUS
Our areas of focus comprised:
• Impairment assessment
• Valuation of derivative transactions
in commodity trading
• Presentation of exceptional items
and certain re-measurements
• Onerous contracts
• Downstream revenue recognition
• Pensions
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Area of focus
How our audit addressed the area of focus
IMPAIRMENT ASSESSMENT
The Group has £5.3 billion of property, plant, and equipment, the majority
of which relates to gas production, storage and power generation assets,
£1.8 billion of intangible assets and £2.6 billion of goodwill.
Impairment assessments of these assets require significant judgement
and there is the risk that valuation of the assets may be incorrect and
any potential impairment charge or reversal miscalculated.
The value of Centrica’s assets is supported by either value in use
calculations, which are based on future cash flow forecasts or fair value
less costs of disposal.
There has been some improvement in forecast oil and gas prices in 2016.
In addition, favourable oil and gas reserve revisions and cost reductions
have resulted in pre-tax impairment reversals of £63 million in relation
to the Norwegian gas and oil assets in the Exploration & Production
business. A pre-tax impairment reversal of £56 million has been
recognised in relation to certain gas assets in Trinidad and Tobago
after considering the proceeds expected under the sale and purchase
agreement. An amount of £16 million (pre-tax) was also reversed in
relation to decommissioning on previously impaired assets.
An impairment assessment was performed on combined cycle gas
turbine (CCGT) power stations with a pre-tax impairment reversal of
£26 million recognised within exceptional items in relation to the
King’s Lynn power station following the award of a 15 year capacity
market contract.
Impairment indicators were identified for the Storage facility following
operational issues. This has resulted in a total pre-tax impairment charge
of £176 million being recognised. The model remains highly sensitive
to key assumptions including price, volume and well performance.
In 2015 the Group announced E&P Canada was no longer a core part
of the Exploration & Production business and would be divested.
The Directors have received a range of bids and have considered
internal discounted cash flow analysis which evidence a wide range
of possible outcomes in relation to the valuation of the business.
Considerable judgement has therefore been applied in determining the
recoverable amount of the assets. As significant uncertainty remains
in the disposal process for E&P Canada, the Directors were unable to
conclude that completion of the sale is highly probable within 12 months
from balance sheet date. Therefore it has not been classified as
held for sale at year end.
Refer to pages 76 and 77 for details on the Audit Committee reviews
and conclusions and notes 3, 7, 13, 15 and S2 in the Financial Statements.
We assessed and challenged the impairment analysis prepared by the
Directors as outlined below.
With regard to the overall impairment assessments performed by the
Directors, we evaluated the design of internal controls in place to check
that the Group’s assets are valued appropriately including those controls
in place to determine any asset impairments or impairment reversals.
We also reviewed the assets that Directors assessed for indicators
of impairment and no indicators were identified.
We evaluated the Directors’ assumptions and estimates used to
determine the recoverable value of the gas and oil production and storage
assets, power generation assets, intangible assets, and goodwill. This
included reviewing fundamental curves, benchmarking their oil and gas
price assumptions, reviewing operating cost forecasts and expected
production profiles. We tested these assumptions by reference to third
party documentation where available, such as commodity price
forecasts, and consultation with operational management. With regard
to Trinidad and Tobago, we reviewed the Directors’ assessment of the
recoverable amount of the assets with consideration to the sale and
purchase agreement.
We used PwC valuation specialists to help us assess the commodity
prices and discount rates used by the Directors. We benchmarked these
to external data and challenged the assumptions based on our knowledge
of the Group and its industry. In addition we tested the Directors’ sensitivity
and stress test scenarios to ensure appropriate judgement had been applied.
We challenged the key assumptions used in each impairment model and
performed sensitivity analysis around key drivers of cash flow forecasts,
including output volumes, commodity prices, operating costs and
expected life of assets.
With regard to E&P Canada, we have challenged the Directors’ assessment
that the business should not be classified as held for sale at the balance
sheet date. This included meeting with operational and group management
to assess the status of the disposal process as at the balance sheet date,
understanding the status of bids, negotiations and assessment of the
options being considered by the Directors. In relation to assessing the
recoverable amount of the E&P Canadian assets, we have considered the
Directors’ internal discounted cash flow analysis, performed a range of
sensitivity analyses on the discounted cash flow and understood the third
party bids received.
Based on our analysis and the analysis performed by our valuations team,
we did not identify any material issues with the impairment conclusions and
valuation of exploration and production, storage and power generation
assets and goodwill. We did not identify any material issues with the
accuracy of the impairment charges and reversals and the associated
disclosures including the classification of assets.
VALUATION OF DERIVATIVE TRANSACTIONS
IN COMMODITY TRADING
The Group enters into a number of forward energy trades to help protect
and optimise the value of its underlying production and storage assets,
power generation assets, and transportation assets, as well as to meet
the future energy and supply needs of customers.
Certain of these arrangements are accounted for as derivative financial
instruments and are recorded at fair value.
Judgement is required in valuing these derivative contracts, particularly
where the life of the contract is beyond the liquid market period. The fair
value calculation requires bespoke models to be used that are specific
to the derivative and, as such, we gave particular focus to the valuation
of derivative contracts at the balance sheet date.
Refer to pages 76 and 77 for details on the Audit Committee reviews
and conclusions and notes 2 and 7 in the Financial Statements.
We assessed the overall commodity trading process including internal
risk management procedures and the system and controls on the
origination and maintenance of complete and accurate information
relating to derivative contracts. We found the controls in place over this
process to be operating effectively and therefore placed reliance on
these controls in our testing.
We tested the valuation of derivative contracts at the year end date which
requires the use of the Directors’ valuation models. Our audit procedures
focused on the integrity of these valuation models and the incorporation
of the contract terms and the key assumptions, including future prices and
discount rates. We verified input prices into the system and recalculated
valuations for a sample of derivatives, as well as performing sensitivity
analyses for more complex derivatives. Our testing focused on ensuring
appropriate judgement had been applied in the valuation of the contracts
and we did not identify any material errors.
Centrica plc Annual Report and Accounts 2016
101
GOVERNANCE
INDEPENDENT AUDITORS’ REPORT
Independent Auditors’ Report
continued
Area of focus
How our audit addressed the area of focus
For each of the material exceptional items, we considered Directors’
analyses of why they were determined to be exceptional and performed
our own, independent assessment by looking, primarily, at the nature
of the items. The detailed work we performed on the exceptional items
relating to the impairment charges and reversals, which is one of the
most significant items, is described on pages 126, 127 and 128.
We have performed audit testing over the restructuring costs recorded
during the year including assessing whether any related provisions meet
the requirements under IAS 37 Provisions, Contingent Liabilities and
Contingent Assets. Our testing did not identify any material issues and
we have ensured appropriate judgement has been applied in classifying
restructuring costs as an exceptional item.
For certain re-measurements we audited the principles management use
to determine whether a trade should be recognised as part of business
performance or presented separately. We evaluated whether the agreed
principles had been applied consistently by testing that a sample of
the trades had been presented correctly as optimisation or speculative
trading. Based on the work performed we did not identify any material
issues with the presentation, classification or disclosure of exceptional
items and certain re-measurements.
We tested the identification and completeness of onerous contracts
through discussions with management, examination of board minutes,
obtaining and reading the new significant contracts entered into during
the year and testing Directors’ assumptions for a sample of contracts.
We tested the valuation of the onerous contract provisions by evaluating
whether appropriate judgements and assumptions had been applied
in determining the unavoidable costs of meeting the obligation and the
estimate of the expected benefits to be received under the contract.
For the Spalding onerous contract provision release, we examined the
revised contract and tested the updated cash flow forecasts. In relation
to the Rijnmond tolling contract settlement, we have reviewed the settlement
agreement and verified the cash payment made. We have also reviewed
management’s updated model for the North America wind farm power
purchase agreement to ensure the appropriate judgement had been applied.
PRESENTATION OF EXCEPTIONAL ITEMS AND CERTAIN
RE-MEASUREMENTS
The middle column of the Income Statement represents exceptional items
and certain re-measurements. In the current year, there is a total pre-tax
exceptional charge of £11 million and a £1,030 million pre-tax net gain
relating to re-measurements, included within operating profit.
Exceptional items
The current year exceptional items pre-tax charge comprises of
restructuring costs of £228 million and an impairment charge on the
UK gas storage assets of £176 million. Impairment reversals were
recognised on certain exploration and production assets of £135 million
and combined cycle gas turbine (CCGTs) power stations of £26 million.
A net gain on disposal of businesses and assets of £101 million, a one-off
past service credit as a result of the implementation of a reduced salary
cap on pensionable pay of £78 million, and a net release of onerous
power procurement contracts of £53 million were also included within
exceptional items in the current year.
The appropriate classification of exceptional items involves subjective
judgement by the Directors including whether the item is truly exceptional
by virtue of its nature, size or incidence. Our focus was on testing that
the presentation and disclosure of these items is materially correct.
Certain re-measurements (as defined in the Financial Statements)
Certain re-measurements which resulted in a pre-tax net gain of £1,030
million, relates to the fair valuing of forward energy trades. There are two
main types of trades the Group participates in:
• optimisation trades – it is the Directors’ view that movements in the fair
value of optimisation trades do not reflect the underlying performance
of the business because they are economically related to parts of
the business which are not fair valued, for example exploration and
production assets or downstream demand. As such, these trades
are only reflected in business performance when the underlying
transaction or asset impacts the profit or loss; and
• speculative trading – it is entered into for the purpose of making profit.
Therefore all fair value movements associated with it are disclosed as
part of underlying business performance.
Our focus was on testing the correct classification of optimisation
and speculative trades.
Refer to pages 76 and 77 for details on the Audit Committee reviews
and conclusions and notes 2 and 7 in the Financial Statements.
ONEROUS CONTRACTS
The Group enters into a number of significant and complex contracts,
for example, power procurement and tolling contracts. Macro-economic
factors, such as forecast commodity prices, can have a significant impact
on the profitability of these contracts, and therefore the Directors make
an assessment as to whether the impact of such factors has resulted
in contracts becoming onerous.
The onerous contract provision of £64 million in relation to the Spalding
power station tolling agreement has been released following the
renegotiation of the contract and further improvements in elements of
the cash flow forecasts underpinning the provision. The Group has also
negotiated an exit from the Rijnmond tolling contract which resulted in
an additional onerous contract provision of £26 million being recognised.
The onerous contract provision for the North America wind farm power
purchase agreement was updated to take into account changes to
forecast US power prices resulting in a £15 million release to the
provision being recorded at year end.
The Directors’ existing assessment of expected costs in relation to the
European gas transportation contract remains materially unchanged.
Our focus on onerous contracts was assessing whether material onerous
contracts have been identified and that the valuation of any provision is
materially correct.
Refer to pages 76 and 77 for details on the Audit Committee reviews
and conclusions and notes 3, 7 and 21 in the Financial Statements.
102
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION Area of focus
How our audit addressed the area of focus
DOWNSTREAM REVENUE RECOGNITION
The accuracy of the recorded energy services revenue within the Group
and its presentation in the income statement is dependent on complex
estimation methodologies and algorithms used to assess the amount of
energy supplied to customers between the date of the last meter reading
and the year end (known as unread revenue). Unread gas and electricity
revenue comprises both billed and unbilled revenue. The specific risk
over unread revenue is the accuracy of the estimation. Where an unread
estimate is billed this gives the customer an opportunity to challenge the
estimate which can lead to the subsequent refinement of unread estimates.
Where unread estimates are unbilled, there continues to be a risk over
accuracy, recoverability and therefore correct recognition in the income
statement and balance sheet.
Furthermore, following the implementation of a new billing system in UK
Business in 2014, Directors’ have performed additional levels of review
over the revenue and receivables cycle including making judgements
over the level of accounts receivable provisioning.
Refer to pages 76 and 77 for details on the Audit Committee reviews
and conclusions and notes 3, 4 and 17 in the Financial Statements.
In order to test the accuracy of the unread billed and unbilled revenue
in UK Home, UK Business and UK Home Services, we assessed the
IT general controls, system application configuration, and business
process controls in relation to the revenue estimation and billing systems.
Our testing in these areas was sufficient to enable us to place reliance
on the system generated revenue estimation for the year end audit. In
North America Home and North America Business, we performed detailed
testing to support the accuracy of the unread billed and unbilled revenue.
Given the relatively short time period between the end of the financial
year and the audit, the majority of unbilled revenue as at 31 December
remained unbilled and uncollected at the date of this report. We therefore
focused our substantive testing on the manual adjustments to estimated
unbilled revenue, assessing the appropriateness of the estimation
methodologies and the reconciliation of unbilled reports to the general
ledger at the year end. Where manual adjustments were made to the
unbilled revenue estimate, we challenged the basis of the adjustments
made, the source of the data used and the consistency of the
adjustments with prior years to confirm we were comfortable with
the adjustments.
In assessing the methodology used to derive the unbilled revenue
estimate at the balance sheet date, and testing the performance of
historical billing and collections, we did not identify any material issues
with the recognition of unbilled revenue.
With regard to the new billing system in UK Business, we increased
our scope of work in order to assess any continued impact of the
implementation, specifically on accounts receivable and associated
provisioning. This included assessing the recoverability of debt and
additional procedures over the calculation of the debt provision at
year end.
Based on our work we did not identify any material misstatements
with downstream revenue recognition.
We used PwC pension specialists to help us assess the assumptions
used by the Directors in the valuation of the pension deficit. We compared
the discount and inflation rates used in the valuation to our internally
developed benchmarks. We have an internally developed range of
acceptable discount rates for valuing pension liabilities, which is based
on our view of various economic indicators. While our range is, itself,
subjective, the discount rate used by the Group is in the middle of our
expected range, however the inflation RPI is at the more optimistic
end of the range.
Based on the work performed, we did not identify any material issues
over the assumptions used in valuing the pension deficit.
PENSIONS
The Group has a net defined benefit pension deficit of £1,137 million,
consisting of a £7,938 million asset, offset by a £9,075 million liability.
The assumptions used in valuing the pension liability are both
judgemental and sensitive to change and thus there is a risk that a
small change in the judgements used will have a significant impact
on the valuation of the pension deficit.
The continued fall in gilt rates and the low yield environment has reduced
the discount rate on which the Group’s pension deficit is calculated to
2.7% (2015: 3.9%), while the remaining assumptions are reasonably
consistent with the prior year.
As such our area of focus was on the assumptions used in calculating
the liability, particularly the discount rate.
Refer to pages 76 and 77 for details on the Audit Committee reviews
and conclusions and notes 3 and 22 in the Financial Statements.
Centrica plc Annual Report and Accounts 2016
103
GOVERNANCE
INDEPENDENT AUDITORS’ REPORT
Independent Auditors’ Report
continued
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed
enough work to be able to give an opinion on the financial
statements as a whole, taking into account the geographic
structure of the Group, the accounting processes and controls,
and the industry in which the Group operates.
The Group is made up of the following business lines: UK Home,
UK Business, Ireland, North America Home, North America
Business, Connected Home, Distributed Energy & Power, Energy
Marketing & Trading, Exploration & Production, Central Power
Generation and Centrica Storage. The Group Financial Statements
are a consolidation of these business lines and comprise the
Group’s operating businesses and centralised functions.
Accordingly, based on size and risk characteristics, we performed
a full scope audit of the financial information for the following
business units: UK Home, UK Business, North America Home,
North America Business, Exploration & Production, Energy
Marketing & Trading and elements of Central Power Generation.
Where the work was performed by component auditors, we
determined the level of involvement we needed to have in the
audit work at those business units to conclude whether sufficient
appropriate audit evidence had been obtained as a basis for
our opinion on the Group Financial Statements as a whole.
Across the Group, the Group team involvement comprised of site
visits, conference calls, review of component auditor work papers,
attendance at component audit clearance meetings and other
forms of communication as considered necessary. Members of
the Group team are also directly involved in the component audits
of UK Home, UK Business, Energy Marketing & Trading and
Central Power Generation. In addition, senior members of the
Group audit team performed a number of site visits throughout
the year including to North America Home in Houston and the
Neas Energy business in Denmark.
Taken together, the business units where we performed our audit
work accounted for 94% of Group revenues and 80% of Group
profit before tax. The coverage levels have been calculated using
absolute values (ie the sum of the numerical values without regard
to whether they were profit or losses for the components). This
coverage also includes business units where only specific audit
procedures have been performed.
Materiality
The scope of our audit was influenced by our application of
materiality. We set certain quantitative thresholds for materiality.
These, together with qualitative considerations, helped us to
determine the scope of our audit and the nature, timing and extent
of our audit procedures on the individual financial statement line
items and disclosures and in evaluating the effect of misstatements,
both individually and on the Financial Statements as a whole.
Based on our professional judgement, we determined materiality
for the Financial Statements as a whole as follows:
OVERALL GROUP MATERIALITY
£59 million (2015: £78 million).
HOW WE DETERMINED IT
5% of 3 year average pre-tax profit adjusted for exceptional items
and certain re-measurements (rounded down) as defined in the
Financial Statements.
RATIONALE FOR BENCHMARK APPLIED
The Group materiality benchmark has been calculated as 5% of profit
from continuing operations, adjusted to exclude the effect of volatility
on underlying performance from disclosed exceptional items and certain
re-measurements. These items have impacted the income statement to
a quantitatively material degree and are not considered to form part of
the underlying results of the Group. To eliminate further volatility in trading
performance, a 3 year average on the same benchmark was used in
calculating the overall materiality.
COMPONENT MATERIALITY
For each component in our audit scope, we allocated a materiality that is
less than our overall Group materiality. The range of materiality allocated
across components was between £10 million and £50 million. Certain
components were audited to a local statutory audit materiality that was
also less than our overall Group materiality.
We agreed with the Audit Committee that we would report to
them misstatements identified during our audit above £5 million
(2015: £10 million) as well as misstatements below that amount
that, in our view, warranted reporting for qualitative reasons.
Going concern
Under the Listing Rules we are required to review the Directors’
Statement, set out on page 82, in relation to going concern.
We have nothing to report having performed our review.
Under ISAs (UK & Ireland) we are required to report to you if we
have anything material to add or to draw attention to in relation
to the Directors’ Statement about whether they considered it
appropriate to adopt the going concern basis in preparing the
Financial Statements. We have nothing material to add or to
draw attention to.
As noted in the Directors’ Statement, the Directors have concluded
that it is appropriate to adopt the going concern basis in preparing
the Financial Statements. The going concern basis presumes that
the Group and parent company have adequate resources to remain
in operation, and that the Directors intend them to do so, for at
least one year from the date the Financial Statements were signed.
As part of our audit we have concluded that the Directors’ use
of the going concern basis is appropriate. However, because not
all future events or conditions can be predicted, these statements
are not a guarantee as to the Group’s and parent Company’s
ability to continue as a going concern.
104
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION OTHER REQUIRED REPORTING
Consistency of other information and compliance with applicable requirements
Companies Act 2006 reporting
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic Report and the Directors’ and Corporate Governance Report for the financial year for
which the Financial Statements are prepared is consistent with the Financial Statements; and
• the Strategic Report and the Directors’ and Corporate Governance Report have been prepared in accordance with applicable
legal requirements.
In addition, in light of the knowledge and understanding of the Company and its environment obtained in the course of the audit,
we are required to report if we have identified any material misstatements in the Strategic Report and the Directors’ and Corporate
Governance Report. We have nothing to report in this respect.
ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
• information in the Annual Report is:
We have no exceptions to report.
– materially inconsistent with the information in the audited Financial Statements; or
– apparently materially incorrect based on, or materially inconsistent with, our knowledge
of the Group and parent Company acquired in the course of performing our audit; or
– otherwise misleading.
• the statement given by the Directors on page 82, in accordance with provision C.1.1 of the UK
We have no exceptions to report.
Corporate Governance Code (the ‘Code’), that they consider the Annual Report taken as a whole
to be fair, balanced and understandable and provides the information necessary for members
to assess the Group’s and parent Company’s position and performance, business model and
strategy is materially inconsistent with our knowledge of the Group and parent Company
acquired in the course of performing our audit.
• the section of the Annual Report on page 74, as required by provision C.3.8 of the Code,
describing the work of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee.
We have no exceptions to report.
The Directors’ assessment of the prospects of the Group and of the principal risks that would threaten the solvency
or liquidity of the Group
Under ISAs (UK & Ireland) we are required to report to you if we have anything material to add or to
draw attention to in relation to:
• the Directors’ confirmation on page 64 of the Annual Report, in accordance with provision C.2.1
of the Code, that they have carried out a robust assessment of the principal risks facing the Group,
including those that would threaten its business model, future performance, solvency or liquidity.
We have nothing material to add or to
draw attention to.
• the disclosures in the Annual Report that describe those risks and explain how they are being
managed or mitigated.
• the Directors’ explanation on page 64 of the Annual Report, in accordance with provision C.2.2
of the Code, as to how they have assessed the prospects of the Group, over what period they
have done so and why they consider that period to be appropriate, and their statement as to
whether they have a reasonable expectation that the Group will be able to continue in operation
and meet its liabilities as they fall due over the period of their assessment, including any related
disclosures drawing attention to any necessary qualifications or assumptions.
We have nothing material to add or to
draw attention to.
We have nothing material to add or to
draw attention to.
Under the Listing Rules we are required to review the Directors’ statement that they have carried out a robust assessment of the principal risks facing the
Group and the Directors’ Statement in relation to the longer-term viability of the Group. Our review was substantially less in scope than an audit and only
consisted of making inquiries and considering the Directors’ process supporting their statements; checking that the statements are in alignment with the
relevant provisions of the Code; and considering whether the statements are consistent with the knowledge acquired by us in the course of performing
our audit. We have nothing to report having performed our review.
Centrica plc Annual Report and Accounts 2016
105
What an audit of Financial Statements involves
An audit involves obtaining evidence about the amounts and
disclosures in the Financial Statements sufficient to give reasonable
assurance that the Financial Statements are free from material
misstatement, whether caused by fraud or error. This includes
an assessment of:
• whether the accounting policies are appropriate to the
Group’s and the parent Company’s circumstances and
have been consistently applied and adequately disclosed;
• the reasonableness of significant accounting estimates
made by the Directors; and
• the overall presentation of the Financial Statements.
We primarily focus our work in these areas by assessing the
Directors’ judgements against available evidence, forming our
own judgements, and evaluating the disclosures in the
Financial Statements.
We test and examine information, using sampling and other
auditing techniques, to the extent we consider necessary to
provide a reasonable basis for us to draw conclusions. We obtain
audit evidence through testing the effectiveness of controls,
substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information
in the Annual Report to identify material inconsistencies with the
audited financial statements and to identify any information that is
apparently materially incorrect based on, or materially inconsistent
with, the knowledge acquired by us in the course of performing the
audit. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.
With respect to the Strategic Report and Directors’ and Corporate
Governance Report, we consider whether those reports include
the disclosures required by applicable legal requirements.
Charles Bowman
(Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
London
23 February 2017
GOVERNANCE
INDEPENDENT AUDITORS’ REPORT
Independent Auditors’ Report
continued
Adequacy of accounting records and information
and explanations received
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
• we have not received all the information and explanations we
require for our audit; or
• adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been
received from branches not visited by us; or
• the parent company financial statements and the part of the
Directors’ Remuneration Report to be audited are not in
agreement with the accounting records and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Directors’ Remuneration Report – Companies Act 2006 opinion
In our opinion, the part of the Directors’ Remuneration Report
to be audited has been properly prepared in accordance with
the Companies Act 2006.
Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report to you if,
in our opinion, certain disclosures of Directors’ remuneration
specified by law are not made. We have no exceptions to report
arising from this responsibility.
Corporate Governance Statement
Under the Listing Rules we are required to review the part of the
Corporate Governance Statement relating to ten further provisions
of the Code. We have nothing to report having performed
our review.
RESPONSIBILITIES FOR THE FINANCIAL STATEMENTS
AND THE AUDIT
Our responsibilities and those of the Directors
As explained more fully in the Directors’ Responsibilities Statement,
the Directors are responsible for the preparation of the Financial
Statements and for being satisfied that they give a true and
fair view.
Our responsibility is to audit and express an opinion on the
Financial Statements in accordance with applicable law and ISAs
(UK & Ireland). Those standards require us to comply with the
Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and
only for the parent Company’s members as a body in accordance
with Chapter 3 of Part 16 of the Companies Act 2006 and for
no other purpose. We do not, in giving these opinions, accept or
assume responsibility for any other purpose or to any other person
to whom this report is shown or into whose hands it may come
save where expressly agreed by our prior consent in writing.
106
STRATEGIC REPORTFINANCIAL STATEMENTSSHAREHOLDER INFORMATION FINANCIAL STATEMENTS
Financial
Statements
108 Group Financial Statements
112 Notes to the Financial Statements
General information
112 1 Summary of significant new accounting policies
and reporting changes
113 2 Centrica specific accounting measures
114 3 Critical accounting judgements and key sources
of estimation uncertainty
Group Income Statement (including Dividends)
118 4 Segmental analysis
124 5 Costs of operations
125 6 Share of results of joint ventures and associates
126 7 Exceptional items and certain re-measurements
129 8 Net finance cost
129 9 Taxation
132 10 Earnings per ordinary share
133 11 Dividends
Group Balance Sheet
133 12 Acquisitions and disposals
137 13 Property, plant and equipment
138 14 Interests in joint ventures and associates
139 15 Other intangible assets and goodwill
141 16 Deferred tax liabilities and assets
142 17 Trade and other receivables
143 18 Inventories
144 19 Derivative financial instruments
145 20 Trade and other payables
146 21 Provisions for other liabilities and charges
147 22 Post retirement benefits
151 23 Commitments and contingencies
Capital structure and financing
153 24 Sources of finance
157 25 Share capital
Post-balance sheet events
157 26 Events after the balance sheet date
Supplementary information
158 S1 General information
158 S2 Summary of significant accounting policies
169 S3 Financial risk management
174 S4 Other equity
175 S5 Hedge accounting
176 S6 Fair value of financial instruments
179 S7 Fixed-fee service and insurance contracts
180 S8 Related party transactions
180 S9 Auditors’ remuneration
181 S10 Related undertakings
190 Company Financial Statements
192 Notes to the Company Financial Statements
201 Gas and Liquids Reserves (Unaudited)
202 Five Year Summary (Unaudited)
203 Ofgem Consolidated Segmental Statement
Centrica plc Annual Report and Accounts 2016
107
Group Income Statement
Year ended 31 December
Group revenue
Cost of sales before exceptional items and
certain re-measurements
Re-measurement of energy contracts
Cost of sales
Gross profit
Operating costs before exceptional items
Exceptional items – restructuring costs
Exceptional items – impairments
Exceptional items – impairment write-backs
Exceptional items – net gain on disposal
Exceptional items – other
Operating costs
Share of profits/(losses) of joint ventures and
associates, net of interest and taxation
Group operating profit/(loss)
Financing costs
Investment income
Net finance cost
Profit/(loss) before taxation
Taxation on profit/(loss)
Profit/(loss) for the year
Attributable to:
Owners of the parent
Non-controlling interests
Earnings per ordinary share
Basic
Diluted
Interim dividend paid per ordinary share
Final dividend proposed per ordinary share
Business
performance
£m
27,102
Exceptional
items and certain
re-measurements
£m
–
Notes
4(b)
–
1,058
1,058
1,058
–
(228)
(176)
161
101
131
(11)
(28)
1,019
–
–
–
1,019
(242)
777
777
–
(22,711)
–
(22,711)
4,391
(3,054)
–
–
–
–
–
(3,054)
130
1,467
(337)
37
(300)
1,167
(282)
885
895
(10)
5
7
5
5
7
7
7
7
7
5
6, 7
4(c)
8
8
7, 9
10
10
11
11
Business
performance
£m
27,971
Exceptional
items and certain
re-measurements
£m
–
(23,734)
–
(23,734)
4,237
(3,039)
–
–
–
–
–
(3,039)
200
1,398
(334)
55
(279)
1,119
(286)
833
863
(30)
–
116
116
116
–
–
(2,284)
16
–
(90)
(2,358)
(13)
(2,255)
–
–
–
(2,255)
538
(1,717)
(1,610)
(107)
2016
Results for
the year
£m
27,102
(22,711)
1,058
(21,653)
5,449
(3,054)
(228)
(176)
161
101
131
(3,065)
102
2,486
(337)
37
(300)
2,186
(524)
1,662
1,672
(10)
Pence
31.4
31.2
3.60
8.40
2015
Results for
the year
£m
27,971
(23,734)
116
(23,618)
4,353
(3,039)
–
(2,284)
16
–
(90)
(5,397)
187
(857)
(334)
55
(279)
(1,136)
252
(884)
(747)
(137)
Pence
(14.9)
(14.9)
3.57
8.43
The notes on pages 112 to 189 form part of these Financial Statements.
108
108
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS
Group Statement of Comprehensive Income
Year ended 31 December
Profit/(loss) for the year
Other comprehensive income/(loss):
Items that will be or have been recycled to the Group Income Statement:
Gains on revaluation of available-for-sale securities, net of taxation
Transfer of available-for-sale reserve gains to Income Statement
Net gains on cash flow hedges
Transferred to income and expense on cash flow hedges
Transferred to assets and liabilities on cash flow hedges
Taxation on cash flow hedges
Exchange differences on translation of foreign operations
Share of other comprehensive (loss)/income of joint ventures and associates, net of taxation
Items that will not be recycled to the Group Income Statement:
Net actuarial losses on defined benefit pension schemes
Exchange (loss)/gain on translation of actuarial reserve
Taxation on net actuarial losses on defined benefit pension schemes
Share of other comprehensive income/(loss) of joint ventures and associates, net of taxation
Other comprehensive loss net of taxation
Total comprehensive income/(loss) for the year
Attributable to:
Owners of the parent
Non-controlling interests
Notes
2016
£m
1,662
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S10
8
(5)
161
(129)
(4)
(3)
25
549
(4)
573
(1,174)
(7)
194
(987)
65
(349)
1,313
1,287
26
Group Statement of Changes in Equity
1 January 2015
Total comprehensive loss
Employee share schemes
Scrip dividend
Dividends paid to equity holders (note 11)
Taxation on share-based payments
31 December 2015
Total comprehensive income
Employee share schemes
Scrip dividend
Dividends paid to equity holders (note 11)
Distributions to non-controlling interests
Issue of share capital
31 December 2016
Share
capital
(note 25)
£m
311
–
–
6
–
–
317
–
–
4
–
–
21
342
Share
premium
£m
931
–
–
204
–
–
1,135
–
–
121
–
–
673
1,929
Retained
earnings
£m
1,825
(747)
2
–
(598)
–
482
1,672
1
–
(651)
–
–
1,504
Other
equity
(note S4)
£m
(332)
(480)
58
–
–
(2)
(756)
(385)
32
–
–
–
–
(1,109)
Non-controlling
interests
(note S10)
£m
336
(172)
–
–
–
–
164
26
–
–
–
(12)
–
178
Total
£m
2,735
(1,227)
60
210
(598)
(2)
1,178
1,287
33
125
(651)
–
694
2,666
The notes on pages 112 to 189 form part of these Financial Statements.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
2015
£m
(884)
5
–
20
(12)
7
(6)
9
(256)
3
(239)
(321)
3
50
(268)
(8)
(515)
(1,399)
(1,227)
(172)
Total
equity
£m
3,071
(1,399)
60
210
(598)
(2)
1,342
1,313
33
125
(651)
(12)
694
2,844
109
109
Group Balance Sheet
Non-current assets
Property, plant and equipment
Interests in joint ventures and associates
Other intangible assets
Goodwill
Deferred tax assets
Trade and other receivables
Derivative financial instruments
Retirement benefit assets
Securities
Current assets
Trade and other receivables
Inventories
Derivative financial instruments
Current tax assets
Securities
Cash and cash equivalents (i)
Assets of disposal groups classified as held for sale
Total assets
Current liabilities
Derivative financial instruments
Trade and other payables
Current tax liabilities
Provisions for other liabilities and charges
Bank overdrafts, loans and other borrowings (i)
Liabilities of disposal groups classified as held for sale
Non-current liabilities
Deferred tax liabilities
Derivative financial instruments
Trade and other payables
Provisions for other liabilities and charges
Retirement benefit obligations
Bank overdrafts, loans and other borrowings
Total liabilities
Net assets
Share capital
Share premium
Retained earnings
Other equity
Total shareholders’ equity
Non-controlling interests
Total shareholders’ equity and non-controlling interests
31 December
2016
Notes
£m
31 December
2015
(restated) (i)
£m
1 January
2015
(restated) (i)
£m
13
14
15
15
16
17
19
22(d)
24
17
18
19
24
24
12(c)
19
20
21
24
12(c)
16
19
20
21
22(d)
24
25
S4
S10
5,298
1,697
1,769
2,614
356
66
582
–
219
12,601
5,102
372
1,291
241
13
2,036
9,055
238
9,293
21,894
(1,100)
(5,525)
(355)
(457)
(398)
(7,835)
(42)
(7,877)
(245)
(493)
(69)
(3,099)
(1,137)
(6,130)
(11,173)
(19,050)
2,844
342
1,929
1,504
(1,109)
2,666
178
2,844
4,629
1,839
1,775
2,049
497
61
440
91
233
11,614
4,905
395
936
126
11
1,158
7,531
13
7,544
19,158
(1,460)
(5,034)
(389)
(396)
(773)
(8,052)
(46)
(8,098)
(98)
(508)
(70)
(2,839)
(210)
(5,993)
(9,718)
(17,816)
1,342
317
1,135
482
(756)
1,178
164
1,342
6,377
2,395
1,991
2,609
354
87
313
185
263
14,574
6,226
555
617
88
11
775
8,272
–
8,272
22,846
(1,565)
(5,667)
(348)
(395)
(1,789)
(9,764)
–
(9,764)
(663)
(588)
(83)
(3,203)
(123)
(5,351)
(10,011)
(19,775)
3,071
311
931
1,825
(332)
2,735
336
3,071
(i)
Cash and cash equivalents and current bank overdrafts, loans and other borrowings have been restated for 2015. An opening balance sheet for 2015 has been presented in accordance
with the requirements of IAS 1: ‘Presentation of financial statements’. See note 1 for further information.
The Financial Statements on pages 108 to 189, of which the notes on pages 112 to 189 form part, were approved and authorised for
issue by the Board of Directors on 23 February 2017 and were signed below on its behalf by:
Iain Conn
Group Chief Executive
Jeff Bell
Group Chief Financial Officer
110
110
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS
Group Cash Flow Statement
Year ended 31 December
Group operating profit/(loss) including share of results of joint ventures and associates
Less share of profit of joint ventures and associates, net of interest and taxation
Group operating profit/(loss) before share of results of joint ventures and associates
Add back/(deduct):
Depreciation, amortisation, write-downs and impairments
Profit on disposals
Decrease in provisions
Defined benefit pension service cost and contributions
Employee share scheme costs
Unrealised gains arising from re-measurement of energy contracts
Operating cash flows before movements in working capital
Decrease in inventories
Decrease in trade and other receivables
Increase/(decrease) in trade and other payables
Operating cash flows before payments relating to taxes, interest and exceptional charges
Taxes paid
Payments relating to exceptional charges
Net cash flow from operating activities
Purchase of businesses, net of cash acquired
Sale of businesses
Purchase of property, plant and equipment and intangible assets
Sale of property, plant and equipment and intangible assets
Investments in joint ventures and associates
Dividends received from joint ventures and associates
Repayments of loans to, and disposal of investments in, joint ventures and associates
Interest received
Sale of securities
Net cash flow from investing activities
Issue and surrender of ordinary share capital, including issue for share awards
Payments for own shares
Distribution to non-controlling interests
Financing interest paid
Repayment of borrowings and finance leases
Cash received from borrowings, net of linked deposit
Equity dividends paid
Net cash flow from financing activities
Net increase in cash and cash equivalents
Cash and cash equivalents including overdrafts at 1 January
Effect of foreign exchange rate changes
Cash and cash equivalents including overdrafts at 31 December
Included in the following line of the Group Balance Sheet:
Cash and cash equivalents
Overdrafts included within current bank overdrafts, loans and other borrowings
The notes on pages 112 to 189 form part of these Financial Statements.
Notes
6
9(d)
4(e)
14(a)
24(c)
S4
24(c)
24(c)
24(c)
24(c)
2016
£m
2,486
(102)
2,384
1,068
(126)
(32)
(179)
46
(737)
2,424
90
221
140
2,875
(206)
(273)
2,396
(335)
35
(829)
13
(17)
117
94
91
28
(803)
694
(17)
(10)
(204)
(477)
–
(532)
(546)
1,047
860
53
1,960
2,036
(76)
2015
£m
(857)
(187)
(1,044)
3,482
(14)
(2)
(131)
45
(12)
2,324
138
769
(604)
2,627
(349)
(81)
2,197
(79)
8
(970)
9
(13)
180
190
38
26
(611)
28
(11)
–
(311)
(1,650)
1,000
(387)
(1,331)
255
621
(16)
860
1,158
(298)
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
111
111
Notes to the Financial Statements
Notes to the Financial Statements provide additional information
required by statute, accounting standards or Listing Rules to explain
a particular feature of the consolidated Financial Statements.
The notes to these Financial Statements focus on areas that
are key to understanding our business. Additional information
that we are required to disclose by accounting standards or
regulation is disclosed in the Supplementary Information (notes
S1 to S10).
In addition, for clarity, each note begins with a simple introduction
outlining its purpose.
1. SUMMARY OF SIGNIFICANT NEW ACCOUNTING POLICIES
AND REPORTING CHANGES
This section details new accounting standards, amendments
to standards and interpretations, whether these are effective
in 2016 or later years, and if and how these are expected
to impact the financial position and performance of the Group.
The principal accounting policies applied in the preparation of these
consolidated Financial Statements are set out below and in the
Supplementary Information (note S2). Unless otherwise stated,
these policies have been consistently applied to the years presented.
(a) Basis of preparation
The consolidated Financial Statements have been prepared in
accordance with International Financial Reporting Standards (IFRS)
adopted by the European Union (EU) and therefore comply with
Article 4 of the EU IAS Regulation and the Companies Act 2006.
The consolidated Financial Statements have been prepared on
the historical cost basis except for derivative financial instruments,
available-for-sale financial assets, financial instruments designated
at fair value through profit or loss on initial recognition, and the assets
of the Group’s defined benefit pension schemes that have been
measured at fair value and the liabilities of the Group’s defined benefit
pension schemes that have been measured using the projected unit
credit valuation method. The carrying values of recognised assets
and liabilities that are hedged items in fair value hedges, and are
otherwise carried at cost, are adjusted to record changes in the
fair values attributable to the risks that are being hedged.
The preparation of financial statements in conformity with IFRS,
as adopted by the EU, requires the use of certain critical accounting
estimates. It requires management to exercise its judgement in the
process of applying the Group’s accounting policies. The areas
involving a higher degree of judgement or complexity and areas
where assumptions and estimates are significant to the consolidated
Financial Statements are described in notes 2 and 3.
(b) Standards, amendments and interpretations
effective or adopted in 2016
From 1 January 2016, the following standards and amendments
are effective in the consolidated Group Financial Statements.
Their first time adoption does not have a material impact on
the consolidated Group Financial Statements:
● Amendment to IAS 1: ‘Presentation of financial statements’
related to the disclosure initiative;
● Amendment to IAS 16: ‘Property, plant and equipment’ and IAS
38: ‘Intangible assets’ related to the clarification of acceptable
methods of depreciation and amortisation;
● Amendment to IAS 19: ‘Employee benefits’ related to employee
contributions to defined benefit plans;
● ‘Annual Improvement Project 2010-2012’; and
● ‘Annual Improvement Project 2012-2014’.
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From 1 January 2016, an amendment to IFRS 11: ‘Joint arrangements’
on the acquisitions of interests in joint operations is effective. This
amendment clarifies that an acquisition of a joint operation that meets
the definition of a business is accounted for in accordance with IFRS 3:
‘Business combinations’. This will lead to a change to the Group’s
current accounting policy for this type of acquisition. However, the
amendment is only applicable prospectively for acquisitions on or after
1 January 2016 and therefore the accounting for acquisitions prior to
this date has not been restated. As these accounting requirements
apply to non-recurring transactions whose size may vary, the Group
cannot quantify the impact that the amendment to this standard will
have in the future.
(c) Standards and amendments that are issued but not
yet applied by the Group
The Group has not yet applied the following standards and
amendments as these are not yet effective in the consolidated
Group Financial Statements, although they have been endorsed
by the EU and will be effective from 1 January 2018:
● IFRS 9: ‘Financial instruments’; and
● IFRS 15: ‘Revenue from contracts with customers’.
Management has established and progressed separate projects
to oversee the implementation of both standards but a detailed
and complete quantitative assessment of the impact upon transition
has not been finalised yet.
Management’s preliminary assessment of the impact of IFRS 9 was
that it would not have a material impact on the Group’s consolidated
Financial Statements. The more detailed reviews performed by the
business in 2016 have continued to corroborate this initial
assessment. To date, given the nature of the Group’s financial
instruments held and/or issued, limited changes to the classification
and measurement of financial instruments have been identified. Initial
reviews have been performed across the business to determine the
impact of the change from the incurred credit loss model to the
expected credit loss model for impairment. Further work is required
in selected areas but to date, no significant changes have been
identified. The impact of the hedge accounting requirements of the
standard, with certain exceptions, will be applied prospectively from
1 January 2018. Whilst the requirements for hedge accounting are
simplified in IFRS 9, the Group does not expect to hedge account
significantly more items because hedging strategies for the Group’s
commodity exposure are portfolio based and dynamic in nature.
Therefore, they may still not be eligible for hedge accounting and
even if they were, this would still require an excessive administrative
burden. Hence, with some limited exceptions, the majority of the
Group’s derivative financial instrument fair value movements are
expected to remain classified as certain re-measurements in the
Group Income Statement and separately reported, as detailed
in note 2. Further work will be conducted in 2017 to complete the
outstanding reviews and update the assessment for new financial
instruments entered into by the Group in 2017.
In relation to IFRS 15, management has made significant progress
in the assessment of the impact of the new standard on the Group.
During 2016, the Group’s business units have continued to review
the contractual arrangements that comprise their current revenue
streams to determine how IFRS 15 will impact the recognition
and disclosure of revenues from these arrangements. The work
performed to date has identified that, for the majority of the Group’s
revenue, the application of IFRS 15 will have no impact on the
current revenue recognition under IAS 18: ‘Revenue’.
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
1. SUMMARY OF SIGNIFICANT NEW ACCOUNTING POLICIES
AND REPORTING CHANGES
The principal reasons for this are:
● the majority of Energy Supply revenue relates to open-ended
customer contracts with no minimum quantities whereby the
Energy Supply business delivers the amount of energy required
by customers on demand. Under IFRS 15, it has been concluded
that the Supply business only has an enforceable right to bill for
consumption once the customer begins to consume energy;
● a portion of our Energy Services revenue is from fixed-fee service
contracts, which are within the scope of IFRS 4: ‘Insurance
contracts’ and consequently is not in the scope of IFRS 15.
Revenue from these contracts will be separately identified from
revenue in the scope of IFRS 15; and
● the majority of the production from our upstream assets (for
example Exploration & Production gas producing fields, Central
Power Generation gas fired power stations and sales of power
from the Group’s associate investment in Nuclear) is transferred
to the Group’s Energy Marketing & Trading segment and is sold
in the market using trades in the scope of IAS 39: ‘Financial
instruments: recognition and measurement’. These transactions
are therefore outside the scope of IFRS 15. Revenue from these
contracts will also be separately identified from revenue in the
scope of IFRS 15.
The revenue streams where differences have been identified to date
are not significant. Further work is still required in 2017 to complete
the reviews of certain revenue streams, for example for the recently
acquired Neas Energy business and a number of less material
revenue streams. Additionally, as the business develops new
product offerings, the IFRS 15 implications of these will also
need to be reviewed.
Separately, there will be changes to the amounts deferred on the
balance sheet related to costs to obtain contracts under IFRS 15
when compared to the current treatment. The exact change in the
amount deferred has yet to be formally quantified but is in the
process of being assessed.
The necessary processes to capture all of the adjustments and
additional disclosures required under IFRS 15 will be put into place
during 2017.
The following standards and amendments are not yet effective
in the consolidated Group Financial Statements and have not yet
been endorsed by the EU:
● Amendment to IAS 7: ‘Statement of cash flows’ related to the
disclosure initiative. Effective from 1 January 2017;
● Amendment to IAS 12: ‘Income taxes’. Effective from
1 January 2017;
● Amendment to IFRS 2: ‘Classification and measurement of
share-based payment transactions’. Effective from
1 January 2018;
● Amendment to IFRS 15: ‘Revenue from contracts with
customers’ clarifications. Effective from 1 January 2018;
● IFRS 16: ‘Leases’. Effective from 1 January 2019;
● ‘Annual Improvement Project 2014-2016’. Effective from
1 January 2017 and 1 January 2018 depending on amendments
to different standards; and
● IFRIC Interpretation 22: ‘Foreign currency transactions and
advance consideration’. Effective from 1 January 2018.
Management does not anticipate that the application of the
amendments to IAS 7, IAS 12, IFRS 2, IFRIC 22 and the ‘Annual
Improvement Project 2014-2016’ will have a material impact on
the amounts reported and disclosed. The clarification of IFRS 15
has been considered as part of the wider IFRS 15 project.
The implementation of IFRS 16, which was issued in January 2016,
is likely to have a significant impact on the Group’s future consolidated
Financial Statements as all leases will be recognised on the balance
sheet (with the exception of short-term and immaterial leases).
A project has been established to oversee the implementation
of this standard. Initial assessments of the impact of the standard
are ongoing. The majority of the implementation work will take place
in 2017 and therefore it has not been practicable at this stage
to quantify the full effect it will have on the Group’s consolidated
Financial Statements upon transition.
(d) Restatements
In March 2016, the IFRS Interpretations Committee issued an
agenda decision regarding the treatment of offsetting and cash-
pooling arrangements in accordance with IAS 32: ‘Financial
instruments: presentation’. This provided additional guidance on
when bank overdrafts in cash-pooling arrangements would meet
the requirement for offsetting in accordance with IAS 32. Following
this additional guidance, the Group has reviewed its cash-pooling
arrangements and has revised its presentation of bank overdrafts
on the Group Balance Sheet and now shows £76 million of bank
overdrafts within current bank overdrafts, bank loans and other
borrowings. Comparatives at 31 December 2015 have been restated
by £298 million. The impact on the 2015 opening balance sheet was
£154 million, and a third balance sheet has been presented on the
Group Balance Sheet in accordance with IAS 1.
Following the conclusion of the strategic review in 2015, new reporting
segments have been established reflecting the implementation of the
Group’s new structure. The new segmental structure and the new
adjusted operating cash flow measures are consistent with the
internal reporting to, and regular review by, the Group’s Executive
Committee (which is the entity’s Chief Operating Decision Maker
as defined by IFRS 8: ‘Operating segments’) for the purposes
of evaluating segmental performance and allocating resources.
In accordance with IFRS 8, the segmental analysis disclosures in
note 4 have been restated accordingly. Additionally, the goodwill
allocation to cash generating units has been amended following the
change in the segmental structure, reflecting the level at which goodwill
is monitored for internal management purposes. See note 15(b).
2. CENTRICA SPECIFIC ACCOUNTING MEASURES
This section sets out the Group’s specific accounting measures
applied in the preparation of the consolidated Financial
Statements. These measures enable the users of the accounts
to understand the Group’s underlying and statutory business
performance separately.
(a) Use of adjusted performance measures
The Directors believe that reporting adjusted profit, adjusted
earnings per share and adjusted operating cash flow provides
additional useful information on business performance and underlying
trends. These measures are used for internal performance purposes.
The adjusted measures in this report are not defined terms under
IFRS and may not be comparable with similarly titled measures
reported by other companies.
The measure of operating profit used by management to evaluate
segment performance is adjusted operating profit. Adjusted
operating profit is defined as operating profit before:
● exceptional items; and
● certain re-measurements;
but including:
● the Group’s share of results from joint ventures and associates
before interest and taxation.
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Notes to the Financial Statements
2. CENTRICA SPECIFIC ACCOUNTING MEASURES
Note 4 contains analysis of adjusted operating profit by segment
and a reconciliation of adjusted operating profit to operating profit
after exceptional items and certain re-measurements. Note 4 also
details an analysis of adjusted operating profit after taxation by
segment and a reconciliation to the statutory results for the year.
Adjusted operating profit after taxation is defined as segment
operating profit after taxation, before exceptional items and certain
re-measurements. This includes the operating results of equity-
accounted interests, net of associated taxation, before interest
and associated taxation.
Adjusted earnings is defined as earnings before:
● exceptional items net of taxation; and
● certain re-measurements net of taxation.
A reconciliation of earnings is provided in note 10.
Adjusted operating cash flow is used by management to assess the
cash generating abilities of each segment. Adjusted operating cash
flow is defined as net cash flow from operating activities before:
● payments relating to exceptional items;
● deficit reduction payments made to the UK defined benefit
pension schemes via Centrica’s Scottish Limited Partnership
entities; and
● movements in variation margin and cash collateral that are
included in net debt;
but including:
● dividends received from joint ventures and associates.
Payments related to exceptional items are excluded since
the Directors do not consider these to represent underlying
business performance. Deficit reduction payments and movements
in variation margin and cash collateral are excluded since the
Directors do not consider these to represent the operating cash
flows generated by underlying business performance in the current
year, since they are predominantly triggered by wider market
factors and, in the case of variation margin and cash collateral,
this represents a timing difference. Dividends received from joint
ventures and associates are considered by the Directors to
represent operating cash flows generated by the Group’s
operations that are structured in this manner.
(b) Exceptional items and certain re-measurements
The Group reflects its underlying financial results in the ‘business
performance’ column of the Group Income Statement. To be able
to provide readers with this clear and consistent presentation, the
effects of ‘certain re-measurements’ of financial instruments, and
‘exceptional items’, are reported in a different column in the Group
Income Statement.
The Group is an integrated energy business. This means that it
utilises its knowledge and experience across the gas and power
(and related commodity) value chains to make profits across the
core markets in which it operates. As part of this strategy, the
Group enters into a number of forward energy trades to protect
and optimise the value of its underlying production, generation,
storage and transportation assets (and similar capacity or off-take
contracts), as well as to meet the future needs of our customers
(downstream demand). These trades are designed to reduce the
risk of holding such assets, contracts or downstream demand and
are subject to strict risk limits and controls.
Primarily because some of these trades include terms that permit
net settlement (they are prohibited from being designated as ‘own
use’), the rules within IAS 39 require them to be individually fair
valued. Fair value movements on these commodity derivative trades
do not reflect the underlying performance of the business because
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they are economically related to our upstream assets, capacity/off-
take contracts or downstream demand, which are typically not fair
valued. Therefore, these certain re-measurements are reported
separately and are subsequently reflected in business performance
when the underlying transaction or asset impacts profit or loss.
The arrangements discussed above and reflected as certain
re-measurements are all managed separately from proprietary
energy trading activities where trades are entered into speculatively
for the purpose of making profits in their own right. These
proprietary trades are included in the business performance
column (in the results before certain re-measurements).
Exceptional items are those items that, in the judgement of the
Directors, need to be disclosed separately by virtue of their nature,
size or incidence. Again, to ensure the business performance
column reflects the underlying results of the Group, these
exceptional items are also reported in a separate column
in the Group Income Statement. Items that may be considered
exceptional in nature include disposals of businesses or significant
assets, business restructurings, significant onerous contract
charges and asset write-downs/impairments.
3. CRITICAL ACCOUNTING JUDGEMENTS
AND KEY SOURCES OF ESTIMATION UNCERTAINTY
This section sets out the key areas of judgement and estimation
that have the most significant effect on the amounts recognised
in the consolidated Financial Statements.
(a) Critical judgements in applying the Group’s
accounting policies
Such key judgements include the following:
● the presentation of selected items as exceptional
(see notes 2 and 7);
● the use of adjusted profit, adjusted earnings per
share and adjusted operating cash flow measures (see notes 2, 4
and 10); and
● the classification of energy procurement contracts as
derivative financial instruments and presentation as
certain re-measurements (see notes 2, 7 and 19).
In addition, management has made the following key judgements
in applying the Group’s accounting policies that have the most
significant effect on the consolidated Group Financial Statements.
Wind farm disposals
In prior years, the profits and losses arising on disposals of equity
interests in wind farms were recognised within the business
performance column of the Group Income Statement as part of the
Central Power Generation segment. These divestments were in line
with the Group’s established wind farm strategy to realise value,
share risk and reduce our capital requirements as individual
projects developed, which involved bringing in partners at an
appropriate stage or full disposal.
In July 2015, the Group announced its intention to exit its 245MW
portfolio of wind assets. During the current period, the Group
disposed of its investment in GLID Wind Farms TopCo Limited
(GLID), which owns Glens of Foudland, Lynn and Inner Dowsing
wind farms, as part of this strategy (see note 12). The profit on
disposal of £73 million has been classified as an exceptional item
in the Group Income Statement since the Directors judge the exit
from the wind business to be non-recurring in nature and distinct
from the Group’s established wind farm strategy. The disposal of
Lincs Wind Farm Limited announced on 13 January 2017 will be
treated in the same way in 2017.
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
3. CRITICAL ACCOUNTING JUDGEMENTS
AND KEY SOURCES OF ESTIMATION UNCERTAINTY
Leases – third-party power station tolling arrangements
The Group had two long-term power station tolling contracts that
were considered leases during 2016: (i) Spalding in the UK and
(ii) Rijnmond in the Netherlands (although the Rijnmond tolling
agreement was terminated with effect from 1 July 2016).
The arrangements provided Centrica with the right to nominate
100% of the plant capacity for the duration of the contracts in
return for a mix of capacity payments and operating payments
based on plant availability.
The Spalding contract runs until 2021 and Centrica holds an
option to extend the tolling arrangement for a further eight years,
exercisable by 30 September 2020. If extended, Centrica is granted
an option to purchase the station at the end of this further period.
Management has determined that the arrangement should be
accounted for as a finance lease, as the lease term was judged to
be substantially all of the economic life of the power station and the
present value of the minimum lease payments at the inception date
of the arrangement amounted to substantially all of the fair value of
the power station at that time. In May 2016, a number of revisions to
this tolling arrangement were agreed; however this has not changed
the accounting assessment of the contract as a finance lease.
Details of the interest charges, finance lease asset and finance
lease payable are included in notes 8, 13 and 24 respectively.
Prior to its termination, the Rijnmond contract ran until 2030 and
Centrica did not have the right to extend the agreement or any
option to purchase the plant. Management had determined that
the arrangement should be accounted for as an operating lease,
as the lease term was not judged to be substantially all of the
economic life of the power station and the present value of the
minimum lease payments at the inception date of the arrangement
did not amount to substantially all of the fair value of the power
station at that time. See note 7 for further details of the impact
of the termination of the contract.
Business combinations and asset acquisitions
Classification of an acquisition as a business combination
or an asset acquisition depends on whether the assets acquired
constitute a business, which can be a complex judgement. Whether
an acquisition is classified as a business combination or asset
acquisition can have a significant impact on the entries made
on and after acquisition.
Business combinations and acquisitions of associates and joint
ventures require a fair value exercise to be undertaken to allocate
the purchase price (cost) to the fair value of the acquired identifiable
assets, liabilities, contingent liabilities and goodwill.
As a result of the nature of fair value assessments in the energy
industry, this purchase price allocation exercise requires subjective
judgements based on a wide range of complex variables at a point
in time. Management uses all available information to make the fair
value determinations.
During the year the Group has made two significant acquisitions:
ENER-G Cogen and Neas Energy. These acquisitions have been
accounted for as business combinations as set out in note 12(a).
Consolidation of the CQ Energy Canada Partnership
The Suncor upstream acquisition in 2013 involved the formation
of the CQ Energy Canada Partnership (CQECP) to acquire Suncor
Energy’s North American gas and oil assets. CQECP is owned and
funded by the Group and Qatar Petroleum International (QPI) on a
60:40 basis. The partnership provides the Group with the ability to
control the business plan and budgets and consequently the
general operation of the assets. Accordingly, this arrangement has
been assessed under IFRS 10: ‘Consolidated financial statements’
and the conclusion has been reached that the Group has power
over the relevant activities of CQECP. This entity has been fully
consolidated into the Group’s Financial Statements and QPI’s
ownership share is represented as a non-controlling interest.
Disposal groups classified as held for sale
The Canadian Exploration & Production business, which is subject
to a sale process, was not considered to meet the conditions
under IFRS 5: ‘Non-current assets held for sale and discontinued
operations’ to be classified as held for sale at the balance sheet
date. Although plans to sell the business had been announced and
negotiations with buyers had commenced, significant uncertainty
remained such that it was not considered highly probable at the
balance sheet date that any sale would be completed within one year.
On 13 January 2017, the Group announced an agreement to sell
its remaining wind farm interest, Lincs Wind Farm Limited, with
completion occurring on 17 February 2017. The investment in the
wind farm and associated shareholder loan have been classified
as a disposal group held for sale at the year end, since a sale was
judged to be highly probable at that date, which was subsequently
confirmed by the announcement.
The Group’s Exploration & Production assets in Trinidad and
Tobago have also been classified as a disposal group held for
sale following an announcement on 30 November 2016 of the sale.
See note 12(c) for further details.
Uncertain taxation provisions
The Group operates internationally in territories with different and
complex tax codes.
Management exercises judgement in relation to the level of
provision required for uncertain tax outcomes. There are a number
of tax positions not yet agreed with the tax authorities where
different interpretations of legislation and commercial arrangements
could lead to a range of outcomes. Judgements are made for each
position having regard to the particular circumstances and advice
obtained.
Management also exercises judgement in assessing the availability
of suitable future taxable profits to support deferred tax asset
recognition. Further details of the Group’s tax position are provided
in notes 9 and 16.
Energy Company Obligation
The Energy Company Obligation (ECO) order requires UK-licensed
energy suppliers to improve the energy efficiency of domestic
households from 1 January 2013. Targets are set in proportion
to the size of historic customer bases. ECO phase 1 had a delivery
date of 31 March 2015. ECO phase 2 must be delivered by
31 March 2017. The Group continues to judge that it is not legally
obligated by this order until 31 March 2017 for ECO phase 2.
Accordingly, the costs of delivery are recognised as incurred,
when cash is spent or unilateral commitments made, resulting
in obligations that cannot be avoided.
In prior periods, the Group had entered into a number of
contractual arrangements and commitments, and issued a
public statement to underline its commitment to deliver a specific
proportion of the ECO requirements. Consequently, the Group’s
result had included the costs of these contractual arrangements
and commitment obligations.
Metering contracts
The Department of Energy and Climate Change (DECC) has
modified the UK gas and electricity supply licences requiring all
domestic premises to be fitted with compliant smart meters for
measuring energy consumption by 31 December 2020. The Group
has a number of existing rental contracts for non-compliant meters
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Notes to the Financial Statements
3. CRITICAL ACCOUNTING JUDGEMENTS
AND KEY SOURCES OF ESTIMATION UNCERTAINTY
that include penalty charges if these meters are removed from use
before the end of their deemed useful lives. The Group considers
that these contracts are not onerous until the meters have been
physically removed from use and, therefore, only recognises a
provision for penalty charges at this point.
In 2015, as part of the smart meter roll-out, the Group renewed
meter rental arrangements with third-parties. The Group assessed
that these are not leases because it does not have the right to
physically or operationally control the smart meters and other
parties also take a significant amount of the output from the assets.
(b) Key sources of estimation uncertainty
Revenue recognition – unread gas and electricity meters
Revenue for energy supply activities includes an assessment of
energy supplied to customers between the date of the last meter
reading and the year end (unread). Unread gas and electricity
comprises both billed and unbilled revenue. It is estimated through
the billing systems, using historical consumption patterns, on a
customer by customer basis, taking into account weather patterns,
load forecasts and the differences between actual meter reads
being returned and system estimates. Actual meter reads continue
to be compared to system estimates between the balance sheet
date and the finalisation of the accounts.
An assessment is also made of any factors that are likely to materially
affect the ultimate economic benefits that will flow to the Group,
including bill cancellation and re-bill rates. To the extent that the
economic benefits are not expected to flow to the Group, the value
of that revenue is not recognised. The judgements applied, and the
assumptions underpinning these judgements, are considered to be
appropriate. However, a change in these assumptions would have
an impact on the amount of revenue recognised.
Industry reconciliation process – cost of sales
Industry reconciliation procedures are required as differences arise
between the estimated quantity of gas and electricity the Group
deems to have supplied and billed customers, and the estimated
quantity industry system operators deem the individual suppliers,
including the Group, to have supplied to customers. The difference
in deemed supply is referred to as imbalance. The reconciliation
procedures can result in either a higher or a lower value of industry
deemed supply than has been estimated as being supplied to
customers by the Group, but in practice tends to result in a higher
value of industry deemed supply. The Group reviews the difference
to ascertain whether there is evidence that its estimate of amounts
supplied to customers is inaccurate or whether the difference arises
from other causes. The Group’s share of the resulting imbalance
is included within commodity costs charged to cost of sales.
Management estimates the level of recovery of imbalance that will
be achieved either through subsequent customer billing or through
developing industry settlement procedures.
Decommissioning costs
The estimated cost of decommissioning at the end of the
producing lives of gas and oil fields (including storage facility assets)
is reviewed periodically and is based on reserves, price levels and
technology at the balance sheet date. Provision is made for the
estimated cost of decommissioning at the balance sheet date.
The payment dates of total expected future decommissioning
costs are uncertain and dependent on the lives of the facilities,
but are currently anticipated to be incurred until 2066, with the
majority of the costs expected to be paid between 2020 and 2040.
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Significant judgements and estimates are also made about the
costs of decommissioning nuclear power stations and the costs
of waste management and spent fuel. These estimates impact the
carrying value of our Nuclear investment. Various arrangements and
indemnities are in place with the Secretary of State with respect to
these costs, as explained in note S2.
Gas and liquids reserves
The volume of proven and probable (2P) gas and liquids reserves
is an estimate that affects the unit of production method of
depreciating producing gas and liquids PP&E as well as being
a significant estimate affecting decommissioning and impairment
calculations. The factors impacting gas and liquids estimates,
the process for estimating reserve quantities and reserve
recognition is described on page 201.
The impact of a change in estimated 2P reserves is dealt
with prospectively by depreciating the remaining book value
of producing assets over the expected future production. If
2P reserves estimates are revised downwards, earnings could
be affected by higher depreciation expense or an immediate
write-down (impairment) of the asset’s book value.
Determination of fair values – energy derivatives
Fair values of energy derivatives are estimated by reference in part
to published price quotations in active markets and in part by using
valuation techniques. More detail on the assumptions used in
determining fair valuations of energy derivatives is provided in
note S6 and of the sensitivities to these assumptions in note S3.
Impairment of long-lived assets
The Group has several material long-lived assets, which are
assessed or tested for impairment at each reporting date in
accordance with the Group’s accounting policy as described in
note 7. The Group makes judgements and estimates in considering
whether the carrying amounts of these assets or cash generating
units (CGUs) are recoverable. The key assets that are subjected
to impairment tests are upstream gas and oil assets, power
generation assets, storage facility assets, Nuclear investment
(20% economic interest accounted for as an investment in
associate) and goodwill.
Exploration & Production gas and oil assets
The recoverable amount of the Group’s gas and oil assets is
determined by discounting the post-tax cash flows expected to be
generated by the assets over their lives taking into account those
assumptions that market participants would take into account when
assessing fair value. The cash flows are derived from projected
production profiles of each field, based predominantly on expected
2P reserves and take into account forward prices for gas and
liquids over the relevant period. Where forward market prices are
not available, prices are determined based on internal model inputs.
Considering the uncertainty with the disposal process of the
Group’s Canadian gas and oil assets, significant judgement was
required in determining the recoverable amount of the assets and
a range of possible outcomes exist. The recoverable amount is
particularly sensitive to the price assumptions made in the
impairment calculations and the outcome of the disposal process.
Further details of the assumptions used in determining the
recoverable amounts and the impairment reversals booked during
the year and sensitivity to the assumptions are provided in note 7.
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Pensions and other post employment benefits
The cost of providing benefits under defined benefit schemes is
determined separately for each of the Group’s schemes under the
projected unit credit actuarial valuation method. Actuarial gains and
losses are recognised in full in the period in which they occur. The
key assumptions used for the actuarial valuation are based on the
Group’s best estimate of the variables that will determine the
ultimate cost of providing post employment benefits. Further details,
including sensitivities to these assumptions, are provided in note 22.
Provisions for onerous contracts
The Group has entered into a number of commodity procurement
and capacity contracts related to specific assets in the ordinary
course of its business. Where the unavoidable costs of meeting the
obligations under these contracts exceed the associated expected
future net benefits, an onerous contract provision is recognised.
The calculation of these provisions will involve the use of estimates.
The key onerous provisions are as follows:
Spalding power station onerous contract provision
The onerous provision is calculated by taking the unavoidable
costs that will be incurred under the contract, excluding those that
are treated as minimum lease payments and included within the
Group’s finance lease liability, deducting any estimated revenues.
Further details of the release of the provision in 2016 are provided
in note 7.
European gas transportation capacity contracts
The onerous provision is calculated using capacity costs incurred
under the contracts, less any predicted income. The provision
calculation assumes that contracts for capacity in continental
Europe are onerous but those that enable gas to be transported
directly back into the UK may be necessary to achieve security of
supply in the future. Therefore, no provision has been recognised
relating to these latter contracts.
Direct Energy wind farm power purchase agreements
The onerous nature of the power purchase agreements is measured
using estimates relating to wind forecasts, forward curves for energy
prices, balancing costs and renewable energy certificates. Further
details of the release of the provision during the year are provided
in note 7.
Notes to the Financial Statements
3. CRITICAL ACCOUNTING JUDGEMENTS
AND KEY SOURCES OF ESTIMATION UNCERTAINTY
Power generation assets
The recoverable amount of the Group’s power generation assets
is calculated by discounting the pre-tax cash flows expected to be
generated by the assets and is dependent on views of forecast
power generation and forecast power, gas, carbon and capacity
prices (where applicable) and the timing and extent of capital
expenditure. Where forward market prices are not available, prices
are determined based on internal model inputs. Further details of
the impairment reversals booked during the year are provided in
note 7.
Storage facility assets
The recoverable amount of our operational storage facilities is
calculated by discounting the post-tax cash flows expected to
be generated by the assets based on predictions of seasonal gas
price spreads and shorter-term price volatilities and the value from
extracting cushion gas at the end of the field life less any related
capital and operating expenditure. Further details of the
impairments booked during the year and sensitivity to the
assumptions are provided in note 7.
Nuclear investment
The recoverable amount of the Nuclear investment is based on the
value of the existing UK nuclear fleet operated by EDF. The existing
fleet value is calculated by discounting post-tax cash flows derived
from the stations based on forecast power generation and power
prices, whilst taking account of planned outages and the possibility
of life extensions. Further details of the methodology and sensitivity
to the assumptions are provided in note 7.
Goodwill
Goodwill does not generate independent cash flows and accordingly
is allocated at inception to specific CGUs or groups of CGUs for
impairment testing purposes. The recoverable amounts of these
CGUs are derived from estimates of future cash flows (as described
in the asset classes above) and hence the goodwill impairment tests
are also subject to these key estimates. The results of these tests
may then be verified by reference to external market valuation data.
Further details on the assumptions used in determining the
recoverable amounts are provided in notes 7 and S2. Sensitivity to
the assumptions is also found in note 7.
Credit provisions for trade and other receivables
The methodology for determining provisions for credit losses on
trade and other receivables and the level of such provision is set
out in note 17. Although the provisions recognised are considered
appropriate, the use of different assumptions or changes in
economic conditions could lead to movements in the provisions
and therefore impact the Group Income Statement.
Following issues arising from the implementation of a new billing
system in UK Business in 2014, management has exercised
additional judgement regarding the appropriate level of provision
for these trade receivables. Changes in these judgements could
also lead to movements in the provisions and therefore impact
the Group Income Statement. Within UK Business, the volume of
gross billed debt outstanding fell to £612 million at the year end
compared to £894 million for the prior year. Within this, the balance
of debt greater than 12 months old increased to £242 million from
£221 million with an appropriate bad debt provision maintained.
Cash collected has exceeded billed revenue during the year by 8%.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
117
117
Notes to the Financial Statements
4. SEGMENTAL ANALYSIS
The Group’s operating segments are those used internally by management to run the business and make decisions. The Group’s
operating segments are based on products and services. The operating segments are also the Group’s reportable segments.
The Group’s results are discussed in the Business Review (pages 36 to 51).
(a) Segmental structure
The types of products and services from which each reportable segment derived its revenues during the year are detailed below:
Segment
Energy Supply & Services – UK & Ireland
Description
UK Home
UK Business
Ireland
(i) The supply of gas and electricity to residential customers in the UK; and (ii) the installation,
repair and maintenance of domestic central heating, plumbing and drains, gas appliances and
kitchen appliances, including the provision of fixed-fee maintenance/breakdown service and
insurance contracts in the UK.
The supply of gas and electricity and provision of energy-related services to business
customers in the UK.
(i) The supply of gas, electricity and energy management solutions to residential, commercial
and industrial customers in the Republic of Ireland; (ii) power generation in the Republic of
Ireland; and (iii) the repair and maintenance of domestic central heating in the Republic of
Ireland.
Energy Supply & Services – North America
NA Home
NA Business
Connected Home
Distributed Energy & Power
Energy Marketing & Trading
Exploration & Production
Central Power Generation
Centrica Storage
(i) The supply of gas and electricity to residential customers in North America; and
(ii) installation and maintenance of heating, ventilation and air conditioning (HVAC) equipment,
water heaters, solar power generating equipment and the provision of breakdown services,
including the provision of fixed-fee maintenance/breakdown service and insurance contracts
in North America.
(i) The supply of gas, electricity and energy-related services to business customers in North
America; and (ii) procurement, trading and optimisation of energy in North America.
The supply of energy efficiency solutions and new technologies to residential customers in all
geographies in which the Group operates.
The supply of energy efficiency solutions, flexible generation and new technologies to
commercial and industrial customers in all geographies in which the Group operates. Flexible
merchant generation is also provided to the UK system operator.
Trading and optimisation of energy in the UK and Europe.
Production and processing of gas and oil and the development of new fields to maintain
reserves in the UK, Europe and North America.
Generation of power from combined cycle gas turbines (CCGT), wind and nuclear assets in
the UK.
Gas storage in the UK.
118
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
4. SEGMENTAL ANALYSIS
(b) Revenue
Gross segment revenue represents revenue generated from the sale of products and services to both third parties and to other
reportable segments of the Group. Group revenue reflects only the sale of products and services to third parties.
Year ended 31 December
Energy Supply & Services – UK & Ireland
UK Home
UK Business
Ireland
Energy Supply & Services – North America
NA Home
NA Business
Connected Home
Distributed Energy & Power
Energy Marketing & Trading
Exploration & Production
Central Power Generation
Centrica Storage
Gross
segment
revenue
Less
inter-segment
revenue
2016
Group
revenue
£m
£m
£m
Gross
segment
revenue
(restated) (i)
£m
Less
inter-segment
revenue
(restated) (i)
£m
9,252
2,031
781
12,064
2,702
7,664
10,366
33
161
3,282
1,642
667
93
28,308
(8)
(1)
–
(9)
–
–
–
(8)
(2)
(88)
(871)
(209)
(19)
(1,206)
9,244
2,030
781
12,055
2,702
7,664
10,366
25
159
3,194
771
458
74
27,102
9,822
2,389
733
12,944
2,655
7,932
10,587
19
95
3,101
2,035
668
156
29,605
–
(2)
–
(2)
–
–
–
(4)
(3)
(144)
(1,206)
(225)
(50)
(1,634)
2015
Group
revenue
(restated) (i)
£m
9,822
2,387
733
12,942
2,655
7,932
10,587
15
92
2,957
829
443
106
27,971
The Group does not monitor and manage performance by geographic territory, but we provide below an analysis of revenue and
certain non-current assets by geography.
Year ended 31 December
UK
North America
Norway
Rest of the world
Revenue
(based on location of customer)
2015
£m
15,654
10,728
297
1,292
27,971
2016
£m
14,459
10,502
370
1,771
27,102
Non-current assets
(based on location of assets) (ii)
2015
£m
6,281
2,827
1,005
179
10,292
2016
£m
6,445
3,281
1,299
353
11,378
(i)
(ii)
Segmental revenue has been restated in the new reporting segments. See note 1 for further information.
Non-current assets include goodwill, other intangible assets, PP&E and interests in joint ventures and associates.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
119
119
Notes to the Financial Statements
4. SEGMENTAL ANALYSIS
(c) Operating profit before and after taxation
The measure of profit used by the Group is adjusted operating profit. Adjusted operating profit is operating profit before exceptional
items and certain re-measurements. This includes results of equity-accounted interests before interest and taxation.
This note also details adjusted operating profit after taxation. Both measures are reconciled to their statutory equivalents.
Adjusted operating profit/(loss)
2016
£m
810
50
46
906
93
221
314
(50)
(26)
161
187
75
(52)
1,515
(48)
1,467
(11)
1,058
2015
(restated) (i)
£m
880
(19)
30
891
77
246
323
(49)
(32)
66
95
128
37
1,459
(61)
1,398
(2,358)
116
(28)
(13)
2,486
(857)
Year ended 31 December
Energy Supply & Services – UK & Ireland
UK Home
UK Business
Ireland
Energy Supply & Services – North America
NA Home
NA Business
Connected Home
Distributed Energy & Power
Energy Marketing & Trading
Exploration & Production
Central Power Generation (ii)
Centrica Storage (iii)
Share of joint ventures’/associates’ interest and taxation
Operating profit before exceptional items and certain
re-measurements
Exceptional items (note 7)
Certain re-measurements included within gross profit (note 7)
Certain re-measurements of associates’ energy contracts (net of taxation)
(note 7)
Operating profit/(loss) after exceptional items and certain
re-measurements
Year ended 31 December
Adjusted operating profit after taxation (iv)
Impact of changes to UK corporation tax rates (note 9) (v)
Corporate and other taxation, and interest (net of taxation) (vi)
Business performance profit for the year
Exceptional items and certain re-measurements (net of taxation) (note 7)
Statutory profit/(loss) for the year
Adjusted operating profit/(loss)
after taxation
2015
(restated) (i)
£m
2016
£m
672
42
41
755
61
145
206
(40)
(20)
124
50
66
(53)
1,088
707
(16)
24
715
36
148
184
(39)
(17)
55
(2)
105
25
1,026
2016
£m
1,088
30
(233)
885
777
1,662
2015
£m
1,026
46
(239)
833
(1,717)
(884)
(i)
(ii)
Adjusted operating profit has been restated in the new reporting segments. See note 1 for further details.
The effective tax rate in the Central Power Generation segment is lower than the standard UK Corporation tax rate of 20% due to prior year tax adjustments and non-taxable income
in the segment’s associate’s profits.
(iii)
The effective tax rate in the Centrica Storage segment is lower than the standard UK Corporation tax rate of 20% due to the mix of profits and losses across upstream and downstream
activities, to which different tax rates apply (see note 9).
Segment operating profit after taxation includes loss of £5 million (2015: £27 million) attributable to non-controlling interests.
(iv)
(v)
(vi)
Includes £9 million (2015: £19 million) relating to equity accounted interests.
Includes joint ventures’/associates’ interest, net of associated taxation.
120
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
4. SEGMENTAL ANALYSIS
(d) Included within adjusted operating profit
Presented below are certain items included within adjusted operating profit, including further details of impairments of property, plant
and equipment and write-downs relating to exploration and evaluation assets.
Year ended 31 December
Energy Supply & Services – UK & Ireland
UK Home
UK Business
Ireland
Energy Supply & Services – North America
NA Home
NA Business
Connected Home
Distributed Energy & Power
Energy Marketing & Trading
Exploration & Production
Central Power Generation
Centrica Storage
Other (ii)
Share of results of joint
ventures and associates
before interest and taxation
2015
2016
(restated) (i)
£m
£m
Depreciation and impairments of
property, plant and equipment
2015
(restated) (i)
£m
2016
£m
Amortisation, write-downs and
impairments of intangibles
2015
2016
(restated) (i)
£m
£m
–
–
–
–
–
–
–
–
–
–
–
178
–
–
178
(1)
–
–
(1)
–
–
–
–
–
–
–
262
–
–
261
(51)
(2)
(2)
(55)
(6)
(2)
(8)
–
(6)
–
(578)
(27)
(36)
(27)
(737)
(52)
(2)
(1)
(55)
(5)
(1)
(6)
–
(2)
–
(753)
(33)
(33)
(11)
(893)
(111)
(11)
(9)
(131)
(49)
(39)
(88)
(6)
(9)
(11)
(25)
–
(1)
(17)
(288)
(90)
(10)
(6)
(106)
(42)
(47)
(89)
(2)
(1)
(16)
(77)
–
(1)
(13)
(305)
(i)
(ii)
The share of results of joint ventures and associates, the depreciation and impairments of property, plant and equipment and the amortisation, write-downs and impairments of intangibles
have been restated in the new reporting segments. See note 1 for further information.
The Other segment includes corporate functions, subsequently recharged.
Impairment of property, plant and equipment
During 2016, an £86 million impairment charge (2015: £4 million) was recognised in the Exploration & Production segment; a £3 million
impairment write-back (2015: £3 million impairment charge) was recognised in the Central Power Generation segment and a £1 million
impairment charge (2015: nil) was recognised in the Distributed Energy & Power segment, all within business performance.
Write-downs and impairments of intangible assets
During 2016, £19 million of write-downs (2015: £71 million) relating to exploration and evaluation assets were recognised in the
Exploration & Production segment and a £1 million impairment (2015: nil) of application software was recognised in the Ireland
segment, both within business performance.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
121
121
Notes to the Financial Statements
4. SEGMENTAL ANALYSIS
(e) Capital expenditure
Capital expenditure represents additions, other than assets acquired as part of business combinations, to property, plant and
equipment and intangible assets. Capital expenditure has been reconciled to the related cash outflow.
Year ended 31 December
Energy Supply & Services – UK & Ireland
UK Home
UK Business
Ireland
Energy Supply & Services – North America
NA Home
NA Business
Connected Home
Distributed Energy & Power
Energy Marketing & Trading
Exploration & Production
Central Power Generation
Centrica Storage
Other (ii)
Capital expenditure
Capitalised borrowing costs
Movements in payables and prepayments related to capital expenditure
Purchases of emissions allowances and renewable obligation certificates
Net cash outflow (iii)
Capital expenditure on property,
plant and equipment (note 13)
2016
£m
2015
(restated) (i)
£m
Capital expenditure on intangible
assets other than goodwill (note 15)
2015
(restated) (i)
£m
2016
£m
48
1
5
54
6
6
12
3
9
7
528
13
33
15
674
(61)
8
–
621
79
1
2
82
8
6
14
–
1
–
615
11
32
15
770
(46)
7
–
731
327
164
6
497
3
210
213
21
1
40
11
–
–
53
836
(1)
–
(627)
208
369
170
5
544
15
151
166
9
3
29
81
–
1
20
853
(2)
5
(617)
239
(i)
(ii)
(iii)
Both the capital expenditure on property, plant and equipment and the capital expenditure on intangible assets other than goodwill have been restated in the new reporting segments.
See note 1 for further details.
The Other segment relates to corporate assets.
The cash outflow relating to intangible assets includes £11 million (2015: £81 million) relating to exploration and evaluation of gas and oil assets.
122
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Notes to the Financial Statements
4. SEGMENTAL ANALYSIS
(f) Adjusted operating cash flow
Adjusted operating cash flow is used by management to assess the cash generating abilities of each segment. Adjusted operating
cash flow is net cash flow from operating activities before payments relating to exceptional items, deficit payments to the UK defined
benefit pension schemes, movements in variation margin and cash collateral that are included in net debt, but including dividends from
joint ventures and associates. This measure is reconciled to the net cash flow from operating activities.
Year ended 31 December
Energy Supply & Services – UK & Ireland
UK Home
UK Business
Ireland
Energy Supply & Services – North America
NA Home
NA Business
Connected Home
Distributed Energy & Power
Energy Marketing & Trading
Exploration & Production
Central Power Generation
Centrica Storage
Other (i)
Adjusted operating cash flow
Dividends received from joint ventures and associates
UK pension deficit payments
Payments relating to exceptional charges
Margin and cash collateral included in net debt
Net cash flow from operating activities
(i)
The Other segment includes corporate functions.
2016
£m
1,053
418
84
1,555
146
285
431
(58)
(15)
198
655
(1)
(49)
(30)
2,686
(117)
(77)
(273)
177
2,396
2015
£m
724
(132)
31
623
158
338
496
(46)
(14)
248
787
130
112
(83)
2,253
(180)
(77)
(81)
282
2,197
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
123
123
Notes to the Financial Statements
5. COSTS OF OPERATIONS
This section details the types of costs the Group incurs and the number of employees in each of our operations.
(a) Analysis of costs by nature
Year ended 31 December
Transportation, distribution and metering costs
Commodity costs
Depreciation, amortisation, impairments and
write-downs
Employee costs
Impairment of trade receivables (note 17)
Other direct costs
Total costs before exceptional items
and certain re-measurements
Exceptional items and certain re-measurements (note 7)
Total costs
(b) Employee costs (i)
Year ended 31 December
Wages and salaries
Social security costs
Pension and other post employment benefits costs
Share scheme costs (note S4)
Cost of
sales
£m
(4,990)
(14,355)
(580)
(787)
–
(1,999)
(22,711)
1,058
(21,653)
Operating
costs
£m
–
–
(448)
(1,363)
(182)
(1,061)
(3,054)
(11)
(3,065)
2016
Total
costs
£m
(4,990)
(14,355)
Cost of
sales
£m
(4,737)
(15,239)
(1,028)
(2,150)
(182)
(3,060)
(841)
(761)
–
(2,156)
(25,765)
1,047
(24,718)
(23,734)
116
(23,618)
Capitalised employee costs
Employee costs recognised in the Group Income Statement
Operating
costs
£m
–
–
(357)
(1,310)
(259)
(1,113)
(3,039)
(2,358)
(5,397)
2016
£m
(1,792)
(160)
(185)
(46)
(2,183)
33
(2,150)
2015
Total
costs
£m
(4,737)
(15,239)
(1,198)
(2,071)
(259)
(3,269)
(26,773)
(2,242)
(29,015)
2015
£m
(1,768)
(155)
(158)
(45)
(2,126)
55
(2,071)
(i)
Details of Directors’ remuneration, share-based payments and pension entitlements in the Remuneration Report on pages 83 to 99 form part of these Financial Statements.
Details of the remuneration of key management personnel are given in note S8.
(c) Average number of employees during the year
Year ended 31 December
Energy Supply & Services – UK & Ireland
Energy Supply & Services – North America
Connected Home
Distributed Energy & Power (iii)
Energy Marketing & Trading (iv)
Exploration & Production
Central Power Generation
Centrica Storage
2016
Number
29,041
5,999
280
844
289
1,242
256
327
38,278
2015
(restated) (i) (ii)
Number
29,536
6,166
197
659
245
1,491
310
294
38,898
(i)
(ii)
(iii)
(iv)
Average number of employees during 2015 has been restated in the new reporting segments. See note 1 for further details.
Average number of employees during 2015 has been restated due to the availability of improved data.
Includes ENER-G Cogen employees from the date of acquisition. The average number of employees of ENER-G Cogen from the date of acquisition to the end of 2016 is 375.
Includes Neas Energy employees from the date of acquisition. The average number of employees of Neas Energy from the date of acquisition to the end of 2016 is 262.
124
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Notes to the Financial Statements
6. SHARE OF RESULTS OF JOINT VENTURES AND ASSOCIATES
Share of results of joint ventures and associates represents the results of businesses where we exercise joint control or significant
influence and generally have an equity holding of up to 50%.
(a) Share of results of joint ventures and associates
The Group’s share of results of joint ventures and associates for the year ended 31 December 2016 principally arises from its interests
in the following entities (reported in the Central Power Generation segment):
● Wind farms – GLID Wind Farms TopCo Limited (i) and Lincs Wind Farm Limited (ii) (iii); and
● Nuclear – Lake Acquisitions Limited.
Year ended 31 December
Income
Expenses excluding certain re-measurements
Certain re-measurements
Interest paid
Taxation excluding certain re-measurements
Taxation on certain re-measurements
Share of post-taxation results of joint ventures and associates
Joint ventures
Wind farms
£m
62
(50)
–
12
(27)
4
–
(11)
Associates
Nuclear
£m
623
(457)
(29)
137
(5)
(20)
1
113
Other
£m
1
(1)
–
–
–
–
–
–
2016
Total
£m
686
(508)
(29)
149
(32)
(16)
1
102
2015
Total
£m
745
(484)
(14)
247
(53)
(8)
1
187
(i)
(ii)
On 7 March 2016, the Group disposed of its 50% interest in GLID Wind Farms TopCo Limited. See note 12(d) for further details.
As part of the finance arrangements entered into by Lincs Wind Farm Limited, the Group’s shares in this company are secured in favour of third parties. The securities would only be enforced
in the event that Lincs Wind Farm Limited defaulted on any of their obligations under their respective finance arrangements.
(iii)
On 17 February 2017, the Group sold its interest in Lincs Wind Farm Limited. See note 12(c) for further details.
(b) Reconciliation of share of results of joint ventures and associates to share of adjusted results of joint ventures
and associates
Year ended 31 December
Share of post-taxation results of joint ventures and associates
Certain re-measurements (net of taxation)
Interest paid
Taxation (excluding taxation on certain re-measurements)
Share of adjusted results of joint ventures and associates
Joint ventures
Wind farms
£m
(11)
–
27
(4)
12
Associates
Nuclear
£m
113
28
5
20
166
2016
Total
£m
102
28
32
16
178
2015
Total
£m
187
13
53
8
261
Further information on the Group’s investments in joint ventures and associates is provided in notes 14 and S10.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
125
125
Notes to the Financial Statements
7. EXCEPTIONAL ITEMS AND CERTAIN RE-MEASUREMENTS
Exceptional items are those items that, in the judgement of the Directors, need to be disclosed separately by virtue of their nature, size
or incidence. Items which may be considered exceptional in nature include disposals of businesses or significant assets, business
restructurings, significant onerous contract charges and asset write-downs/impairments.
(a) Exceptional items
Year ended 31 December
Pension past service credit (i)
Net release of/(provision for) onerous power procurement contracts (ii)
Restructuring costs (iii)
Net gain on disposal of businesses and assets (iv)
Write-back/(impairment) of exploration and production assets (v)
Write-back/(impairment) of combined cycle gas turbine (CCGT) power stations (vi)
Impairment of UK gas storage assets (vii)
Impairment of Nuclear investment
Exceptional items included within Group operating profit/(loss)
Net taxation on exceptional items (note 9)
Effect of change in UK upstream tax rates (note 9) (viii)
Impairment of exploration and production deferred tax assets (note 9)
Net exceptional items after taxation
2016
£m
78
53
(228)
101
135
26
(176)
–
(11)
9
29
–
27
2015
£m
–
(90)
–
–
(1,865)
(31)
–
(372)
(2,358)
477
116
(81)
(1,846)
(i)
(ii)
As a result of the implementation of a reduced salary cap on pensionable pay for the Centrica Pension Plan final salary scheme, a past service credit of £80 million (net of £2 million costs of
implementing the changes) has been recognised. See note 22.
The Group recognised two reductions in onerous contract provisions established in prior periods: a £64 million reduction in relation to its UK gas-fired power station tolling contract (within
the Central Power Generation segment) as a consequence of both a renegotiation of the contract and changes in the UK capacity market; £15 million reduction in relation to its Direct Energy
wind power procurement arrangement (within the NA Business segment) as a result of changes to forecast US power prices. Separately, an additional charge of £26 million was booked due
to the termination of the Group’s onerous Rijnmond gas-fired power station tolling contract (within the Energy Marketing & Trading segment).
(iii)
Following the extensive strategic review announced in 2015, the Group has incurred restructuring costs implementing the new organisational model relating principally to redundancy costs,
impairment of assets on closure of businesses and consultancy costs. The costs have been incurred in Energy Supply & Services – UK & Ireland (£140 million), Energy Supply & Services –
North America (£26 million) and Exploration & Production (£23 million). The remaining amount (£39 million) predominantly relates to Corporate Centre costs that have not been allocated to
specific segments.
(iv)
(v)
On 7 March 2016, the Group disposed of its joint venture investment in GLID wind farms for £116 million and recorded a gain on disposal of £73 million within the Central Power Generation
segment. On 18 May 2016, the Group disposed of its interest in Skene and Buckland gas and oil assets for an adjusted consideration of $14 million (£10 million) and a gain of £50 million is
recorded within the Exploration & Production segment. On 9 October 2016 and 14 November 2016, the Group disposed of Airco Mechanical Ltd. and Airtron Canada (Direct Energy Business
Services Limited), two non-core NA Home businesses, for consideration of $10 million and C$5 million respectively (£11 million) and a loss on disposal of £22 million. See note 12(d).
In the Exploration & Production segment, write-backs of assets and reductions to decommissioning provisions have been booked relating to increases in value of certain UK, Dutch and
Norwegian gas and oil fields (pre-tax write-back £79 million, post-tax £62 million), predominantly due to increases in reserves, cost savings and revisions to decommissioning estimates
(see note 7(c) for further details) and the Group's remaining exploration and production assets in Trinidad and Tobago (pre-tax write-back £56 million, post-tax £45 million), which are being
disposed of to Shell and have been classified as a disposal group held for sale at the year end (see note 12(c)) with the agreed sales proceeds triggering the write-back.
(vi)
A pre-tax write-back of £26 million has been recorded in the current period in respect of the Kings Lynn asset held in the Central Power Generation segment following the award of a 15-year
capacity contract. See note 7(c).
(vii)
(viii)
A pre-tax impairment charge of £176 million (post-tax £144 million) has been recorded in the current period in respect of UK gas storage assets. See note 7(c) for further details.
During the year, the petroleum revenue tax (PRT) rate was reduced from 35% to 0% and supplementary corporation tax (SCT) was reduced from 20% to 10% with effect from
1 January 2016. These changes have been substantively enacted by the reporting date and the net change in deferred tax has been recognised immediately as an exceptional tax gain.
Certain re-measurements are the fair value movements on energy contracts entered into to meet the future needs of our customers or to
sell the energy produced from our upstream assets. These contracts are economically related to our upstream assets, capacity/off-take
contracts or downstream demand, which are typically not fair valued, and are therefore separately identified in the current period and
reflected in business performance in future periods when the underlying transaction or asset impacts the Group Income Statement.
(b) Certain re-measurements
Year ended 31 December
Certain re-measurements recognised in relation to energy contracts (note 2):
Net gains arising on delivery of contracts
Net gains/(losses) arising on market price movements and new contracts
Net re-measurements included within gross profit
Net losses arising on re-measurement of associates’ energy contracts (net of taxation)
Net re-measurements included within Group operating profit/(loss)
Taxation on certain re-measurements (note 9) (i)
Net re-measurements after taxation
(i)
Includes £16 million gain (2015: £20 million gain) due to the effect of change in UK tax rates.
2016
£m
968
90
1,058
(28)
1,030
(280)
750
2015
£m
973
(857)
116
(13)
103
26
129
The Group is generally a net buyer of commodity, procuring gas and power for our customers. Following market recovery in commodity prices
during 2016, net gains arising on market price movements and new contracts of £90 million (2015: £857 million loss) have been recorded.
126
126
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
7. EXCEPTIONAL ITEMS AND CERTAIN RE-MEASUREMENTS
(c) Impairment accounting policy, process and sensitivities
The Group tests the carrying amounts of goodwill, PP&E and intangible assets (with the exception of exploration assets – see note S2) for
impairment annually, or more frequently if events or changes in circumstances indicate that the recoverable amounts may be lower than
their carrying amounts. Interests in joint ventures and associates and exploration assets are reviewed annually for indicators of impairment
and tested for impairment where such an indicator arises. Where an asset does not generate cash flows that are independent from other
assets, the Group estimates the recoverable amount of the CGU to which the asset belongs. The recoverable amount is the higher of
value in use (VIU) and fair value less costs of disposal (FVLCD).
At inception, goodwill is allocated to each of the Group’s CGUs or groups of CGUs that expect to benefit from the business combination
in which the goodwill arose. If the recoverable amount of an asset (or CGU) is estimated to be less than its carrying amount, the carrying
amount of the asset (or CGU) is reduced to its recoverable amount. Any impairment is expensed immediately in the Group Income
Statement. Any CGU impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU and then
to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit.
VIU calculations have been used to determine recoverable amounts for all CGUs that include goodwill and indefinite-lived intangible asset
balances with the exception of the impairment tests for the Exploration & Production gas and oil CGUs, where FVLCD has been used.
This methodology is deemed to be more appropriate for these CGUs as it is based on the post-tax cash flows arising from the underlying
assets and is consistent with the approach taken by management to evaluate the economic value of the underlying assets. Subsequently,
the specific, underlying Exploration & Production gas and oil PP&E assets and, in addition, the Group’s associate investment in Nuclear
and the Storage PP&E assets have also used the FVLCD impairment methodology. UK power generation assets have used the VIU
impairment methodology. Further details of the approach and assumptions used in the VIU calculations are provided in note S2.
FVLCD discount rate and cash flow assumptions
Exploration & Production – gas and oil production
A write-back of £135 million (2015: impairment £1,865 million) has been recorded within exceptional items for exploration and production
assets including £16 million of reductions to decommissioning provisions. For those assets subject to the impairment write-back, the
associated recoverable amounts (net of decommissioning costs) of £756 million are categorised within Level 3 of the fair value hierarchy.
FVLCD is determined by discounting the post-tax cash flows expected to be generated by the gas and oil production and development
assets, net of associated selling costs, taking into account those assumptions that market participants would use in estimating fair value.
Post-tax cash flows are derived from projected production profiles of each field, taking into account forward prices for gas and liquids over
the relevant period. Where forward market prices are not available (that is outside the active period for each commodity), prices are
determined based on internal model inputs. Note S6 provides additional detail on the active period of each of the commodity markets
in which the Group operates. The date of cessation of production depends on the interaction of a number of variables, such as the
recoverable quantities of hydrocarbons, production costs, the contractual duration of the licence area and the selling price of the gas and
liquids produced. As each field has specific reservoir characteristics and economic circumstances, the post-tax cash flows for each field
are computed using individual economic models. Post-tax cash flows used in the FVLCD calculation for the first five years are based on
the Group’s Board-approved business plans and, thereafter, are based on long-term production and cash flow forecasts, which
management believes reflects the assumptions of a market participant.
The future post-tax cash flows are discounted using a post-tax nominal discount rate of 9% (2015: 9%) to determine the FVLCD. The
discount rate and inflation rate used in the FVLCD calculation are determined in the same manner as the rates used in the VIU calculations
described in note S2, with the exception of the adjustment required to determine an equivalent pre-tax discount rate.
The valuation of Exploration & Production goodwill is particularly sensitive to the price assumptions made in the impairment calculations.
To illustrate this, the price assumptions for gas and oil have been varied by +/–10%. Changes in price generate different production
profiles and in some cases the date that an asset ceases production. This has been considered in the sensitivity analysis. Otherwise,
all other operating costs, life of field capital expenditure and abandonment expenditure assumptions remain unchanged. For exploration
and production assets, an increase in gas and oil prices of 10% would potentially reverse £89 million (2015: £327 million) of previous
post-tax impairment charges of the underlying exploration and production assets. A reduction of 10% would potentially give rise to further
post-tax impairments of the underlying exploration and production assets of £166 million (2015: £245 million) but no further post-tax
impairment of goodwill (2015: £238 million) due to headroom arising in the year. The Canada and Trinidad and Tobago exploration and
production assets are the subject of disposal processes and therefore have been excluded from the current year sensitivities. In the case
of the Canadian E&P assets, the outcome of the disposal process could result in a range of possible outcomes, including the disposal
of the entire Canadian E&P business (either to a sole buyer or multiple buyers), or of the assets being retained. The recoverable amount
of the Canadian assets is therefore subject to uncertainty. In determining an appropriate recoverable amount the external bids have been
considered together with discounted post-tax cash flows expected to be generated by the assets over their lives. This assessment
supports the asset carrying values and accordingly no impairment has been booked. The net assets within the CQ Energy Canada
Partnership are included in note S10. A 10% increase/decrease in gas and oil prices would increase/decrease the recoverable amounts
of these net assets by £207 million/£208 million respectively. Commodity prices and the outcome of the current disposal process are the
main determinants in the value of these assets.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
127
127
Notes to the Financial Statements
7. EXCEPTIONAL ITEMS AND CERTAIN RE-MEASUREMENTS
Central Power Generation – Nuclear
No impairment charge has been recorded (2015: £372 million) for the Group’s associate investment in Nuclear. FVLCD is determined by
discounting the post-tax cash flows expected to be generated by the investment, net of associated selling costs, taking into account those
assumptions that market participants would use in estimating fair value. Post-tax cash flows are derived from projected production profiles
of the underlying nuclear power stations, planned and unplanned outage assumptions, operating cost assumptions and forward prices for
power and forecast capacity market auction prices. Where forward market prices are not available (that is outside the active period for each
commodity), prices are determined based on internal model inputs. Note S6 provides additional detail of the active period of each of the
commodity markets in which the Group operates. Post-tax cash flows used in the FVLCD calculations for the first five years are based on
the Group’s Board-approved business plans and thereafter are based on long-term production and cash flow forecasts.
The future post-tax cash flows are discounted using a post-tax nominal discount rate of 8% (2015: 8%) to determine the FVLCD.
The discount rate and inflation rate used in the FVLCD calculation are determined in the same manner as the rates used in the VIU
calculations described in note S2, with the exception of the adjustment required to determine an equivalent pre-tax discount rate.
The valuation of the Group’s investment in Nuclear, which is categorised within Level 3 of the fair value hierarchy, is particularly sensitive
to assumptions/variations in the power price. To illustrate this, sensitivities were performed at the year end to vary the power price
assumptions in the Group’s internal valuation model by +/–10%. An increase in power prices of 10%, assuming all other assumptions
remain constant, would result in a reversal of previous impairments of £444 million (2015: £453 million). A reduction of 10% would give
rise to a further impairment charge of £461 million (2015: £436 million).
Storage
The recoverable amount of the Group’s operational storage facilities is calculated on a FVLCD basis by discounting the post-tax cash
flows expected to be generated by the assets. Such estimates are based on predictions of seasonal gas price spreads, shorter-term price
volatilities and the value from extracting cushion gas at the end of the field life less any related capital and operating expenditure that a typical
market participant might use to assess value. Where forward market prices are not available (that is outside the active period for each
commodity), prices are determined based on internal model inputs. Note S6 provides additional detail on the active period of each of the
commodity markets in which the Group operates. The future post-tax cash flows are discounted using a post-tax nominal discount rate
of 7.5% (2015: 7.5%) to determine FVLCD. For further details of the calculation of the discount rate and inflation rates used, see note S2.
A pre-tax impairment charge of £176 million (post-tax £144 million) has been recorded within exceptional items in the current period.
This has resulted from the decision to decommission the 8A platform and from updated assumptions on asset availability in the near-term
and future asset expenditure.
The impairment test remains particularly sensitive to assumptions/variations in seasonal gas price spreads and to the resolution of the limitation of
the maximum operating pressure of the storage asset. To illustrate the impact of price on the impairment analysis, sensitivities were performed to
vary the gas spreads by +/-10%. An increase in gas spreads of 10%, assuming all other assumptions remain constant, would lead to a potential
post-tax impairment write-back of £66 million. A reduction of 10% would give rise to a further post-tax impairment of £80 million.
The valuation of the recoverable amount of the operational storage facilities is categorised within Level 3 of the fair value hierarchy. A change
in the assumptions of the timing and extent of the return to maximum operating pressure could also significantly impact the impairment
calculation and could result in a further impairment in certain adverse scenarios. Furthermore, the Group is considering the strategic
options open to Centrica Storage to determine its long term future. Following the impairment charge recorded in the period, the current
value of the Group’s gas storage fixed assets is £417 million (£112 million, net of the decommissioning provision and deferred tax).
VIU discount rate and cash flow assumptions
Central Power Generation – CCGT power stations
An impairment write-back of £26 million has been recorded within exceptional items for the Kings Lynn power station following the award
of a 15-year capacity contract. In 2015, a £31 million impairment charge was recognised in relation to the segment’s Spalding finance
leased UK gas-fired power station.
The recoverable amount was determined using VIU calculations, with future cash flows discounted using a pre-tax nominal discount rate
of 7.4% (2015: 7.4%). Cash inflows were based on forecast production profiles, forward prices for power, gas and carbon and forecast
capacity market auction prices. Where forward market prices were not available (that is outside the active period for each commodity),
prices were determined based on internal model inputs. Cash outflows for operating and capital expenditure were based, for the first
five years, on the Group’s Board-approved business plans and thereafter are based on long-term production and cash flow forecasts.
The impairment write-back has been adjusted for depreciation that would have occurred had no impairment loss been recognised in prior years.
128
128
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
8. NET FINANCE COST
Financing costs mainly comprise interest on bonds, bank debt and commercial paper, the results of hedging activities used to
manage foreign exchange and interest rate movements on the Group’s borrowings, and notional interest arising on discounting
of decommissioning provisions. An element of financing cost is capitalised on qualifying projects.
Investment income predominantly includes interest received on short-term investments in money market funds, bank deposits,
government bonds and notional interest on pensions.
Year ended 31 December
Cost of servicing net debt
Interest income
Interest cost on bonds, bank loans and overdrafts
Interest cost on finance leases
Net gains/(losses) on revaluation (i)
Notional interest arising from discounting and other interest
Capitalised borrowing costs (ii)
(Cost)/income
Financing
costs
£m
Investment
income
£m
–
(305)
(15)
(320)
–
(79)
(399)
62
(337)
35
–
–
35
2
–
37
–
37
2016
Total
£m
35
(305)
(15)
(285)
2
(79)
(362)
62
(300)
Financing
costs
£m
Investment
income
£m
–
(289)
(15)
(304)
(2)
(76)
(382)
48
(334)
50
–
–
50
–
5
55
–
55
2015
Total
£m
50
(289)
(15)
(254)
(2)
(71)
(327)
48
(279)
(i)
Includes gains and losses on fair value hedges, movements in fair value of other derivatives primarily used to hedge foreign exchange exposure associated with inter-company loans,
and foreign currency gains and losses on the translation of inter-company loans.
(ii)
Borrowing costs have been capitalised using an average rate of 4.53% (2015: 4.20%). Capitalised interest has attracted tax deductions totalling £18 million (2015: £14 million),
with deferred tax liabilities being set up for the same amounts.
9. TAXATION
The taxation note details the different tax charges and rates, including current and deferred tax arising in the Group. The current tax
charge is the tax payable on this year’s taxable profits. This tax charge excludes share of taxation on the results of joint ventures and
associates. Deferred tax represents the tax on differences between the accounting carrying values of assets and liabilities and their tax
bases. These differences are temporary and are expected to unwind in the future.
(a) Analysis of tax charge
Year ended 31 December
Current tax
UK corporation tax
UK petroleum revenue tax
Non-UK tax
Adjustments in respect of prior years – UK
Adjustments in respect of prior years – non-UK
Total current tax
Deferred tax
Origination and reversal of temporary differences – UK
UK petroleum revenue tax
Origination and reversal of temporary differences – non-UK
Change in tax rates (i)
Adjustments in respect of prior years – UK
Adjustments in respect of prior years – non-UK (ii)
Total deferred tax
Total tax on profit/(loss) (iii)
Business
performance
£m
Exceptional
items
and certain
re-measurements
£m
Results for
the year
£m
Business
performance
£m
2016
Exceptional
items
and certain
re-measurements
£m
2015
Results for
the year
£m
(103)
8
(220)
60
4
(251)
54
(12)
(75)
21
(59)
40
(31)
(282)
134
–
16
53
–
203
(174)
–
(262)
45
(60)
6
(445)
(242)
31
8
(204)
113
4
(48)
(120)
(12)
(337)
66
(119)
46
(476)
(524)
(233)
(30)
(206)
198
(24)
(295)
91
46
24
27
(169)
(10)
9
(286)
(75)
–
–
–
–
(75)
274
11
192
136
–
–
613
538
(308)
(30)
(206)
198
(24)
(370)
365
57
216
163
(169)
(10)
622
252
(i)
During the year, the UK upstream Supplementary Charge was reduced from 20% to 10% and UK petroleum revenue tax from 35% to 0% with effect from 1 January 2016. The consequential
reduction in net deferred tax liabilities of £36 million has been recognised within exceptional items (£29 million) and certain re-measurements (£7 million), and includes a petroleum revenue tax
charge of £90 million (2015: £33 million). Other rate change impacts relate to the future reduction in the UK standard rate to 17% (see below).
(ii)
(iii)
A comprehensive review as part of business transformation activities in North America during the year enabled certain deferred tax balances to be adjusted.
Total tax on profit/(loss) excludes taxation on the Group’s share of profits of joint ventures and associates.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
129
129
Notes to the Financial Statements
9. TAXATION
UK tax rates
The Group earns the majority of its profits in the UK. Most activities in the UK are subject to the standard rate for UK corporation tax,
which for 2016 was 20% (2015: 20.25%). Upstream gas and oil production activities are taxed at a UK corporation tax rate of 30%
(2015: 30%) plus a supplementary charge of 10% (2015: 20%) to give an overall rate of 40% (2015: 50%). In addition, certain upstream
assets in the UK attract petroleum revenue tax (PRT) at 0% (2015: 50% which was deductible against corporation tax), giving an overall
effective rate of 40% (2015: 75%).
On 6 September 2016, the UK Government substantively enacted Finance Act 2016 which included a reduction in the main UK
corporation tax rate to 17% from 1 April 2020. At 31 December 2016, the relevant UK deferred tax assets and liabilities included
in these consolidated Group Financial Statements were based on the reduced rate having regard to their reversal profiles.
Non-UK tax rates
Norwegian upstream profits are taxed at the standard rate of 25% (2015: 27%) plus a special tax of 53% (2015: 51%) resulting in an
aggregate tax rate of 78% (2015: 78%). Profits earned in the US are taxed at a Federal rate of 35% (2015: 35%) together with state taxes
at various rates dependent on the state. Taxation for other jurisdictions is calculated at the rate prevailing in those respective jurisdictions,
with rates ranging from 12.5% in the Republic of Ireland to 55% in Trinidad and Tobago. The tax charges are not material in such
jurisdictions.
Prior year adjustments reflect changes made to estimates or to judgements when further information becomes available.
Movements in deferred tax liabilities and assets are disclosed in note 16.
Tax on items taken directly to equity is disclosed in note S4.
(b) Factors affecting the tax charge
The Group is expected to continue earning the majority of its profits in the UK and accordingly considers the standard UK rate to be the
appropriate reference rate.
The differences between the total tax shown above and the amount calculated by applying the standard rate of UK corporation tax to the
profit/(loss) before tax are as follows:
Year ended 31 December
Profit/(loss) before tax
Less: share of profits in joint ventures and associates,
net of interest and taxation
Group profit/(loss) before tax
Tax on profit at standard UK corporation tax
rate of 20% (2015: 20.25%)
Effects of:
Depreciation/impairment on non-qualifying assets
(including write-backs)
Non-taxable disposals
Other non-allowable/non-taxable items
Goodwill and investment impairments not deductible
for tax purposes
Higher rates applicable to upstream profits/losses
Upstream investment incentives
UK petroleum revenue tax rates
Non-UK tax rates (i)
Movement in uncertain tax provisions (ii)
Movement in unrecognised deferred tax assets
Changes to tax rates (iii)
Adjustments in respect of prior years (iv)
Taxation on profit/(loss) for the year
Less: movement in deferred tax
Total current tax
2016
Business
performance
£m
1,167
Exceptional items
and certain
re-measurements
£m
1,019
Results for
the year
£m
2,186
Business
performance
£m
1,119
Exceptional
items
and certain
re-measurements
£m
(2,255)
2015
Results for
the year
£m
(1,136)
(130)
1,037
28
1,047
(102)
2,084
(200)
919
13
(2,242)
(187)
(1,323)
(207)
(209)
(416)
(186)
454
268
(49)
(4)
(5)
–
(61)
22
(3)
(60)
(4)
14
21
54
(282)
31
(251)
12
12
(8)
–
1
–
–
(107)
–
13
45
(1)
(242)
445
203
(37)
8
(13)
–
(60)
22
(3)
(167)
(4)
27
66
53
(524)
476
(48)
(67)
3
(19)
–
23
16
8
(45)
(56)
(5)
27
15
(286)
(9)
(295)
(222)
–
35
(199)
347
–
5
78
–
(96)
136
–
538
(613)
(75)
(289)
3
16
(199)
370
16
13
33
(56)
(101)
163
15
252
(622)
(370)
(i)
(ii)
Excludes additional non-UK tax applicable to upstream profits, notably in Norway.
The major part of the uncertain tax provision is transfer pricing related, where a range of reasonable outcomes is possible. Accordingly a provision is required reflecting the judgement inherent
in the arm’s length standard. The uncertain tax provisions are periodically reassessed, having regard to progress made towards resolution.
(iii)
(iv)
Changes to tax rates on exceptional items and certain re-measurements includes a petroleum revenue tax charge of £90 million (2015: £33 million).
Excludes amounts included in movement in uncertain tax provisions that relate to prior years of £9 million (2015: £20 million).
130
130
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
9. TAXATION
(c) Factors that may affect future tax charges
The Group’s effective tax rates are impacted by changes to the mix of activities and production across the territories in which it operates.
Effective tax rates may also fluctuate where profits and losses cannot be offset for tax purposes, such as in the UK where there is
generally no offset between upstream gas and oil and downstream results. Losses realised in one territory cannot be offset against
profits in another.
The Group’s UK profits earned away from gas and oil production will benefit from reduced rates of corporation tax in 2017 and beyond
(19% from 1 April 2017 and 17% from 1 April 2020).
Profits from gas and oil production in the UK continue to be taxed at rates above the UK statutory rate (40% verses 20%). PRT is now set
at 0% but may still give rise to historic refunds from the carry-back of excess reliefs (for example, from decommissioning).
Income earned in territories outside the UK, notably in the US and Norway, is generally subject to higher effective rates of tax than the
current UK statutory rate.
Globally, tax reform has significant potential to change tax charges, particularly in relation to the OECD’s Base Erosion and Profit Shifting
(‘BEPS’) project, which has widespread support. Based on current proposals, the Group does not expect its tax position to be impacted
materially.
Local tax laws and rates are subject to change, which may have a significant impact on the Group’s future tax charges. In particular,
the US presidential election may lead to substantial tax reforms.
In the medium term, the Group’s effective tax rate is expected to remain above the UK statutory rate, reflecting a continued upward trend
in profits earned outside the UK.
(d) Relationship between current tax charge and taxes paid
Year ended 31 December
Current tax charge:
Corporation tax
Petroleum revenue tax
Taxes paid:
Corporation tax
Petroleum revenue tax
UK
£m
Non-UK
£m
(144)
(8)
(152)
89
(12)
77
200
–
200
129
–
129
2016
£m
56
(8)
48
218
(12)
206
UK
£m
110
30
140
130
(9)
121
Non-UK
£m
230
–
230
228
–
228
2015
£m
340
30
370
358
(9)
349
Differences between current tax charged and taxes paid arose principally due to the following factors:
● Corporation tax payments are generally made by instalment, based on estimated taxable profits, or the prior period’s profits. Payments
are made on account and the final liability is settled as the tax return is filed. Fluctuations in profits from year to year, one-off items and
mark-to-market movements within the year may therefore give rise to divergence between the charge for the year and the taxes paid.
Early payments on account can result in overpayments for a given year. These are included as tax assets, to be refunded in a
subsequent period; and
● PRT payments were based on income realised in the preceding period, with subsequent adjustments to reflect actual profits. Following
the reduction in the PRT rate to 0% from 1 January 2016, PRT tax cash is expected to reflect refunds, but on a less predictable basis.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
131
131
Notes to the Financial Statements
10. EARNINGS PER ORDINARY SHARE
Earnings per share (EPS) is the amount of profit or loss attributable to each share. Basic EPS is the amount of profit or loss for the year
divided by the weighted average number of shares in issue during the year. Diluted EPS includes the impact of outstanding share options.
Basic profit per ordinary share has been calculated by dividing the profit attributable to equity holders of the Company for the year of
£1,672 million (2015: £747 million loss) by the weighted average number of ordinary shares in issue during the year of 5,318 million
(2015: 5,011 million). The number of shares excludes 61 million ordinary shares (2015: 72 million), being the weighted average number
of the Company’s own shares held in the employee share trust and treasury shares purchased by the Group as part of the share
repurchase programme.
The Directors believe that the presentation of adjusted basic earnings per ordinary share, being the basic earnings per ordinary share
adjusted for certain re-measurements and exceptional items assists with understanding the underlying performance of the Group, as
explained in note 2.
In May 2016, 350 million new ordinary shares were issued at 200.0 pence per share which represented approximately 7% of the issued
ordinary share capital prior to the placing.
In addition to basic and adjusted basic earnings per ordinary share, information is presented for diluted and adjusted diluted earnings
per ordinary share. Under this presentation, no adjustments are made to the reported profit/(loss) for either 2016 or 2015, however,
the weighted average number of shares used as the denominator is adjusted for potentially dilutive ordinary shares.
Weighted average number of shares
Year ended 31 December
Weighted average number of shares – basic
Dilutive impact of share-based payment schemes (i)
Weighted average number of shares – diluted
2016
Million
shares
5,318
43
5,361
2015
Million
shares
5,011
38
5,049
(i)
The dilutive impact of share-based payment schemes is included in the calculation of diluted EPS, unless it has the effect of increasing the profit or decreasing the loss attributable to each
share. Therefore, these shares are excluded from the calculation of basic diluted EPS in 2015.
Basic to adjusted basic earnings per share reconciliation
Year ended 31 December
Profit/(loss) – basic
Net exceptional items after taxation (notes 2 and 7) (i)
Certain re-measurement gains after taxation (notes 2 and 7)
Earnings – adjusted basic (i)
Profit/(loss) – diluted
Earnings – adjusted diluted (i)
2016
Pence per
ordinary share
31.4
(0.5)
(14.1)
16.8
£m
1,672
(27)
(750)
895
2015
Pence per
ordinary share
(14.9)
34.7
(2.6)
17.2
£m
(747)
1,739
(129)
863
1,672
31.2
(747)
(14.9)
895
16.7
863
17.1
(i)
Net exceptional profit after taxation of £27 million (2015: £1,846 million loss) is reduced by nil (2015: £107 million) for the purpose of calculating adjusted basic and adjusted diluted EPS.
The adjustment reflects the share of net exceptional items attributable to non-controlling interests.
132
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
11. DIVIDENDS
Dividends represent the cash return of profits to shareholders and are paid twice a year, in June and November. Dividends are paid as
an amount per ordinary share held. The Group retains part of the profits generated to meet future investment plans or to fund share
repurchase programmes.
Prior year final dividend
Interim dividend
2016
Date of
Pence per
share
payment
8.43 23 Jun 2016
3.60 24 Nov 2016
£m (i)
454
197
651
£m
418
180
598
2015
Pence per
Date of
share
payment
8.40 25 Jun 2015
3.57 26 Nov 2015
(i)
Included within the prior year final dividend are forfeited dividends of £3 million older than 12 years that were written back in accordance with Group policy.
The Directors propose a final dividend of 8.40 pence per ordinary share (totalling £461 million) for the year ended 31 December 2016.
The dividend will be submitted for formal approval at the Annual General Meeting to be held on 8 May 2017 and, subject to approval,
will be paid on 29 June 2017 to those shareholders registered on 12 May 2017.
Commencing with the final dividend for the year ended 31 December 2014, the Company has offered a scrip dividend alternative to its
shareholders. £84 million of the £454 million prior year final dividend was in the form of ordinary shares to shareholders opting in to the
scrip dividend alternative. The market value per share at the date of payment was £2.02 per share resulting in the issue of 41 million new
shares and £81 million of share premium.
Similarly, £41 million of the £197 million interim dividend was taken as a scrip dividend. The market value per share at the date of payment
was £2.13 resulting in the issue of 19 million new shares and £40 million of share premium.
The Group has sufficient distributable reserves to pay dividends to its ultimate shareholders. Distributable reserves are calculated on
an individual legal entity basis and the ultimate parent company, Centrica plc, currently has adequate levels of realised profits within
its retained earnings to support dividend payments. Refer to the Centrica plc Company Balance Sheet on page 191. On an annual
basis, the distributable reserve levels of the Group’s subsidiary undertakings are reviewed and dividends paid up the ownership chain
to replenish Centrica plc’s reserve levels.
12. ACQUISITIONS AND DISPOSALS
(a) 2016 business combinations
This section details business combinations made by the Group. During the year, the significant acquisitions undertaken by the Group
were those of ENER-G Cogen International, a combined heat and power (CHP) business and Neas Energy, one of Europe’s leading
providers of energy management and optimisation services for decentralised third-party owned assets.
The fair values of acquired assets and liabilities are provisional unless otherwise stated. The purchase price allocation exercise requires
management to make subjective judgements at the time control passes to the Group.
ENER-G Cogen
On 16 May 2016, the Group acquired 100% of ENER-G Cogen’s CHP business for cash consideration of £149 million. The company,
which operates across Europe and North America, supplies, installs and maintains CHP solutions for industrial and commercial
customers. This business is reported as part of the Distributed Energy & Power (DE&P) segment. The business is a strong fit with the
DE&P business model and provides immediate capability to the division, where previously the Group had been reliant on subcontracting
to third parties.
For this acquisition, the majority of the value is recognised as goodwill, which is reflective of the enhanced synergies, geographical
presence, the assembled workforce and international growth opportunities in the distributed energy sector. In addition, assumptions were
made regarding margins on the existing order book and future margins on renewed contracts which are both captured in the customer
intangible asset. £85 million of goodwill was recognised on acquisition, none of which is tax deductible.
On acquisition, when the ENER-G business was first consolidated into the Group under IFRS, certain of the acquiree’s infrastructure contracts
have been treated as finance leases. The acquired business previously reported under UK GAAP, under which these contracts were not
considered to be leases. This represents the principal change to the accounting policies of the acquiree for the purposes of consolidation.
Neas Energy
On 5 October 2016, the Group acquired 100% of Neas Energy’s business for cash consideration of £210 million. The business provides
energy management services and short-term optimisation trading services for decentralised third-party owned assets across Europe
(including windfarms, solar plants and CHP plants). It is also engaged in short-term trading in power, gas and environmental certificates
across 18 countries. This business is reported as part of the Energy Marketing & Trading (EM&T) segment.
For this acquisition, the majority of the value is recognised as goodwill. This reflects the assembled workforce, geographical presence
and international growth opportunities brought to the EM&T segment by the acquisition. £151 million of goodwill was recognised
on acquisition, none of which is tax deductible.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
133
133
Notes to the Financial Statements
12. ACQUISITIONS AND DISPOSALS
Flowgem
On 25 August 2016, the Group acquired 100% of Flowgem Limited for cash consideration of £13 million and contingent consideration
with a fair value of £5 million. This UK-based business has developed an early stage technology to remotely detect water leaks, which
enhances the Group’s connectivity offering in the UK and North America, adding new capabilities to the Hive product portfolio and
complementing the Group’s home services offering. This business will be reported as part of the Connected Home segment. £13 million
of goodwill was recognised on acquisition, none of which is tax deductible.
Other acquisitions in the period were immaterial and resulted in no goodwill being recognised.
Provisional fair value of the identifiable acquired assets and liabilities
ENER-G
Cogen (i)
£m
Neas Energy
£m
Flowgem
£m
Balance Sheet items
Intangible assets
Property, plant and equipment
Other non-current assets
Current assets (including £37 million of cash and cash equivalents)
Current liabilities
Non-current liabilities
Net identifiable assets
Goodwill
Net assets acquired
Consideration comprises:
Cash consideration
Contingent consideration (ii)
Total consideration
30
28
15
43
(35)
(17)
64
85
149
149
–
149
45
1
1
168
(149)
(7)
59
151
210
210
–
210
Income Statement items
Revenue recognised since the acquisition date in the Group Income Statement (iii)
Profit/(loss) since the acquisition date in the Group Income Statement (iii)
69
2
714
13
5
–
–
1
(1)
–
5
13
18
13
5
18
–
(1)
Total
£m
80
29
16
212
(185)
(24)
128
249
377
372
5
377
783
14
(i)
Subsequent to the provisional fair values reported in the 2016 condensed interim Financial Statements, the fair values of ENER-G’s assets and liabilities have been updated in accordance
with the provisions of IFRS 3. In addition to other immaterial adjustments, a reclassification of £10 million between finance lease receivables and deferred revenue was made to reflect a
revised allocation of future cash receipts between finance lease receivables and associated service contracts. The net impact of all opening balance sheet adjustments on goodwill is a
£1 million reduction.
(ii)
Contingent consideration is stated at fair value at the reporting date and is classified as other payables (Level 3 in terms of fair value hierarchy). Fair value is based on a set of key assumptions
which take into consideration the probability of meeting sale volumes targets between 2017 and 2020. Future developments may require further revisions to the estimates. The maximum
consideration to be paid to the vendor amounts to £17 million.
(iii)
Revenue and profits/losses from business performance between the acquisition date and the balance sheet date, exclude exceptional items and certain re-measurements.
Acquisition-related costs have been charged to ‘operating costs before exceptional items’ in the Group Income Statement for an
aggregated amount of £4 million.
Pro forma information
The pro forma consolidated results of the Group, assuming the acquisitions had been made at the beginning of the year, would show
revenue of £28,474 million (compared to reported revenue of £27,102 million) and profit after taxation before exceptional items and certain
re-measurements of £886 million (compared to reported profit after taxation of £885 million). This pro forma information includes the
revenue and profits/losses made by the acquired businesses between the beginning of the financial year and the date of the acquisition,
without accounting policy alignments and/or the impact of the fair value uplifts resulting from purchase accounting considerations.
This pro forma aggregated information is not necessarily indicative of the results of the combined Group that would have occurred
had the acquisitions actually been made at the beginning of the year presented, or indicative of the future results of the combined Group.
134
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
12. ACQUISITIONS AND DISPOSALS
(b) 2015 business combinations – measurement period adjustments
During the year, there have been no material updates to the fair value of assets and liabilities recognised for businesses acquired in 2015.
Goodwill in respect of these acquisitions increased by £1 million.
(c) Assets and liabilities of disposal groups classified as held for sale
Assets and associated liabilities that are expected to be recovered principally through a sale have been classified as held for sale
and are presented separately on the face of the Group Balance Sheet.
On 30 November 2016, the Group agreed to sell its entire portfolio of gas assets in Trinidad and Tobago to Shell Exploration and Production
for initial consideration of $30 million (£24 million). The assets to be disposed of consist of a 17.3% interest in the producing NCMA-1 block
and 80% and 90% operated interests respectively in the undeveloped blocks NCMA-4 and Block 22. In addition to the initial consideration,
the Group will receive further consideration subject to Block 22 and NCMA-4 reaching agreed milestones. The transaction is subject to
government and partners’ approval and is expected to close in the first half of 2017.
As detailed in note 7, prior to classification of these assets as held for sale, previously recognised impairments were reversed, giving rise
to an exceptional pre-tax income statement credit of £56 million (£45 million post-tax).
These interests are currently shown in the Exploration & Production segment.
On 13 January 2017, as a consequence of the Group’s strategy to reduce its exposure on wind power generation assets, the Group agreed
to sell its remaining 50% interest in Lincs Wind Farm Limited (‘Lincs’) for net proceeds of £224 million, of which £113 million relates to a
shareholder loan. The counterparties to this transaction are UK Green Investment Bank plc and Green Investment Bank Offshore Wind Fund.
The transaction completed on 17 February 2017. During the course of a 12-month transition period post-completion, Centrica will provide
operations maintenance support to the buyers. The Group’s interest in Lincs is currently shown in the Central Power Generation segment.
Non-current assets (other than interests in joint ventures)
Interests in joint ventures
Assets of disposal groups classified as held for sale
Non-current liabilities
Liabilities of disposal groups classified as held for sale
Net assets of disposal groups classified as held for sale
Trinidad and Tobago
gas assets
£m
66
–
66
(42)
(42)
24
Lincs Wind Farm
£m
117
55
172
–
–
172
Total
£m
183
55
238
(42)
(42)
196
None of the above disposal groups are material enough to be shown as discontinued operations on the face of the Group Income
Statement as they do not represent a separate major line of business or geographical area of operations.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
135
135
Notes to the Financial Statements
12. ACQUISITIONS AND DISPOSALS
(d) Disposals
During the year, the Group sold its interest in the GLID wind farms joint venture, the Skene and Buckland fields and the Airtron Canada
and Airco Mechanical businesses. This note details the consideration received, the assets and liabilities disposed of and the profit/(loss)
before and after tax arising on disposal.
Date of disposal
Business/assets disposed of by the Group
Sold to
Goodwill
Property, plant and equipment
Interests in joint ventures
Other assets
Current liabilities
Non-current provisions for other liabilities and charges
Net assets/(liabilities) disposed of
Consideration received
Deferred consideration
Total consideration
Profit/(loss) on disposal before tax and release of cash flow
hedge reserve
Release of share of joint venture cash flow hedge reserve on disposal
Profit/(loss) on disposal before tax
Taxation
Profit/(loss) on disposal after tax
7 March 2016
18 May 2016
9 October 2016/
14 November 2016
GLID wind farms joint venture
Skene and Buckland gas and
oil assets (i)
Airco Mechanical/
Airtron Canada
Consortium comprised of UK
Green Investment Bank
Offshore Wind Fund and
BlackRock funds
£m
–
–
16
–
–
–
16
94
–
94
78
(5)
73
–
73
Apache Beryl Limited and
Enterprise Oil Limited
Management buyout/
Ainsworth Inc.
£m
–
3
–
2
–
(45)
(40)
10
–
10
50
–
50
(21)
29
£m
10
2
–
31
(10)
–
33
8
3
11
(22)
–
(22)
1
(21)
(i)
Based on the final completion statement, the consideration related to this disposal was amended to £10 million compared to £11 million reported in the condensed interim Financial
Statements for the period ended 30 June 2016.
On 7 March 2016, GLID wind farms were disposed of for sales proceeds of £116 million of which £22 million was in relation to
outstanding interest due to the Group from GLID. A profit on disposal after tax of £73 million was recognised on the sale of the Group’s
interest in this joint venture, and has been recognised as an exceptional item (see note 7) since this transaction is part of Centrica’s exit
from the wind business. Centrica will continue to purchase 100% of the power and 50% of the ROCs from the three GLID wind farms
under existing power purchase agreements (PPAs) until 2024.
On 16 November 2015, a Sale and Purchase Agreement (SPA) was entered into with Apache Beryl Limited to divest the non-operated
interests in Skene and Buckland for consideration of $15 million (£11 million). At 31 December 2015, this disposal group was classified
as held for sale. The transaction completed with Apache Beryl Limited and Enterprise Oil Limited (a Shell related party), which exercised
its pre-emption rights, on 18 May 2016. A profit on disposal after tax of £29 million was recognised as an exceptional item (see note 7).
On 9 October 2016, the Group announced a disposal through a management buyout of its NA Home investment in Airco Mechanical Ltd.
for consideration of $10 million (£8 million), out of which $3 million (£2 million) is deferred for payment on 1 December 2017. A loss on
disposal after tax of $11 million (£9 million) was recognised as an exceptional item (see note 7).
On 14 November 2016, the Group announced a disposal of NA Home’s interest in Airtron Canada (Direct Energy Business Services
Limited) for consideration of C$5 million (£3 million). Of the consideration, C$4 million was received upon completion of the transaction
and C$1 million is deferred for payment 18 months post completion. A loss on disposal after tax of C$19 million (£12 million) was
recognised as an exceptional item (see note 7). Centrica will support the buyer for a period of 12 months post completion, under the
terms of a transition service agreement.
All other disposals undertaken by the Group were immaterial, both individually and in aggregate. None of these disposals are material
enough to be shown as discontinued operations on the face of the Group Income Statement as they do not represent a separate major
line of business or geographical area of operations.
136
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
13. PROPERTY, PLANT AND EQUIPMENT
PP&E includes significant investment in power stations, gas production and gas storage assets. Once operational, all assets are
depreciated over their useful economic lives.
(a) Carrying amounts
Cost
1 January
Additions and capitalised
borrowing costs (note 4(e))
Acquisitions
Disposals/retirements (i)
Transfers (ii)
Transfers to disposal groups
held for sale
Decommissioning liability
revisions and additions
(note 21) (iii)
Exchange adjustments
31 December
Accumulated
depreciation and
impairment
1 January
Charge for the year
Impairments
Disposals/retirements (i)
Transfers to disposal groups
held for sale
Exchange adjustments
31 December
NBV at 31 December
Land and
buildings
£m
Plant,
equipment
and vehicles
£m
Power
generation
£m
Gas
production
and storage
£m
2016
Total
£m
Land and
buildings
£m
Plant,
equipment
and vehicles
£m
Power
generation
£m
Gas
production
and storage
£m
2015
Total
£m
30
602
2,070
14,944
17,646
29
633
2,061
15,158
17,881
–
–
–
–
–
–
1
31
16
1
–
–
–
–
17
14
90
1
(89)
–
23
28
(259)
–
561
–
(18)
98
674
29
(366)
98
–
(4)
(315)
(319)
22
39
665
–
9
1,867
279
1,022
16,571
301
1,071
19,134
262
93
–
(79)
–
22
298
367
1,704
36
(28)
(258)
11,035
523
139
(11)
13,017
653
111
(348)
–
–
1,454
413
(249)
630
12,067
4,504
(249)
652
13,836
5,298
1
–
–
–
–
–
–
30
15
1
–
–
–
–
16
14
115
–
(142)
–
12
–
–
–
642
–
(27)
32
770
–
(169)
32
–
–
(204)
(204)
–
(4)
602
(1)
(2)
2,070
(192)
(465)
14,944
(193)
(471)
17,646
330
76
–
(139)
–
(5)
262
340
1,639
31
34
–
–
–
1,704
366
9,520
778
1,139
(21)
(201)
(180)
11,035
3,909
11,504
886
1,173
(160)
(201)
(185)
13,017
4,629
(i)
(ii)
(iii)
Included within plant, equipment and vehicles disposals are £8 million (2015: £133 million) of gross assets which have been retired and have a net book value of zero.
Transfers from other balance sheet accounts includes £98 million (2015: £32 million) from intangible assets for exploration licences where the field is now being developed.
Includes £22 million revision to dilapidations provisions on UK properties.
(b) Assets in the course of construction included in above carrying amounts
31 December
Plant, equipment and vehicles
Gas production and storage
Power generation
2016
£m
55
505
7
2015
£m
53
1,245
–
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
137
137
Notes to the Financial Statements
13. PROPERTY, PLANT AND EQUIPMENT
(c) Assets held under finance leases and to which title was restricted included in above carrying amounts
Cost at 1 January
Additions
Cost at 31 December
Aggregate depreciation at 1 January
Charge for the year
Impairments
Aggregate depreciation at
31 December
NBV at 31 December
Plant,
equipment
and vehicles
£m
48
32
80
2
7
–
Power
generation
£m
469
–
469
469
–
–
Gas
production
and storage
£m
415
–
415
397
1
–
9
71
469
–
398
17
2016
Total
£m
932
32
964
868
8
–
876
88
Plant,
equipment
and vehicles
£m
–
48
48
–
2
–
Power
generation
£m
469
–
469
435
3
31
Gas
production
and storage
£m
415
–
415
394
3
–
2
46
469
–
397
18
2015
Total
£m
884
48
932
829
8
31
868
64
14. INTERESTS IN JOINT VENTURES AND ASSOCIATES
Investments in joint ventures and associates represent businesses where we exercise joint control or significant influence and generally
have an equity holding of up to 50%. These include investments in the existing EDF UK nuclear power station fleet and various UK
wind farms.
(a) Interests in joint ventures and associates
1 January
Additions
Disposals
Decrease in shareholder loans
Share of profits for the year
Share of other comprehensive income
Transfer to held for sale
Impairment
Dividends (i)
Exchange adjustments
31 December
Investments in
joint ventures
and associates
£m
1,679
17
21
–
102
56
(55)
(3)
(129)
3
1,691
Shareholder
loans
£m
160
–
(41)
–
–
–
(113)
–
–
–
6
2016
Investments in
joint ventures
and associates
£m
2,045
13
(3)
–
187
(5)
–
(372)
(186)
–
1,679
Total
£m
1,839
17
(20)
–
102
56
(168)
(3)
(129)
3
1,697
Shareholder
loans
£m
350
–
–
(190)
–
–
–
–
–
–
160
2015
Total
£m
2,395
13
(3)
(190)
187
(5)
–
(372)
(186)
–
1,839
(i)
Included within dividends is a non-cash £12 million (2015: £6 million) tax credit received in lieu of payment.
(b) Share of joint ventures’ and associates’ assets and liabilities
31 December
Share of non-current assets
Share of current assets
Share of current liabilities
Share of non-current liabilities
Cumulative impairment
Restricted interest on shareholder loan (i)
Share of net assets of joint ventures and associates
Shareholder loans
Interests in joint ventures and associates
Associates
Nuclear
£m
3,670
638
4,308
(149)
(1,897)
(2,046)
(586)
–
1,676
–
1,676
2016
2015
Other
£m
17
3
20
(1)
(4)
(5)
–
–
15
6
21
Total
£m
3,687
641
4,328
(150)
(1,901)
(2,051)
(586)
–
1,691
6
1,697
Total
£m
4,124
660
4,784
(306)
(2,201)
(2,507)
(586)
(12)
1,679
160
1,839
Net cash/(debt) included in share of net assets
78
–
78
(401)
(i)
The Group restricted an element of interest received on the shareholder loan to Lincs Wind Farm Limited.
Further information on the Group’s investments in joint ventures and associates is provided in notes 6 and S10.
138
138
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
15. OTHER INTANGIBLE ASSETS AND GOODWILL
The Group Balance Sheet contains significant intangible assets. Goodwill, customer relationships and brands arise when we acquire
a business. Goodwill is attributable to enhanced geographical presence, cost savings, synergies, growth opportunities, the assembled
workforce and technical goodwill from items such as deferred tax. Goodwill is not amortised but is assessed for recoverability each year.
The Group uses European Union Allowances (EUAs) and Renewable Obligation Certificates (ROCs) to satisfy its related obligations.
Upstream exploration and evaluation expenditure is capitalised as an intangible asset until development of the asset commences,
at which point it is transferred to PP&E or is deemed not commercially viable and is written down.
(a) Carrying amounts
Cost
1 January
Additions and capitalised
borrowing costs (note
4(e))
Acquisitions
Disposals/retirements
and surrenders (iv)
Write-downs
Transfers (v)
Exchange adjustments
31 December
Accumulated
amortisation
1 January
Amortisation
Impairments
Disposals/retirements
and surrenders (iv)
Transfers (v)
Exchange adjustments
31 December
NBV at 31 December
Customer
relation-
ships
and
brands (i)
£m
Application
software
(ii) (iii)
£m
Exploration
and
evaluation
expenditure
£m
EUAs
and
ROCs
£m
Customer
relation-
ships
and
brands
£m
Application
software
(ii)
£m
Exploration
and
evaluation
expenditure
£m
EUAs
and
ROCs
£m
Goodwill
£m
Total
£m
Goodwill
£m
Total
£m
2016
2015
683
1,380
299
485
2,778
5,625
654
1,505
260
562
2,736
5,717
–
48
196
13
629
19
11
–
–
250
836
330
2
–
153
32
617
2
(34)
–
–
107
804
(75)
–
–
67
1,581
(664)
–
–
28
311
–
(19)
(98)
46
425
(10)
–
(88)
391
3,321
(783)
(19)
(186)
639
6,442
387
73
–
(34)
–
70
496
308
524
195
14
(71)
–
33
695
886
2
–
–
–
–
–
2
309
159
–
–
–
–
–
159
266
729
–
–
1,801
268
14
–
(88)
66
707
2,614
(105)
(88)
169
2,059
4,383
–
–
–
27
683
297
73
–
–
–
17
387
296
(307)
–
–
(3)
1,380
(585)
–
–
5
299
669
161
–
(298)
–
(8)
524
856
2
–
–
–
–
–
2
297
81
–
(3)
(71)
(32)
(52)
485
22
–
137
–
–
–
159
326
–
71
853
105
–
–
–
(29)
2,778
(895)
(71)
(32)
(52)
5,625
127
–
609
1,117
234
746
–
–
(7)
729
2,049
(298)
–
2
1,801
3,824
The remaining amortisation period of material customer relationship assets is around five years.
Application software includes assets under construction with a cost of £229 million (2015: £193 million).
The remaining amortisation period of material application software assets is between six and 10 years.
(i)
(ii)
(iii)
(iv)
(v)
Included within disposals/retirements and surrenders are £86 million (2015: £286 million) of gross assets that have been retired and have a net book value of zero.
Transfers to other balance sheet accounts, including £98 million to PP&E and £88 million to assets held for sale in respect of fully impaired goodwill relating to Trinidad and Tobago.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
139
139
Notes to the Financial Statements
15. OTHER INTANGIBLE ASSETS AND GOODWILL
(b) Carrying amount of goodwill and intangible assets with indefinite useful lives allocated to CGUs
Goodwill acquired through business combinations, and indefinite-lived intangible assets, have been allocated for impairment testing
purposes to individual CGUs or groups of CGUs, each representing the lowest level within the Group at which the goodwill or
indefinite-lived intangible asset is monitored for internal management purposes.
Principal acquisitions to which
goodwill and intangibles with indefinite
useful lives relate
Carrying
amount of
indefinite-lived
intangible
assets (i)
£m
Carrying
amount of
goodwill
£m
AlertMe/Dyno-Rod
Enron Direct/Electricity Direct
Bord Gáis Energy
63
181
15
57
–
–
2016
Total
£m
120
181
15
Carrying
amount of
indefinite-lived
intangible
assets
(restated) (i) (ii)
£m
Carrying
amount of
goodwill
(restated) (ii)
£m
2015
Total
(restated) (ii)
£m
63
181
13
925
471
18
28
–
57
–
–
13
–
–
–
–
120
181
13
938
471
18
28
–
1,105
16
1,121
565
31
119
145
–
–
–
–
565
31
119
145
390
2,614
–
73
390
2,687
350
2,049
–
70
350
2,119
31 December
CGUs
Energy Supply & Services –
UK & Ireland:
UK Home
UK Business
Ireland
Energy Supply & Services –
North America:
NA Home
NA Business
Direct Energy/ATCO/
CPL/WTU/FCP/Bounce/
Residential Services Group/
Clockwork/Astrum Solar
Direct Energy/ATCO/Strategic
Energy/FCP/HEM
Connected Home
AlertMe/Flowgem
Distributed Energy & Power ENER-G, Panoramic Power
Energy Marketing & Trading Neas Energy
Exploration & Production:
UK/Norway/Netherlands Newfield/Heimdal/Venture
(i)
(ii)
The indefinite-lived assets mainly relate to the Mr Sparky and Benjamin Franklin brands acquired as part of the Clockwork business combination, and the Dyno-Rod brand.
The goodwill and indefinite-lived assets have been restated in the new reporting segments. See note 1 for further details.
140
140
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
16. DEFERRED TAX LIABILITIES AND ASSETS
Deferred tax is an accounting adjustment to provide for tax that is expected to arise in the future as a result of differences in the
accounting and tax bases of assets and liabilities. The principal deferred tax liabilities and assets recognised by the Group relate
to capital investments, fair value movements on derivative financial instruments, PRT and pensions.
1 January 2015
Credit/(charge) to income – change to tax rates
Credit/(charge) to income – other
(Charge)/credit to equity
Acquisition/disposal of businesses
Transfer of deferred tax assets to disposal groups
classified as held for sale
Exchange and other adjustments
31 December 2015
Credit/(charge) to income – change to tax rates
(Charge)/credit to income – other
(Charge)/credit to equity
Acquisition/disposal of businesses
Transfer of deferred tax liabilities to disposal groups
classified as held for sale
Exchange and other adjustments
31 December 2016
Accelerated tax
depreciation
(corporation tax)
£m
(1,403)
212
226
–
(5)
Other timing
differences
including losses
carried forward (i)
£m
780
(61)
126
(2)
–
Marked to
market positions
£m
330
20
81
(6)
–
Net deferred
PRT (ii)
£m
64
(29)
42
–
–
Retirement
benefit
obligation and
other provisions
£m
(80)
21
(16)
50
–
2
48
(920)
161
(345)
–
(6)
(10)
(8)
825
(92)
531
(1)
(15)
–
65
(1,045)
3
(87)
1,164
–
17
442
16
(630)
(3)
–
–
34
(141)
–
–
77
(41)
(21)
–
–
–
–
15
–
–
(25)
22
(77)
194
–
–
4
118
Total
£m
(309)
163
459
42
(5)
(8)
57
399
66
(542)
190
(21)
3
16
111
(i)
Other timing differences include deferred tax assets of £1,300 million (2015: £1,199 million) in respect of decommissioning provisions and £303 million (2015: £169 million) in respect of losses
carried forward. The losses arise principally from accelerated allowances for upstream investments expenditure, for which equivalent deferred tax liabilities are included under accelerated tax
depreciation.
The deferred PRT amounts include the effect of deferred corporation tax as PRT is deductible for corporation tax purposes.
(ii)
Certain deferred tax assets and liabilities have been offset where there is a legally enforceable right to offset current tax assets against
current tax liabilities and when the deferred income taxes relate to the same fiscal authority. The following is an analysis of the gross
deferred tax balances and associated offsetting balances for financial reporting purposes:
31 December
Gross deferred tax balances crystallising within one year
Gross deferred tax balances crystallising after one year
Offsetting deferred tax balances
Net deferred tax balances (after offsetting for financial reporting
purposes)
Assets
£m
223
1,502
1,725
(1,369)
2016
Liabilities
£m
(258)
(1,356)
(1,614)
1,369
Assets
£m
372
1,654
2,026
(1,529)
2015
Liabilities
£m
(307)
(1,320)
(1,627)
1,529
356
(245)
497
(98)
Deferred tax assets arise principally on decommissioning provisions, trading losses carried forward, retirement benefit obligations and
marked to market positions. Forecasts indicate that there will be suitable taxable profits to utilise those deferred tax assets not offset
against deferred tax liabilities. Specific legislative provisions applicable to gas and oil production provide assurance that deferred tax
assets relating to decommissioning costs and certain trading losses will be utilised.
At the balance sheet date the Group had certain unrecognised deductible temporary differences of £1,276 million (2015: £963 million),
of which £1,073 million (2015: £790 million) are carried forward tax losses available for utilisation against future taxable profits. Some
£313 million (2015: £118 million) of these losses will expire within one to five years. All other temporary differences have no expiry date.
No deferred tax asset has been recognised in respect of these temporary differences, due to the unpredictability of future profit streams.
At the balance sheet date, no taxable temporary differences existed in respect of the Group’s overseas investments (2015: nil). The
deferred tax liability arising on these temporary differences is estimated to be nil (2015: nil).
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
141
141
Notes to the Financial Statements
17. TRADE AND OTHER RECEIVABLES
Trade and other receivables include accrued income, and are amounts owed by our customers for goods we have delivered or
services we have provided. These balances are valued net of expected irrecoverable debts. Other receivables include payments made
in advance to our suppliers.
31 December
Financial assets:
Trade receivables
Accrued energy income
Other accrued income
Cash collateral posted (note 24(c))
Other receivables (including loans)
Less: provision for credit losses
Non-financial assets: prepayments and other receivables
Current
£m
2016
Non-current
£m
2,305
2,394
123
307
231
5,360
(697)
4,663
439
5,102
–
–
–
–
41
41
–
41
25
66
Current
£m
2,493
1,925
127
216
338
5,099
(694)
4,405
500
4,905
2015
Non-current
£m
–
–
–
–
25
25
–
25
36
61
Trade and other receivables include financial assets representing the contractual right to receive cash or other financial assets from
residential customers, business customers and treasury, trading and energy procurement counterparties as follows:
31 December
Financial assets by class:
Residential customers
Business customers
Treasury, trading and energy procurement counterparties
Less: provision for credit losses
Current
£m
2016
Non-current
£m
1,690
2,429
1,241
5,360
(697)
4,663
8
32
1
41
–
41
Current
£m
1,562
2,496
1,041
5,099
(694)
4,405
2015
Non-current
£m
7
12
6
25
–
25
Receivables from residential and business customers are generally considered to be fully performing until such time as the payment
that is due remains outstanding past the contractual due date. Contractual due dates range from falling due upon receipt to falling due
in 30 days from receipt. Receivables from residential customers are generally reviewed for impairment on an individual basis once a
customer discontinues their relationship with the Group.
Current financial assets within trade and other receivables net of provision
for credit losses on an undiscounted basis
31 December
Balances that are not past due
Balances that are past due but not considered to be individually impaired
Balances with customers that are considered to be individually impaired
2016
£m
3,342
1,279
42
4,663
An ageing of the carrying value of trade and other receivables that are past due that are not considered to be individually impaired
is as follows:
Financial assets within trade and other receivables on an undiscounted basis
31 December
Days past due:
Less than 30 days
30 to 89 days
Less than 90 days
90 to 182 days
183 to 365 days
Greater than 365 days
142
142
2016
£m
703
224
927
125
144
83
1,279
2015
£m
2,790
1,576
39
4,405
2015
£m
745
366
1,111
225
163
77
1,576
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
17. TRADE AND OTHER RECEIVABLES
The provision for credit losses is based on an incurred loss model and is determined by application of expected default and loss factors,
informed by historical loss experience and current sampling to the various balances receivable from residential and business customers
on a portfolio basis, in addition to provisions taken against individual accounts. Balances are written off when recoverability is assessed
as being remote. The impairment charge in trade receivables is stated net of credits for the release of specific provisions made in previous
years, which are no longer required. These relate primarily to residential customers in the UK. Movements in the provision for credit losses
by class are as follows:
1 January
Impairment of trade receivables (i)
Receivables written off
31 December
Residential
customers
£m
(359)
(117)
81
(395)
Business
customers
£m
(332)
(58)
94
(296)
Treasury,
trading
and energy
procurement
counterparties
£m
(3)
(3)
–
(6)
2016
Total
£m
(694)
(178)
175
(697)
Residential
customers
£m
(388)
(109)
138
(359)
Business
customers
£m
(243)
(188)
99
(332)
Treasury,
trading
and energy
procurement
counterparties
£m
(3)
–
–
(3)
2015
Total
£m
(634)
(297)
237
(694)
(i)
2016 includes £4 million reclassified to deferred income for related cancel/rebill activity. 2015 includes £38 million of items previously classified as provisions within accrued energy income
that management believe is more appropriately classified as provisions for credit losses.
18. INVENTORIES
Inventories represent assets that we intend to use in future periods, either by selling the asset itself (for example gas in storage) or by
using it to provide a service to a customer.
31 December
Gas in storage and transportation
Other raw materials and consumables
Finished goods and goods for resale
2016
£m
190
175
7
372
2015
£m
221
160
14
395
The Group consumed £750 million of inventories (2015: £889 million) during the year. Write downs amounting to £10 million
(2015: £19 million) were charged to the Group Income Statement in the year.
19. DERIVATIVE FINANCIAL INSTRUMENTS
The Group uses derivative financial instruments to manage the risk arising from fluctuations in the value of certain assets or liabilities,
associated with treasury management, energy sales and procurement. These derivatives are held at fair value, and are predominantly
unrealised positions, expected to unwind in future periods. The Group also uses derivatives for proprietary energy trading purposes.
Purpose
Proprietary energy trading
and treasury management
Energy procurement/
optimisation
Accounting treatment
Carried at fair value, with changes in fair value recognised in the Group’s results for the year, before
exceptional items and certain re-measurements (i)
Carried at fair value, with changes in fair value reflected in certain re-measurements
(i) With the exception of certain energy derivatives related to cross-border transportation and capacity contracts.
In cases where a derivative qualifies for hedge accounting, derivatives are classified as fair value hedges or cash flow hedges.
Note S5 provides further detail on the Group’s hedge accounting.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
143
143
Notes to the Financial Statements
19. DERIVATIVE FINANCIAL INSTRUMENTS
The carrying values of derivative financial instruments by product type for accounting purposes are as follows:
31 December
Derivative financial instruments – held for trading under IAS 39:
Energy derivatives – for procurement/optimisation
Energy derivatives – for proprietary trading
Interest rate derivatives (i)
Foreign exchange derivatives (i)
Energy derivative contracts designated at fair value through profit or loss
Derivative financial instruments in hedge accounting relationships:
Interest rate derivatives (i)
Foreign exchange derivatives (i)
Total derivative financial instruments
Included within:
Derivative financial instruments – current
Derivative financial instruments – non-current
Assets
£m
1,420
33
–
93
18
158
151
1,873
1,291
582
2016
Liabilities
£m
(1,360)
(92)
(30)
(103)
–
(6)
(2)
(1,593)
(1,100)
(493)
Assets
£m
1,038
99
–
68
14
129
28
1,376
936
440
2015
Liabilities
£m
(1,782)
(1)
(25)
(89)
–
(3)
(68)
(1,968)
(1,460)
(508)
(i)
Included within these categories are £291 million (2015: £82 million) of derivatives used to hedge movements in net debt. See note 24(c).
The contracts included within energy derivatives are subject to a wide range of detailed specific terms but comprise the following general
components, analysed on a net carrying value basis:
31 December
Short-term forward market purchases and sales of gas and electricity:
UK and Europe
North America
Structured gas purchase contracts
Structured gas sales contracts
Structured power purchase contracts
Other
Net total
Net (losses)/gains on derivative financial instruments due to re-measurement
31 December
Financial assets and liabilities measured at fair value:
Derivative financial instruments – held for proprietary energy trading
Derivative financial instruments – held for trading under IAS 39
Energy contracts designated at fair value through profit or loss
Derivative financial instruments in hedge accounting relationships
Income
Statement
£m
(89)
1,040
(2)
25
974
2016
Equity
£m
–
–
–
185
185
2016
£m
(165)
(59)
296
(10)
(45)
2
19
Income
Statement
£m
36
148
10
(29)
165
2015
£m
119
(470)
(263)
–
(54)
36
(632)
2015
Equity
£m
–
–
–
28
28
144
144
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
20. TRADE AND OTHER PAYABLES
Trade and other payables include accruals, and are principally amounts we owe to our suppliers. Deferred income represents monies
received from customers in advance of the delivery of goods or the performance of services by the Group.
31 December
Financial liabilities:
Trade payables
Deferred income
Capital payables
Other payables
Accruals:
Commodity costs
Transportation, distribution and metering costs
Operating and other accruals
Non-financial liabilities:
Other payables and accruals
Deferred income
Financial liabilities within current trade and other payables
31 December
Less than 90 days
90 to 182 days
183 to 365 days
Current
£m
2016
Non-current
£m
Current
£m
2015
Non-current
£m
(699)
(534)
(142)
(399)
(1,547)
(407)
(898)
(2,852)
(4,626)
(673)
(226)
(5,525)
–
–
–
(40)
–
–
–
–
(40)
(18)
(11)
(69)
(649)
(584)
(181)
(573)
(1,187)
(326)
(853)
(2,366)
(4,353)
(548)
(133)
(5,034)
2016
£m
(4,402)
(123)
(101)
(4,626)
–
–
–
(34)
–
–
–
–
(34)
(20)
(16)
(70)
2015
£m
(4,160)
(77)
(116)
(4,353)
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
145
145
Notes to the Financial Statements
21. PROVISIONS FOR OTHER LIABILITIES AND CHARGES
Provisions are recognised when an obligation exists that can be reliably measured, but where there is uncertainty over the timing
and/or amount of the payment. The main provisions relate to decommissioning costs for upstream assets we own, or have owned,
which require restoration or remediation. Further provisions relate to sale and purchase contracts we have entered into that are now
onerous, restructuring costs, and legal and regulatory matters.
Current provisions for
other liabilities and charges
Restructuring costs
Decommissioning costs (ii) (iii)
Sale/purchase contract loss provision (iv)
Other (v)
1 January
2016
£m
(16)
(117)
(163)
(100)
(396)
Acquisitions
and disposals
£m
–
–
–
–
–
Charged in
the year
£m
(122)
–
(33)
(22)
(177)
Notional
interest
£m
–
–
(5)
–
(5)
Non-current provisions for
other liabilities and charges
Restructuring costs
Decommissioning costs (ii) (iii)
Sale/purchase contract loss provision (iv)
Other (v)
1 January
2016
£m
(11)
(2,592)
(191)
(45)
(2,839)
Acquisitions
and disposals
£m
–
4
–
–
4
Charged in
the year
£m
(8)
(47)
(1)
(8)
(64)
Notional
interest
£m
(3)
(62)
(2)
–
(67)
Included within the above liabilities are the following financial liabilities:
Financial liabilities
31 December
Restructuring costs
Provisions other than restructuring costs
Unused and
reversed in
the year
£m
6
–
23
18
47
Unused and
reversed in
the year
£m
–
57
60
1
118
Utilised
£m
32
55
179
43
309
Revisions
and
additions
£m
–
(279)
–
(22)
(301)
Transfers
(i)
£m
16
(157)
(49)
(13)
(203)
Exchange
adjustments
£m
(3)
(7)
(15)
(7)
(32)
31 December
2016
£m
(87)
(226)
(63)
(81)
(457)
Transfers
(i)
£m
1
199
49
13
262
Exchange
adjustments
£m
–
(200)
(12)
–
(212)
31 December
2016
£m
(21)
(2,920)
(97)
(61)
(3,099)
Current
£m
(87)
(142)
(229)
2016
Non-current
£m
(18)
(148)
(166)
Current
£m
(16)
(252)
(268)
2015
Non-current
£m
(9)
(222)
(231)
(i)
(ii)
Includes transfers to/from other balance sheet accounts including retirement benefit obligations and liabilities of disposal groups classified as held for sale.
Provision has been made for the estimated net present cost of decommissioning gas production and storage facilities at the end of their useful lives. The estimate has been based on
2P reserves, price levels and technology at the balance sheet date. The timing of decommissioning payments is dependent on the lives of the facilities but is expected to occur by 2066,
with the majority of the provision being utilised between 2020 and 2040.
(iii)
The real discount rate used to discount the Group’s European decommissioning liabilities was reduced by 1% in the period which resulted in an increase in the provision of £229 million,
£14 million of which was recorded immediately in the Group Income Statement.
(iv)
The sale/purchase contract loss provision relates mainly to a number of European gas transportation contracts and Direct Energy wind farm power purchase agreements. The majority of the
provision is expected to be utilised by 2020. During the year, the Rijnmond and Spalding tolling contract provisions were extinguished.
(v)
Other provisions have been made for dilapidations, insurance, legal and various other claims.
146
146
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
22. POST RETIREMENT BENEFITS
The Group manages a number of final salary and career average defined benefit pension schemes. It also has defined contribution
schemes. The majority of these schemes are in the UK.
(a) Summary of main post retirement benefit schemes
Status
Type of benefit
Name of scheme
Defined benefit final salary pension
Closed to new members in 2006 UK
Centrica Engineers
Defined benefit career average pension Open to service engineers only UK
Pension Scheme
Closed to new members in 2003 UK
Centrica Pension Plan
Defined benefit final salary pension
Closed to new members in 2003 UK
Centrica Pension Scheme Defined benefit final salary pension
Defined benefit career average pension Closed to new members in 2008 UK
UK
Defined contribution pension
Defined benefit final salary pension
Country
Open to new members
Closed to new members in 2014 Republic
of Ireland
Number of
active members
as at
31 December
2016
3,733
3,758
3,517
9
1,631
15,309
147
Total
membership
as at
31 December
2016
8,651
5,185
8,722
10,652
4,112
23,245
175
Defined contribution pension
Defined benefit final salary pension
Post retirement benefits
Open to new members
Republic
of Ireland
176
205
Closed to new members in 2004 Canada
Closed to new members in 2012 Canada
8
9
384
262
Bord Gáis Energy
Company Defined Benefit
Pension Scheme
Bord Gáis Energy
Company Defined
Contribution Pension Plan
Direct Energy Marketing
Limited Pension Plan
Direct Energy
Marketing Limited
The Centrica Engineers Pension Scheme (CEPS), Centrica Pension Plan (CPP) and Centrica Pension Scheme (CPS) form the significant
majority of the Group’s defined benefit obligation and are referred to below as the ‘Registered Pension Schemes’. The other schemes
are individually, and in aggregate, immaterial.
Independent valuations
The Registered Pension Schemes are subject to independent valuations at least every three years, on the basis of which the qualified
actuary certifies the rate of employer contributions, which together with the specified contributions payable by the employees and
proceeds from the schemes’ assets, are expected to be sufficient to fund the benefits payable under the schemes.
The latest full actuarial valuations were carried out at the following dates: the Registered Pension Schemes at 31 March 2015 and the
Direct Energy Marketing Limited Pension Plan at 1 August 2014. These have been updated to 31 December 2016 for the purpose of
meeting the requirements of IAS 19. Investments held in all schemes have been valued for this purpose at market value.
Governance
The Registered Pension Schemes are managed by trustee companies whose boards consist of both company-nominated and member-
nominated Directors. Each scheme holds units in the Centrica Combined Common Investment Fund (CCCIF), which holds the majority
of the combined assets of the Registered Pension Schemes. The board of the CCCIF is currently comprised of nine Directors; three
independent Directors, three Directors appointed by Centrica plc (including the Chairman) and one Director appointed by each of the
three Registered Pension Schemes.
Under the terms of the Pensions Act 2004, Centrica plc and each trustee board must agree the funding rate for its defined benefit
pension scheme and a recovery plan to fund any deficit against the scheme-specific statutory funding objective. This approach was
first adopted for the triennial valuations completed at 31 March 2006, and has been reflected in subsequent valuations, including the
31 March 2015 valuations.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
147
147
Notes to the Financial Statements
22. POST RETIREMENT BENEFITS
(b) Risks
The Registered Pension Schemes expose the Group to the following risks:
Asset volatility
The pension liabilities are calculated using a discount rate set with reference to AA corporate bond yields; if the growth in plan assets
is lower than this, this will create an actuarial loss within other equity. The CCCIF is responsible for managing the assets of each scheme
in line with the liability-related investment objectives that have been set by the trustees of the schemes, and invests in a diversified portfolio
of assets. The schemes are relatively young in nature (the schemes opened in 1997 on the formation of Centrica plc on demerger from
BG plc (formerly British Gas plc), and only took on liabilities in respect of active employees). Therefore, the CCCIF holds a significant
proportion of return-seeking assets; such assets are generally expected to provide a higher return than corporate bonds, but result in
greater exposure to volatility and risk in the short term. The investment objectives are to achieve a target return above a return based
on a portfolio of gilts, subject to a maximum volatility ceiling. If there have been advantageous asset movements relative to liabilities
above a set threshold, then de-risking is undertaken, and as a consequence the return target and maximum volatility ceiling are reduced.
Interest rate
A decrease in the bond interest rate will increase the net present value of the pension liabilities. The relative immaturity of the schemes
means that the duration of the liabilities is longer than average for typical UK pension schemes, resulting in a relatively higher exposure
to interest rate risk.
Inflation
Pensions in deferment, pensions in payment and pensions accrued under the career average schemes increase in line with the Retail
Price Index (RPI) and the Consumer Price Index (CPI). Therefore scheme liabilities will increase if inflation is higher than assumed, although
in some cases caps are in place to limit the impact of significant movements in inflation. Furthermore, a pension increase exchange (PIE)
option implemented in 2015 is available to future retirees, which gives the choice to receive a higher initial pension in return for giving up
certain future increases linked to RPI, again limiting the impact of significant movements in inflation.
Longevity
The majority of the schemes’ obligations are to provide benefits for the life of scheme members and their surviving spouses; therefore
increases in life expectancy will result in an increase in the pension liabilities. The relative immaturity of the schemes means that there is
comparatively little observable mortality data to assess the rates of mortality experienced by the schemes, and means that the schemes’
liabilities will be paid over a long period of time, making it particularly difficult to predict the life expectancy of the current membership.
Furthermore, pension payments are subject to inflationary increases, resulting in a higher sensitivity to changes in life expectancy.
Salary
Pension liabilities are calculated by reference to the future salaries of active members, and hence salary rises in excess of assumed
increases will increase scheme liabilities. During 2011, changes were introduced to the final salary sections of CEPS and CPP such that
annual increases in pensionable pay are capped to 2%, resulting in a reduction in salary risk. During 2016, a salary cap on pensionable
pay for the CPP and CPS career average schemes was implemented. Both the 2011 and 2016 changes result in a reduction in salary risk.
Foreign exchange
Certain of the assets held by the CCCIF are denominated in foreign currencies, and hence their values are subject to exchange rate risk.
The CCCIF has long-term hedging programmes in place to manage interest rate, inflation and foreign exchange risks.
The table below analyses the total liabilities of the Registered Pension Schemes, calculated in accordance with accounting principles,
by type of liability, as at 31 December 2016.
Total liabilities of the Registered Pension Schemes
31 December
Actives – final salary – capped
Actives – final salary – uncapped and crystallised benefits
Actives – career average
Deferred pensioners
Pensioners
2016
%
27
5
7
31
30
100
148
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
22. POST RETIREMENT BENEFITS
(c) Accounting assumptions
The accounting assumptions for the Registered Pension Schemes have been given below:
Major assumptions used for the actuarial valuation
31 December
Rate of increase in employee earnings:
Subject to 2% cap
Other not subject to cap
Rate of increase in pensions in payment
Rate of increase in deferred pensions:
In line with CPI capped at 2.5%
In line with RPI
Discount rate
2016
%
1.7
3.2
3.2
2.1
3.2
2.7
2015
%
1.7
3.0
3.0
1.9
3.0
3.9
The assumptions relating to longevity underlying the pension liabilities at the balance sheet date have been based on a combination
of standard actuarial mortality tables, scheme experience and other relevant data, and include an allowance for future improvements
in mortality. The longevity assumptions for members in normal health are as follows:
Life expectancy at age 65 for a member
31 December
Currently aged 65
Currently aged 45
Male
Years
23.2
25.0
2016
Female
Years
24.9
26.8
Male
Years
23.4
25.1
2015
Female
Years
25.1
27.0
The other demographic assumptions have been set having regard to the latest trends in scheme experience and other relevant data.
The assumptions are reviewed and updated as necessary as part of the periodic actuarial valuations of the pension schemes.
Reasonably possible changes as at 31 December to one of the actuarial assumptions would have affected the scheme liabilities as set
out below:
Impact of changing material assumptions
31 December
Rate of increase in employee earnings subject to 2% cap
Rate of increase in pensions in payment and deferred pensions
Discount rate
Inflation assumption
Longevity assumption
2016
Indicative effect
on scheme
liabilities
%
+/–1
+/–5
–/+6
+/–5
+/–3
Increase/
decrease in
assumption
0.25%
0.25%
0.25%
0.25%
1 year
2015
Indicative effect
on scheme
liabilities
%
+/–1
+/–4
–/+6
+/–4
+/–3
Increase/
decrease in
assumption
0.25%
0.25%
0.25%
0.25%
1 year
The indicative effects on scheme liabilities have been calculated by changing each assumption in isolation and assessing the impact
on the liabilities. For the reasonably possible change in the inflation assumption, it has been assumed that a change to the inflation
assumption would lead to corresponding changes in the assumed rates of increase in uncapped pensionable pay, pensions in payment
and deferred pensions.
The remaining disclosures in this note cover all of the Group’s defined benefit schemes.
(d) Amounts included in the Group Balance Sheet
31 December
Fair value of plan assets
Present value of defined benefit obligation
Net liability recognised in the Group Balance Sheet
Pension asset presented in the Group Balance Sheet as:
Retirement benefit assets
Retirement benefit liabilities
Net pension liability
2016
£m
7,938
(9,075)
(1,137)
–
(1,137)
(1,137)
2015
£m
6,642
(6,761)
(119)
91
(210)
(119)
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
149
149
Notes to the Financial Statements
22. POST RETIREMENT BENEFITS
(e) Movement in the year
1 January
Items included in the Group Income Statement:
Current service cost
Contributions by employer in respect of employee salary sacrifice
arrangements (i)
Total current service cost
Past service credit
Interest (expense)/income
Items included in the Group Statement of Comprehensive Income:
Returns on plan assets, excluding interest income
Actuarial gain/(loss) from changes to demographic assumptions
Actuarial (loss)/gain from changes in financial assumptions
Actuarial gain/(loss) from experience adjustments
Exchange adjustments
Items included in the Group Cash Flow Statement:
Employer contributions
Contributions by employer in respect of employee salary sacrifice
arrangements (i)
Other movements:
Plan participants’ contributions
Benefits paid from schemes
Acquisition/disposal of businesses
Settlement
Transfers from provisions for other liabilities and charges
31 December
Pension
liabilities
£m
(6,761)
(118)
(23)
(141)
80
(265)
–
93
(2,361)
100
(13)
–
–
(1)
202
–
9
(17)
(9,075)
2016
Pension
assets
£m
6,642
Pension
liabilities
£m
(6,382)
2015
Pension
assets
£m
6,444
–
(129)
–
–
–
258
994
–
–
–
6
225
23
1
(202)
–
(9)
–
7,938
(24)
(153)
38
(248)
–
(24)
5
(176)
8
–
–
(1)
170
3
–
(1)
(6,761)
–
–
–
–
253
(126)
–
–
–
(5)
224
24
1
(170)
(3)
–
–
6,642
(i)
A salary sacrifice arrangement was introduced on 1 April 2013 for pension scheme members. The contributions paid via the salary sacrifice arrangement have been treated as employer
contributions, and included within current service cost, with a corresponding reduction in salary costs.
In addition to current service cost on the Group’s defined benefit pension schemes, the Group also charged £44 million (2015: £43 million)
to operating profit in respect of defined contribution pension schemes. This included contributions of £13 million (2015: £13 million) paid
via a salary sacrifice arrangement.
(f) Pension scheme assets
The market values of plan assets were:
31 December
Equities
Diversified asset funds
Corporate bonds
High-yield debt
Liability matching assets
Property
Cash pending investment
Quoted
£m
1,991
50
1,294
309
1,241
–
283
5,168
Unquoted
£m
307
–
–
1,296
844
323
–
2,770
2016
Total
£m
2,298
50
1,294
1,605
2,085
323
283
7,938
Quoted
£m
1,884
47
1,732
167
874
–
64
4,768
Unquoted
£m
219
–
–
781
556
318
–
1,874
2015
Total
£m
2,103
47
1,732
948
1,430
318
64
6,642
Included within equities are £1 million (2015: £1 million) of ordinary shares of Centrica plc via pooled funds that include a benchmark
allocation to UK equities. Included within corporate bonds are £1 million (2015: £2 million) of bonds issued by Centrica plc held within
pooled funds over which the CCCIF has no ability to direct investment decisions. Apart from the investment in the Scottish Limited
Partnerships which form part of the asset-backed contribution arrangements described in note 22(g), no direct investments are made
in securities issued by Centrica plc or any of its subsidiaries or property leased to or owned by Centrica plc or any of its subsidiaries.
Included within the Group Balance Sheet within non-current securities are £85 million (2015: £76 million) of investments, held in trust on
behalf of the Group, as security in respect of the Centrica Unfunded Pension Scheme. Of the pension scheme liabilities above, £62 million
(2015: £50 million) relate to this scheme. More information on the Centrica Unfunded Pension Scheme is included in the Remuneration
Report on pages 83 to 99.
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Notes to the Financial Statements
22. POST RETIREMENT BENEFITS
(g) Pension scheme contributions
The continued fall in gilt rates and the low yield environment has impacted the discount rate on which our pension deficit is calculated,
giving rise to a higher liability, as well as increasing the cost of providing new pension benefits. The Group has taken steps to mitigate,
as far as possible, these increased costs to help remain competitive and support the Group’s growth.
After a period of member consultation, the following amendments to the Registered Pension Schemes were approved: an increase
in member contributions, a change to the inflationary increases for future pension build up in retirement to the lower of CPI and 2.5%
and a reduced pensionable salary cap for the CPP and CPS career average schemes only. These changes will partially mitigate the
impact of the low yield environment.
As a result of the implementation of a salary cap on pensionable pay for the CPP scheme, a past service credit of £80 million (net of
£2 million costs of implementing the changes) has been recognised as an exceptional item in the period as described in note 7.
During the year, the Group finalised the outcome of the UK Registered Pension Schemes triennial review, based on the position as at
31 March 2015, with the Pension Trustees. The Group is committing additional annual cash contributions of £76 million for 14 years to
fund the pension deficit which, on a Technical Provisions basis, has increased from £331 million in 2012 to £1,203 million in 2015 primarily
due to a lower discount rate used following falls in market yields. The funding will be provided through a new asset-backed contribution
arrangement with the annual contributions commencing in 2017. The existing asset-backed contribution arrangements, paying £77 million
in 2016, £55 million in 2017, £22 million per annum in 2018-2022 and £5 million per annum in 2023-2026 into the schemes, will continue
unchanged. A £995 million security package over certain of the Group’s assets, enforceable in the unlikely event the Group is unable to
meet its obligations, has also been agreed in support of these arrangements.
Although the Group has established a new funding arrangement in the year based on the position as at 31 March 2015, it should be
noted that the market rates, from which the discount rate is derived, have continued to decline in the subsequent period. The Group
continues to monitor its pension liabilities on an ongoing basis, including assessing various scenarios that may arise and their potential
implications for the business.
Deficit payments are also being made in respect of the Direct Energy Marketing Limited Pension Plan in Canada. £2 million was paid
in 2016 with further annual contributions of £1 million to be paid 2017, 2018 and 2019.
The Group estimates that it will pay £110 million of ordinary employer contributions during 2017 at an average rate of 24% of pensionable
pay, together with £37 million of contributions paid via the salary sacrifice arrangement. At 31 March 2015 (the date of the latest full
actuarial valuations) the weighted average duration of the liabilities of the Registered Pension Schemes was 24 years.
23. COMMITMENTS AND CONTINGENCIES
(a) Commitments
Commitments are not held on the Group’s Balance Sheet as these are executory arrangements, and relate to amounts that we are
contractually required to pay in the future as long as the other party meets its contractual obligations.
The Group procures commodities through a mixture of production from gas fields, power stations, wind farms and procurement
contracts. Procurement contracts include short-term forward market purchases of gas and electricity at fixed and floating prices.
They also include gas and electricity contracts indexed to market prices and long-term gas contracts with non-gas indexation. The
commitments in relation to commodity purchase contracts disclosed below are stated net of amounts receivable under commodity
sales contracts, where there is a right of offset with the counterparty.
The total volume of gas to be taken under certain long-term structured contracts depends on a number of factors, including the actual
reserves of gas that are eventually determined to be extractable on an economic basis. The commitments disclosed below are based
on the minimum quantities of gas and other commodities that the Group is contracted to buy at estimated future prices.
The commitments in this note differ in scope and in basis from the maturity analysis of energy derivatives disclosed in note S3. Whilst the
commitments in relation to commodity purchase contracts include all purchase contracts, only certain procurement and sales contracts
are within the scope of IAS 39 and included in note S3. In addition, the volumes used in calculating the maturity analysis in note S3 are
estimated using valuation techniques, rather than being based on minimum contractual quantities.
On 25 March 2013, the Group and Company announced that it had entered into a 20-year agreement with Cheniere to purchase 89bcf
per annum of LNG volumes for export from the Sabine Pass liquefaction plant in the US, subject to a number of project milestones and
regulatory approvals being achieved. During 2015, Cheniere made a positive final investment decision on the fifth project at Sabine Pass
following receipt of Federal Energy Regulatory Commission approval and a Non-Free Trade Agreement licence from the Department
of Energy. Under the terms of the agreement with Cheniere, the Group is committed to make capacity payments of up to £3.8 billion
(included in ‘LNG capacity’ below) between 2018 and 2038. The Group may also make up to £8.5 billion of commodity purchases based
on market gas prices and foreign exchange rates as at the balance sheet date. The target date for first commercial delivery is estimated
by the terminal operator as September 2019.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
151
151
Notes to the Financial Statements
23. COMMITMENTS AND CONTINGENCIES
31 December
Commitments in relation to the acquisition of property, plant and equipment:
Development of Norwegian Maria gas and oil field
Development of Norwegian Oda gas and oil field
Development of other Norwegian gas and oil assets
Development of Cygnus gas field
Other capital expenditure
Commitments in relation to the acquisition of intangible assets:
Renewable obligation certificates to be purchased from joint ventures (i)
Renewable obligation certificates to be purchased from other parties
Other intangible assets
Other commitments:
Commodity purchase contracts
LNG capacity
Transportation capacity
Outsourcing of services
Power station tolling fees
Smart meters
Power station operating and maintenance
Heat rate call options
Other long-term commitments
Operating lease commitments:
Future minimum lease payments under non-cancellable operating leases
2016
£m
61
79
–
11
153
700
3,405
299
47,735
4,469
983
111
196
149
68
10
269
2015
£m
110
–
52
101
79
977
2,462
272
43,547
4,473
932
146
93
169
155
77
289
381
770
(i)
Renewable obligation certificates are purchased from several joint ventures which produce power from wind energy under long-term off-take agreements (up to 15 years). The commitments
disclosed above are the gross contractual commitments and do not take into account the Group’s economic interest in the joint venture.
At 31 December the maturity analyses for commodity purchase contract commitments and the total minimum lease payments under
non-cancellable operating leases were:
31 December
<1 year
1–2 years
2–3 years
3–4 years
4–5 years
>5 years
Operating lease payments recognised as an expense in the year were as follows:
Year ended 31 December
Minimum lease payments (net of sub-lease receipts)
Contingent rents – renewables (i)
Commodity
purchase contract
commitments
2015
£billion
9.1
5.0
3.4
2.9
3.6
19.5
43.5
2016
£billion
11.4
6.6
4.6
4.2
3.8
17.1
47.7
Total minimum lease
payments under
non-cancellable
operating leases
2015
£m
121
82
73
66
58
370
770
2016
£m
91
78
49
38
31
94
381
2016
£m
100
68
2015
£m
125
75
(i)
The Group has entered into long-term arrangements with renewable providers to purchase physical power, renewable obligation certificates and levy exemption certificates from renewable
sources. Payments made under these contracts are contingent upon actual production and so there is no commitment to a minimum lease payment (2015: nil). Payments made for physical
power are charged to the Group Income Statement as incurred and disclosed as contingent rents.
152
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Notes to the Financial Statements
23. COMMITMENTS AND CONTINGENCIES
(b) Guarantees and indemnities
This section discloses any guarantees and indemnities that the Group has given, where we may have to provide security in the future
against existing and future obligations that will remain for a specific period.
In connection with the Group’s energy trading, transportation and upstream activities, certain Group companies have entered into
contracts under which they may be required to prepay, provide credit support or provide other collateral in the event of a significant
deterioration in creditworthiness. The extent of credit support is contingent upon the balance owing to the third party at the point
of deterioration.
The Group has provided a number of guarantees and indemnities in respect of decommissioning costs; the most significant indemnities
relate to the decommissioning costs associated with the Morecambe, Statfjord and Kvitebjørn fields. These indemnities are to the previous
owners of these fields. Under the licence conditions of the fields, the previous owners will have exposure to the decommissioning costs
should these liabilities not be fully discharged by the Group.
With regard to Morecambe, the security is to be provided when the estimated future net revenue stream from the associated gas field
falls below a predetermined proportion of the estimated decommissioning cost. The nature of the security may take a number of different
forms and will remain in force until the costs of such decommissioning have been irrevocably discharged and the relevant legal
decommissioning notices in respect of the relevant fields have been revoked.
Following legislation having been executed, the UK Government has now signed contracts (Decommissioning Relief Deeds – DRDs)
with industry, providing certainty on decommissioning tax relief through confirmation of allowance against previous taxable profits.
These deeds permit industry to move to post-tax Decommissioning Security Agreements (DSAs), cutting the cost of these and freeing
up capital for investment. Centrica has a signed DRD and discussions are ongoing with the relevant counterparty to move to a post-tax
DSA for Morecambe.
Security for Statfjord and Kvitebjørn is slightly different in this respect as it was provided to the previous owners as part of the acquisition
of these fields.
(c) Contingent liabilities
The Group has no material contingent liabilities.
24. SOURCES OF FINANCE
(a) Capital structure
The Group seeks to maintain an efficient capital structure with a balance of debt and equity as shown in the table below:
31 December
Net debt
Equity
Capital
2016
£m
3,473
2,666
6,139
2015
£m
4,747
1,178
5,925
Debt levels are restricted to limit the risk of financial distress and, in particular, to maintain a strong credit profile. The Group’s credit standing
is important for several reasons: to maintain a low cost of debt, limit collateral requirements in energy trading, hedging and decommissioning
security arrangements, and to ensure the Group is an attractive counterparty to energy producers and long-term customers.
The Group monitors its current and projected capital position on a regular basis, considering a medium-term view of three to five years,
and different stress case scenarios, including the impact of changes in the Group’s credit ratings and significant movements in commodity
prices. A number of financial ratios are monitored; including those used by the credit rating agencies, such as debt to cash flow ratios
and adjusted EBITDA to gross interest expense. Adjusted EBITDA is defined as earnings from business performance before share of
results of joint ventures and associates and before interest, tax, depreciation, impairments and amortisation. At 31 December 2016,
the ratio of the Group’s net debt to adjusted EBITDA was 1.5 (2015: 2.0). Adjusted EBITDA to gross interest expense for the year ended
31 December 2016 was 5.9 (2015: 6.3). This measure now excludes capitalised interest, so the comparative has been restated accordingly.
Under the terms of the Company’s Articles of Association, the Group’s borrowings are subject to certain limits. At the start of 2016, the
limit in operation was the higher of £5 billion and three times adjusted capital and reserves. As at the date of approval of the consolidated
Group Financial Statements for the year ended 31 December 2015, there was a technical breach of Article 94, predominantly due to asset
impairments and a resulting reduction in capital and reserves. A resolution was put to the Company’s shareholders at the Annual General
Meeting in April 2016, at which time an increase to the limit was approved. Gross borrowings are now restricted to the higher of £10 billion
and three times adjusted capital and reserves and the Group is operating within this limitation.
British Gas Insurance Limited (BGIL) is required under PRA regulations to hold a minimum capital amount and has complied with this
requirement in 2016 (and 2015).
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
153
153
Notes to the Financial Statements
24. SOURCES OF FINANCE
(b) Liquidity risk management and going concern
The Group has a number of treasury and risk policies to monitor and manage liquidity risk. Cash forecasts identifying the Group’s liquidity
requirements are produced regularly and are stress-tested for different scenarios, including, but not limited to, reasonably possible
increases or decreases in commodity prices and the potential cash implications of a credit rating downgrade. The Group seeks to ensure
that sufficient financial headroom exists for at least a 12-month period to safeguard the Group’s ability to continue as a going concern.
It is the Group’s policy to maintain committed facilities and/or available surplus cash resources of at least £1,200 million, raise at least
75% of its net debt (excluding non-recourse debt) in the long-term debt market and to maintain an average term to maturity in the
recourse long-term debt portfolio greater than five years.
At 31 December 2016, the Group had undrawn committed credit facilities of £4,497 million (2015: £4,379 million) and £1,881 million
(2015: £935 million, restated for reclassification of bank overdrafts, see note 1 for more details) of unrestricted cash and cash equivalents.
186% (2015: 136%) of the Group’s net debt has been raised in the long-term debt market and the average term to maturity of the long-
term debt portfolio was 11.6 years (2015: 12.0 years).
The Group’s liquidity is impacted by the cash posted or received under margin and collateral agreements. The terms and conditions of
these depend on the counterparty and the specific details of the transaction. Cash is generally returned to the Group or by the Group
within two days of trade settlement. Refer to note 24(c) for movement in cash posted or received as collateral.
The relatively high level of undrawn committed bank facilities and available cash resources has enabled the Directors to conclude that the
Group has sufficient headroom to continue as a going concern. The statement of going concern is included in the Directors’ Report –
Governance, on page 82.
154
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
24. SOURCES OF FINANCE
(c) Net debt summary
Net debt predominantly includes capital market borrowings offset by cash, cash posted or received as collateral, securities and certain
hedging financial instruments used to manage interest rate and foreign exchange movements on borrowings.
1 January 2015
Cash inflow from sale of securities (v)
Cash inflow from additional borrowings
Cash outflow from payment of capital element
of finance leases
Cash outflow from repayment of borrowings
Remaining cash inflow and movement in cash
posted/received under margin and collateral
agreements (vi)
Revaluation
(Increase)/decrease in interest payable and
amortisation of borrowings
New finance lease agreements
Exchange adjustments
31 December 2015
Net cash inflow from sale/purchase of securities (v)
Cash outflow from payment of capital element
of finance leases
Cash outflow from repayment of borrowings
Remaining cash inflow and movement in cash
posted/received under margin and collateral
agreements (vi)
Revaluation
Increase in interest payable and amortisation of
borrowings
Acquisition of businesses
New finance lease agreements
Exchange adjustments and other non-cash
movements
31 December 2016
Cash and
cash equivalents,
net of bank
overdrafts (i) (ii)
£m
621
26
1,000
(35)
(1,615)
879
–
–
–
(16)
860
28
(50)
(427)
1,496
–
–
–
–
53
1,960
Current and
non-current
borrowings,
finance leases
and interest
accruals,
net of related
deposits
£m
(6,956)
–
(1,000)
Derivatives
£m
89
–
–
Cash posted/
(received) as
collateral (iii)
£m
776
–
–
Current and
non-current
securities (iv)
£m
274
(26)
–
Net debt
£m
(5,196)
–
–
–
–
597
10
(17)
(49)
(92)
(4,747)
–
–
–
–
–
–
(16)
9
–
–
82
–
–
–
–
209
1,319
192
–
–
–
–
291
(8)
26
(32)
(223)
(3,473)
–
–
(282)
–
–
–
41
535
–
–
–
(177)
–
–
32
–
106
496
–
–
–
–
–
–
(4)
244
(28)
–
–
–
8
–
–
–
35
1,615
–
26
(26)
(49)
(113)
(6,468)
–
50
427
–
(25)
(8)
(6)
(32)
8
232
(390)
(6,452)
(i)
Cash and cash equivalents includes £155 million (2015: £223 million) of restricted cash mostly held by the Group’s insurance undertakings that is not readily available to be used for other
purposes within the Group.
(ii)
(iii)
Cash and cash equivalents are net of £76 million bank overdrafts (2015: £298 million). This is offset by a corresponding gross up in current borrowings.
Collateral is posted or received to support energy trading and procurement activities. It is posted when contracts with marginable counterparties are out of the money and is received when
contracts are in the money. These positions reverse when contracts are settled and the collateral is returned. Of the net cash collateral posted at the year end, £21 million (2015: £74 million)
is included within trade payables, £307 million (2015: £216 million) within trade receivables, and £210 million (2015: £393 million) has been offset against net derivative financial liabilities.
The items, to which the cash posted or received as collateral under margin and collateral agreements relate are not included within net debt.
(iv)
(v)
(vi)
Securities balances include £130 million (2015: £124 million) of index-linked gilts which the Group uses for short-term liquidity management purposes and £102 million of available-for-sale
financial assets (2015: £120 million). The Group has posted £29 million (2015: £28 million) of non-current securities as collateral against an index-linked swap maturing on 16 April 2020.
Includes sale of shares in Enercare Inc. which were sold in 2016 for consideration of C$61 million (£31 million) (2015 sales were C$60 million (£26 million)).
Including non-cash movements relating to the reversal of collateral amounts posted when the related derivative contract settles (where these daily margin amounts posted reduce the ultimate
amount payable/receivable on settlement of the related derivative contract).
Centrica plc Annual Report and Accounts 2016
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155
155
Notes to the Financial Statements
24. SOURCES OF FINANCE
(d) Borrowings, finance leases and interest accruals summary
31 December
Bank overdrafts
Bank loans
Bonds (by maturity date):
24 October 2016
14 April 2017
19 September 2018
1 February 2019
25 September 2020
22 February 2022
10 March 2022
16 October 2023
4 September 2026
16 April 2027
13 March 2029
5 January 2032 (ii)
19 September 2033
16 October 2043
12 September 2044
25 September 2045
10 April 2075 (iii)
10 April 2076 (iv)
Obligations under finance leases (v)
Other borrowings
Interest accruals
Coupon
rate
%
Principal
m
Current
£m
(76)
–
Non-current
£m
–
(148)
5.500
Floating
7.000
3.213
Floating
3.680
6.375
4.000
6.400
5.900
4.375
Zero
7.000
5.375
4.250
5.250
5.250
3.000
£300
$200
£400
€100
$80
HK$450
£500
$750
£200
$70
£750
€50
£770
$600
£550
$50
£450
€750
–
(162)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(162)
(39)
–
(121)
(398)
–
–
(425)
(85)
(65)
(47)
(541)
(622)
(228)
(56)
(751)
(54)
(763)
(480)
(537)
(40)
(457)
(637)
(5,788)
(194)
–
–
(6,130)
31 December
2016
Total
£m
(76)
(148)
–
(162)
(425)
(85)
(65)
(47)
(541)
(622)
(228)
(56)
(751)
(54)
(763)
(480)
(537)
(40)
(457)
(637)
(5,950)
(233)
–
(121)
(6,528)
Current
£m
(298)
–
Non-current
£m
–
(222)
31 December
2015
(restated) (i)
Total
£m
(298)
(222)
(308)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(308)
(43)
(4)
(120)
(773)
–
(136)
(433)
(74)
(54)
(39)
(523)
(525)
(222)
(47)
(739)
(38)
(763)
(401)
(537)
(33)
(450)
(550)
(5,564)
(207)
–
–
(5,993)
(308)
(136)
(433)
(74)
(54)
(39)
(523)
(525)
(222)
(47)
(739)
(38)
(763)
(401)
(537)
(33)
(450)
(550)
(5,872)
(250)
(4)
(120)
(6,766)
Restated for reclassification of £298 million of overdrawn bank balances from cash and cash equivalents to current bank overdrafts, bank loans and other borrowings. See note 1 for further details.
€50 million of zero coupon notes have an accrual yield of 4.200%, which will result in a €114 million repayment on maturity.
(i)
(ii)
(iii)
(iv)
(v)
The Group has the right to repay at par on 10 April 2025 and every interest payment date thereafter.
The Group has the right to repay at par on 10 April 2021 and every interest payment date thereafter.
Contingent rents paid under finance lease obligations during the year were £37 million (2015: £27 million).
Maturity analysis for non-current bank loans at 31 December
2–5 years
>5 years
2016
£m
–
(148)
(148)
2015
£m
(100)
(122)
(222)
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Notes to the Financial Statements
25. SHARE CAPITAL
Ordinary share capital represents the total number of shares issued which are publicly traded. We also disclose the number of own
and treasury shares the Company holds, which the Company has bought itself, principally as part of the share repurchase programme.
Allotted and fully paid share capital of the Company
31 December
5,539,363,372 ordinary shares of 614/81 pence each (2015: 5,128,545,946)
2016
£m
342
2015
£m
317
In May 2016, 350 million new ordinary shares were issued at a price of 200.0 pence per share, raising total proceeds of £694 million net
of issuance costs.
The closing price of one Centrica ordinary share on 31 December 2016 was 234.1 pence (2015: 218.1 pence). Centrica employee
share ownership trusts purchase Centrica ordinary shares from the open market and receive treasury shares to satisfy future obligations
of certain employee share schemes. The movements in own and treasury shares during the year are shown below:
1 January
Shares purchased
Treasury shares placed into trust
Shares released to employees on vesting
31 December (i)
Own shares
2016
Million
shares
6.0
6.8
1.4
(5.2)
9.0
2015
Million
shares
5.5
3.0
1.5
(4.0)
6.0
Treasury shares
2016
Million
shares
58.7
–
(1.4)
(6.5)
50.8
2015
Million
shares
76.9
–
(1.5)
(16.7)
58.7
(i)
The closing balance in the treasury and own share reserve of own shares was £23 million (2015: £17 million) and treasury shares was £157 million (2015: £181 million).
26. EVENTS AFTER THE BALANCE SHEET DATE
The Group updates disclosures in light of new information being received, or a significant event occurring, in the period between
31 December 2016 and the date of this report.
Disposal
On 13 January 2017, Centrica announced the sale of its 50% share in Lincs Wind Farm Limited to the Green Investment Bank for net
proceeds of £224 million, of which £113 million relates to a shareholder loan, which exceeds the carrying value of the disposed assets.
The transaction completed on 17 February 2017, but the Group will continue to operate Lincs for a 12-month period with a continued
focus on safety and power availability.
Centrica Storage
On 16 February 2017, Centrica Storage announced that following further test results at the Rough storage field and review with technical
advisors, injection services cannot currently be offered for the 2017/18 storage year.
Centrica Storage will continue and complete the testing programme and will then evaluate the full results from all 24 wells. This analysis
is expected to be completed by 30 June 2017 and a further update to the market will be provided at that time. The return to injection
operations in 2017 remains subject to successfully completing testing and evaluation of all wells and confirmation that Rough can be
safely returned to service.
Dividends
The Directors propose a final dividend of 8.40 pence per ordinary share (totalling £461 million) for the year ended 31 December 2016.
The dividend will be submitted for formal approval at the Annual General Meeting to be held on 8 May 2017 and, subject to approval,
will be paid on 29 June 2017 to those shareholders registered on 12 May 2017.
Centrica plc Annual Report and Accounts 2016
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157
157
Notes to the Financial Statements
Supplementary information
Supplementary information includes additional information and disclosures we are required to make by accounting standards or regulation.
S1. GENERAL INFORMATION
Centrica plc is a company domiciled and incorporated in the UK. The address of the registered office is Millstream, Maidenhead Road,
Windsor, Berkshire SL4 5GD. The nature of the Group’s operations and principal activities are set out in note 4(a) and on pages 2 to 64.
The consolidated Financial Statements of Centrica plc are presented in pounds sterling. Operations and transactions conducted in
currencies other than pounds sterling are included in the consolidated Financial Statements in accordance with the foreign currencies
accounting policy set out in note S2.
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This section sets out the Group’s significant accounting policies in addition to the critical accounting policies applied in the preparation
of these consolidated Financial Statements. These accounting policies have been consistently applied to the years presented.
Income Statement presentation
The Group Income Statement and segmental note separately identify the effects of re-measurement of certain financial instruments,
and items that are exceptional, in order to provide readers with a clear and consistent presentation of the Group’s underlying
performance, as described in note 2.
Basis of consolidation
The Group Financial Statements consolidate the Financial Statements of the Company and entities controlled by the Company.
Subsidiaries are all entities (including structured entities) over which the Group has control. Control is exercised over an entity when
the Group is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns
through its power over the entity. Subsidiaries are fully consolidated from the date on which control is transferred to the Group. They
are deconsolidated from the date that control ceases. Transactions with non-controlling interests that relate to their ownership interests
and do not result in a loss of control are accounted for as equity transactions.
The results of subsidiaries acquired or disposed of during the year are consolidated from the effective date of acquisition (at which point
the Group gains control over a business as defined by IFRS 3, and applies the acquisition method to account for the transaction as a
business combination) or up to the effective date of disposal, as appropriate. Where necessary, adjustments are made to the Financial
Statements of subsidiaries, associates and joint ventures to align the accounting policies with those used by the Group.
When the Group ceases to have control, any retained interest in the entity is re-measured to its fair value with the change in carrying
amount recognised in profit or loss. This fair value becomes the initial carrying amount for the purposes of subsequently accounting
for the retained interest as a joint venture, associate or financial asset.
Segmental reporting
The Group’s operating segments are reported in a manner consistent with the internal reporting provided to and regularly reviewed by
the Group’s Executive Committee for the purposes of evaluating segment performance and allocating resources.
Revenue
Revenue is recognised to the extent that it is probable that the economic benefits will flow to the Group and the revenue can be measured
reliably. Revenue includes amounts receivable for goods and services provided in the normal course of business, net of discounts,
rebates, VAT and other sales-related taxes.
Energy supply: revenue is recognised on the basis of energy supplied during the year. Revenue for energy supply activities includes
an assessment of energy supplied to customers between the date of the last meter reading and the year end (unread). Unread gas and
electricity is estimated using historical consumption patterns, taking into account the industry reconciliation process for total gas and total
electricity usage by supplier, and is included in accrued energy income within trade and other receivables.
Proprietary energy trading: revenue comprises both realised (settled) and unrealised (fair value changes) net gains and losses from trading
in physical and financial energy contracts.
Fixed-fee service and insurance contracts: revenue from these contracts is recognised in the Group Income Statement with regard to the
incidence of risk over the life of the contract, reflecting the seasonal propensity of claims to be made under the contracts and the benefits
receivable by the customer, which span the life of the contract as a result of emergency maintenance being available throughout the
contract term.
Amounts paid in advance are treated as deferred income, with any amount in arrears recognised as accrued income. For one-off services,
such as installations, revenue is recognised at the date of service provision.
Storage services: storage capacity revenues are recognised evenly over the contract period, whilst commodity revenues for the injection
and withdrawal of gas are recognised at the point of gas flowing into or out of the storage facilities. Gas purchases and gas sales
transactions entered into to optimise the performance of the gas storage facilities are presented net within cost of sales. Cushion
gas sales revenue is recognised when the gas is transferred to the customer account or sold to the market.
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Notes to the Financial Statements
Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Upstream production: revenue associated with exploration and production sales (of natural gas, crude oil and condensates) is recognised
when title passes to the customer. Revenue from the production of natural gas, oil and condensates in which the Group has an interest
with other producers is recognised based on the Group’s working interest and the terms of the relevant production sharing arrangements
(the entitlement method). Where differences arise between production sold and the Group’s share of production, this is accounted for
as an overlift or underlift (see separate accounting policy). Purchases and sales entered into to optimise the performance of production
facilities are presented net within revenue.
Power generation: revenue is recognised on the basis of power supplied during the year. Power purchases and sales entered into to
optimise the performance of power generation facilities are presented net within revenue.
Cost of sales
Energy supply includes the cost of gas and electricity produced and purchased during the year taking into account the industry
reconciliation process for total gas and total electricity usage by supplier, and related transportation, distribution, royalty costs and
bought-in materials and services.
Cost of sales relating to fixed-fee service and insurance contracts includes direct labour and related overheads on installation work,
repairs and service contracts in the year.
Cost of sales relating to gas and oil production includes depreciation of assets used in production of gas and oil, royalty costs and direct
labour costs.
Cost of sales within power generation businesses includes the depreciation of assets included in generating power, fuel purchase costs,
direct labour costs and carbon emissions costs.
Investment income
Interest income is accrued on a time basis, by reference to the principal outstanding and at the effective interest rate applicable, which
is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net
carrying value.
Borrowing costs
Borrowing costs that arise in connection with the acquisition, construction or production of a qualifying asset are capitalised and
subsequently amortised in line with the depreciation of the related asset. Borrowing costs are capitalised from the time of acquisition
or from the beginning of construction or production until the point at which the qualifying asset is ready for use. Where a specific financing
arrangement is in place, the specific borrowing rate for that arrangement is applied. For non-specific financing arrangements, a Group
financing rate representative of the weighted average borrowing rate of the Group is used (2016: 4.53%, 2015: 4.20%). Borrowing costs
not arising in connection with the acquisition, construction or production of a qualifying asset are expensed.
Foreign currencies
The consolidated Financial Statements are presented in pounds sterling, which is the functional currency of the Company and the Group’s
presentational currency. Each entity in the Group determines its own functional currency and items included in the Financial Statements of
each entity are measured using that functional currency. Transactions in foreign currencies are, on initial recognition, recorded in the
functional currency of the entity at the exchange rate ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies are retranslated at the functional currency rate of exchange ruling at the
balance sheet date. All exchange movements are included in the Group Income Statement for the period. In previous periods, the Group
utilised net investment hedging and exchange differences on foreign currency borrowings that provided a hedge against a net investment
in a foreign entity were taken directly to equity. Upon the disposal or partial disposal of the net investment, any accumulated foreign
exchange reserves related to the investment are recognised in the Group Income Statement. The Group no longer uses net investment
hedging but historic exchange differences remain in equity until the disposal of the specific investments.
Non-monetary items that are measured at historical cost in a currency other than the functional currency of the entity concerned are
translated using the exchange rate prevailing at the dates of the initial transaction.
For the purpose of presenting consolidated Financial Statements, the assets and liabilities of the Group’s non-sterling functional currency
subsidiary undertakings, joint ventures and associates are translated into pounds sterling at exchange rates prevailing at the balance sheet
date. The results of these (generally foreign) subsidiary undertakings, joint ventures and associates are translated into pounds sterling at
the average rates of exchange for the relevant period. The relevant exchange rates are shown below:
Exchange rate per pound sterling (£)
US dollars
Canadian dollars
Euro
Norwegian krone
Danish krone (i)
Closing rate at 31 December
2016
1.23
1.66
1.17
10.66
8.72
2015
1.47
2.04
1.36
13.04
N/A
Average rate for the year ended
31 December
2015
1.53
1.96
1.38
12.35
N/A
2016
1.35
1.79
1.23
11.37
8.58
(i)
The average rate for the Danish krone is for the three-month period ended 31 December 2016, being the period of ownership of Neas Energy.
Centrica plc Annual Report and Accounts 2016
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159
159
Notes to the Financial Statements
Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Exchange adjustments arising from the retranslation of the opening net assets and results of non-sterling functional currency operations
are transferred to the Group’s foreign currency translation reserve, a separate component of equity, and are reported in the Statement
of Comprehensive Income. In the event of the disposal of a non-sterling functional currency subsidiary, the cumulative translation difference
arising in the foreign currency translation reserve is charged or credited to the Group Income Statement on disposal.
Employee share schemes
The Group operates a number of employee share schemes, detailed in the Remuneration Report on pages 83 to 99, under which it
makes equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value at
the date of grant (excluding the effect of non-market based vesting conditions). The fair value determined at the grant date is expensed
on a straight-line basis together with a corresponding increase in equity over the vesting period, based on the Group’s estimate of the
number of awards that will vest, and adjusted for the effect of non-market based vesting conditions.
The majority of the share-based payment charge arises from five schemes. More information is included in the Remuneration Report
on pages 83 to 99.
Deferred Matching Share Scheme (DMSS):
● Applicable employees: Senior Executive Group.
● From 2015 this scheme was replaced by the Annual Incentive Plan (AIP) and Long Term Incentive Plan (LTIP) for Executive Directors
and the On Track Incentive Plan (OTIP) for Senior Executives and senior management.
● Vesting period of four years, comprising bonus year and three-year performance period.
● Participants must defer between 20% and 40% of annual pre-tax bonus into scheme (deferred shares) and can elect to invest
additional amounts of annual bonus up to a maximum of 50% of total potential bonus (investment shares).
● Deferred and investment shares will be matched with conditional shares. On achievement of performance targets over a three-year
period, matching shares are either released immediately or delivered as nil cost options exercisable for seven years.
● Performance measured through Group and segment Economic Profit (EP) targets.
● Leaving prior to vesting date will normally mean forfeiting rights to deferred and matching shares.
Long Term Incentive Scheme (LTIS):
● Applicable employees: senior management.
● From 2015 this scheme was replaced by the AIP and LTIP for Executive Directors and OTIP for Senior Executives and senior management.
● Vesting period of three years following grant date.
● Grants after 2012: number of shares calculated according to EPS, Group EP, total shareholder return (TSR) and non-financial KPIs.
● Following the end of the assessed performance period, and subject to continued employment at that date, shares are either released
immediately or delivered as nil cost options exercisable for seven years.
● Leaving prior to vesting date will normally mean forfeiting rights.
Share Award Scheme (SAS):
● Applicable employees: senior and middle management.
● Shares vest subject to continued employment within the Group in two stages: half after two years and the other half after three years.
● Leaving prior to vesting date will normally mean forfeiting rights.
On Track Incentive Plan (OTIP):
● Applicable employees: Senior Executives, senior and middle management.
● Shares vest subject to continued employment within the Group in two stages: half after two years and the other half after three years.
● Leaving prior to vesting date will normally mean forfeiting rights to the unvested share awards.
Long Term Incentive Plan (LTIP):
● Applicable employees: Executive Directors.
● Shares vest subject to continued employment and performance conditions after a three-year period.
● Number of shares calculated according to EPS, Group EP and non-financial KPIs.
● Mandatory holding period of two years following vesting during which claw back applies.
● Leaving prior to vesting date will normally mean forfeiting rights.
For each of the schemes, the fair value is measured using the market value on the date of the grant.
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Notes to the Financial Statements
Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business combinations and goodwill
The acquisition of subsidiaries is accounted for using the acquisition method (at the point the Group gains control over a business
as defined by IFRS 3. The cost of the acquisition is measured as the cash paid and the aggregate of the fair values, at the date of
exchange, of other assets transferred, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for
control of the acquiree. The consideration transferred includes the fair value of any asset or liability resulting from a contingent
consideration arrangement at the acquisition date.
Acquisition-related costs are expensed as incurred. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet
the conditions for recognition under IFRS 3, are recognised at their fair value at the acquisition date, except for non-current assets
(or disposal groups) that are classified as held for sale in accordance with IFRS 5, which are recognised and measured at FVLCD.
The Group recognises any non-controlling interests in the acquiree on an acquisition-by-acquisition basis, either at fair value or at
the non-controlling interests’ proportionate share of the recognised amounts of acquiree’s identifiable net assets.
Goodwill arising on a business combination represents the excess of the consideration transferred, the amount of the non-controlling
interests and the acquisition date fair value of any previously held interest in the acquiree over the Group’s interest in the fair value of the
identifiable net assets acquired. Goodwill arising on the acquisition of a stake in a joint venture or an associate represents the excess of
the consideration transferred over the Group’s interest in the fair value of the identifiable assets and liabilities of the investee at the date
of acquisition. Goodwill is initially recognised as an asset at cost and is subsequently measured at cost less any accumulated impairment
losses. The goodwill arising on an investment in a joint venture or in an associate is not recognised separately, but is shown under
‘Interests in joint ventures and associates’ in the Group Balance Sheet. If, after reassessment, the Group’s interest in the net fair value
of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business combination, the excess is
recognised immediately in the Group Income Statement.
Following the amendment to IFRS 11, acquisitions of joint operations that meet the definition of a business are accounted for as a
business combination.
On disposal of a subsidiary, associate or joint venture entity, any amount of goodwill attributed to that entity is included in the
determination of the profit or loss on disposal. A similar accounting treatment is applied on disposal of assets that represent a business.
Other intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. Intangible assets include contractual customer
relationships, brands, application software, emissions trading schemes, renewable obligation certificates, and certain exploration
and evaluation expenditures, the accounting policies for which are dealt with separately below. For purchased application software,
for example investments in customer relationship management and billing systems, cost includes contractors’ charges, materials,
directly attributable labour and directly attributable overheads.
Capitalisation begins when expenditure for the asset is being incurred and activities necessary to prepare the asset for use are
in progress. Capitalisation ceases when substantially all the activities that are necessary to prepare the asset for use are complete.
Amortisation commences at the point of commercial deployment. The cost of intangible assets acquired in a business combination
is their fair value as at the date of acquisition.
Following initial recognition, intangible assets are carried at cost less any accumulated amortisation and any accumulated impairment
losses. The useful lives of intangible assets are assessed to be either finite or indefinite. Intangible assets with finite lives are amortised
over their useful economic life and are tested for impairment annually otherwise they are assessed for impairment whenever there is
an indication that the intangible asset could be impaired. The amortisation period and the amortisation method for an intangible asset
are reviewed at each financial year end. Changes in the expected useful life or the expected pattern of consumption of future economic
benefits embodied in the asset are accounted for on a prospective basis by changing the amortisation period or method, as appropriate,
and treated as changes in accounting estimates.
Intangible assets are derecognised on disposal, or when no future economic benefits are expected from their use.
Intangible assets with indefinite useful lives are tested for impairment annually, and whenever there is an indication that the intangible
asset could be impaired, either individually or at the CGU level. Such intangibles are not amortised. The useful life of an intangible asset
with an indefinite useful life is reviewed annually to determine whether the indefinite life assessment continues to be supportable. If not,
the change in the useful life assessment from indefinite to finite is made on a prospective basis.
The useful economic lives for the principal categories of intangible assets are as follows:
Contractual customer relationships
Strategic identifiable acquired brands
Application software
Licences
Up to 20 years
Indefinite
Up to 15 years
Up to 20 years
Centrica plc Annual Report and Accounts 2016
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161
161
Notes to the Financial Statements
Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
EU Emissions Trading Scheme and renewable obligation certificates
Purchased carbon dioxide emissions allowances are recognised initially at cost (purchase price) within intangible assets. The liability is
measured at the cost of purchased allowances up to the level of purchased allowances held, and then at the market price of allowances
ruling at the balance sheet date, with movements in the liability recognised in operating profit.
Forward contracts for the purchase or sale of carbon dioxide emissions allowances are measured at fair value with gains and losses
arising from changes in fair value recognised in the Group Income Statement. The intangible asset is surrendered and the liability is
extinguished at the end of the compliance period to reflect the consumption of economic benefits.
Purchased renewable obligation certificates are recognised initially at cost within intangible assets. A liability for the renewables obligation
is recognised based on the level of electricity supplied to customers, and is calculated in accordance with percentages set by the UK
Government and the renewable obligation certificate buyout price for that period.
The intangible asset is surrendered and the liability is extinguished at the end of the compliance period to reflect the consumption of
economic benefits. Any recycling benefit related to the submission of renewable obligation certificates is recognised in the Group Income
Statement when received.
Exploration, evaluation, development and production assets
The Group uses the successful efforts method of accounting for exploration and evaluation expenditure. Exploration and evaluation
expenditure associated with an exploration well, including acquisition costs related to exploration and evaluation activities are capitalised
initially as intangible assets. Certain expenditures such as geological and geophysical exploration costs are expensed. If the prospects
are subsequently determined to be successful on completion of evaluation, the relevant expenditure including licence acquisition costs is
transferred to PP&E. If the prospects are subsequently determined to be unsuccessful on completion of evaluation, the associated costs
are expensed in the period in which that determination is made.
All field development costs are capitalised as PP&E. Such costs relate to the acquisition and installation of production facilities and include
development drilling costs, project-related engineering and other technical services costs. PP&E, including rights and concessions related
to production activities, are depreciated from the commencement of production in the fields concerned, using the unit of production
method, based on all of the 2P reserves of those fields. Changes in these estimates are dealt with prospectively.
The net carrying value of fields in production and development is annually compared on a field-by-field basis with the likely discounted
future net revenues to be derived from the remaining commercial reserves. An impairment loss is recognised where it is considered that
recorded amounts are unlikely to be fully recovered from the net present value of future net revenues. Exploration assets are reviewed
annually for indicators of impairment and production and development assets are tested annually for impairment.
Interests in joint arrangements and associates
Under IFRS 11, joint arrangements are those that convey joint control which exists only when decisions about the relevant activities
require the unanimous consent of the parties sharing control. Investments in joint arrangements are classified as either joint operations
or joint ventures depending on the contractual rights and obligations of each investor. Associates are investments over which the Group
has significant influence but not control or joint control, and generally holds between 20% and 50% of the voting rights. The Group’s joint
ventures and associates (as defined in note 6) are accounted for using the equity method.
Under the equity method, investments are carried at cost plus post-acquisition changes in the Group’s share of net assets, less any
impairment in value in individual investments. The Group Income Statement reflects the Group’s share of the results of operations after
tax and interest. Accounting policies of the joint ventures and associates have been changed where necessary to ensure consistency
with the policies adopted by the Group. Upon initial acquisition goodwill may arise and is recognised within ‘interests in joint ventures
and associates’ in the Group Balance Sheet.
Following the amendment to IFRS 11, acquisitions of joint operations that meet the definition of a business are accounted for as a
business combination.
The Group’s interests in joint operations (gas and oil exploration and production licence arrangements) are accounted for by recognising
its assets (including its share of assets held jointly), its liabilities (including its share of liabilities incurred jointly), its revenue from the sale
of its share of the output arising from the joint operation, its share of the revenue from the sale of the output by the joint operation and its
expenses (including its share of any expenses incurred jointly).
Where the Group has an equity stake or a participating interest in operations governed by a joint arrangement for which it is acting
as operator, an assessment is carried out to confirm whether the Group is acting as agent or principal. As the terms and conditions
negotiated between business partners usually provide joint control to the parties over the relevant activities of the gas and oil fields
and/or wind farms that are governed by joint arrangements, the Group is usually deemed to be an agent when it is appointed as operator
and not as principal (as the contracts entered into do not convey control to the parties). Accordingly, the Group recognises its interests
in these arrangements as outlined above except that it presents gross liabilities and gross receivables of joint operations (including
amounts due to or from non-operating partners) in the Group Balance Sheet in accordance with the netting rules of IAS 32.
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Notes to the Financial Statements
Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Property, plant and equipment
PP&E is included in the Group Balance Sheet at cost, less accumulated depreciation and any provisions for impairment. The initial cost
of an asset comprises its purchase price or construction cost and any costs directly attributable to bringing the asset into operation. The
purchase price or construction cost is the aggregate amount paid and the fair value of any other consideration given to acquire the asset.
Subsequent expenditure in respect of items of PP&E such as the replacement of major parts, major inspections or overhauls, are
capitalised as part of the cost of the related asset where it is probable that future economic benefits will arise as a result of the expenditure
and the cost can be reliably measured. All other subsequent expenditure, including the costs of day-to-day servicing, repairs and
maintenance, is expensed as incurred.
Freehold land is not depreciated. Other PP&E, with the exception of upstream production assets (see above), are depreciated on a
straight-line basis at rates sufficient to write off the cost, less estimated residual values, of individual assets over their estimated useful
lives. The depreciation periods for the principal categories of assets are as follows:
Freehold and leasehold buildings
Plant
Equipment and vehicles
Power stations and wind farms
Gas storage
Up to 50 years
Five to 20 years
Three to 10 years
Up to 30 years
Up to 40 years
Assets held under finance leases are depreciated over their expected useful economic lives on the same basis as for owned assets,
or where shorter, the lease term.
The carrying values of PP&E are tested annually for impairment and are reviewed for impairment when events or changes in circumstances
indicate that the carrying value may not be recoverable. Residual values and useful lives are reassessed annually and if necessary changes
are accounted for prospectively.
Impairment assumptions
Details of the approach taken to impairment are included in note 7(c). The following provides further information on the assumptions used
in the VIU calculations:
VIU – Key assumptions used
The VIU calculations use pre-tax cash flow projections based on the Group’s Board-approved business plans. The Group’s business
plans are based on past experience, and adjusted to reflect market trends, economic conditions, key risks, the implementation of
strategic objectives and changes in commodity prices, as appropriate. Commodity prices used in the planning process are based in part
on observable market data and in part on internal estimates. The extent to which the commodity prices used in the business plans are
based on observable market data is determined by the extent to which the market for the underlying commodity is judged to be active.
Note S6 provides additional detail on the active period of each of the commodity markets in which the Group operates.
(a) VIU – Growth rates and discount rates
Cash flows beyond the planned period have been extrapolated using long-term growth rates in the market where the CGU operates.
Long-term growth rates are determined using a blend of publicly available historical data and long-term growth rate forecasts published
by external analysts. Cash flows are discounted using a discount rate specific to each CGU. Discount rates reflect the current market
assessments of the time value of money and are based on the estimated cost of capital of each CGU. Additionally, risks specific to the
cash flows of the CGUs are reflected within cash flow forecasts. Each CGU’s weighted average cost of capital is then adjusted to reflect
the impact of tax in order to calculate an equivalent pre-tax discount rate.
Long-term growth rates and pre-tax discount rates used in the VIU calculations for each of the Group’s CGUs are provided in the
table below:
2016 (i)
Growth rate to
perpetuity
Pre-tax discount rate
Energy Supply &
Services –
UK Home
%
Energy Supply
& Services –
UK Business
%
Energy Supply &
Services –
Ireland
%
Energy Supply &
Services –
NA Home
(ii)
%
Energy Supply &
Services –
NA Business
(ii)
%
Connected
Home
(iii)
%
Distributed
Energy & Power
(iii)
%
Energy
Marketing &
Trading
%
1.9
7.4
1.9
7.4
1.5
7.2
2.2/2.1
7.9/7.5
2.2/2.1
7.9/7.5
2.2/1.9
10.5/9.6
2.2/1.9
10.5/9.6
1.9
9.6
Comparative data has not been presented following the change in reporting segments.
(i)
(ii)
(iii)
US/Canada respectively.
US/UK respectively.
(b) VIU – Inflation rates
Inflation rates used in the business plan were based on a blend of a number of publicly available inflation forecasts for the UK, Canada,
the Republic of Ireland and the US. Inflation rates used for the VIU calculations were as follows: UK: 2.0% (2015: 1.8%); Canada: 2.1%
(2015: 2.1%); Republic of Ireland 1.5% (2015: 1.4%); and the US: 2.2% (2015: 2.2%).
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Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(c) Key operating assumptions by CGUs using VIU
The key operating assumptions across all CGUs are gross margin, revenues and operating costs. Each of these assumptions is tailored
to the specific CGU using management’s knowledge of the environment, as shown in the table below:
CGU
Energy Supply
& Services –
UK Home
Gross margin
Existing customers: based on
contractual terms.
New customers and renewals:
based on gross margins achieved in
the period leading up to the date of the
business plan. Both adjusted for current
market conditions and transportation
cost inflation.
For the Services business, future sales
and related gross margins are based on
percentages achieved in the period up
to the approval of the business plan.
Revenues
Existing customers: based on
contractual terms.
Adjusted for: growth forecasts which
are based on sales and marketing
activity, recent customer acquisitions
and current economic environment in
the UK.
Gas and electricity revenues based on
forward market prices.
Operating costs
Wages: projected headcount in line with expected
efficiency programme. Salary increases based on
inflation expectations.
Credit losses: historical assumptions regarding
provisions have been updated to reflect the current
UK environment.
Energy Supply
& Services –
UK Business
Existing customers: based on
contractual terms.
New customers and renewals: based
on gross margins achieved in the period
leading up to the date of the business
plan. Both adjusted for current market
conditions and transportation
cost inflation.
Market share: percentage immediately
prior to business plan.
Adjusted for: growth forecasts which are
based on sales, marketing activity, recent
customer acquisitions and current
economic environments in the UK.
Gas and electricity revenues based on
forward market prices.
Wages: projected headcount in line with expected
activity. Salary increases based on inflation
expectations.
Credit losses: historical assumptions regarding
provisions have been updated to reflect the current
UK environment.
Energy Supply
& Services –
Ireland
Energy Supply
& Services –
NA Home
Existing customers: based on
contractual terms.
New customers and renewals: based
on gross margins achieved in the
period leading up to the date of the
business plan. Both adjusted for
current market conditions, inflation
and transportation costs.
Existing customers: based on
contractual terms and gross margins
achieved in the period leading up to the
date of the business plan.
New customers and renewals: based
on gross margins achieved in the
period leading up to the date of the
business plan.
Adjusted for: competitor data. For the
Services business, adjustments are
made for current economic conditions
and the status of the housing market
as appropriate.
Market share: percentage immediately
prior to business plan.
Adjusted for: growth forecasts which
are based on sales, marketing activity
and recent customer acquisitions.
Gas and electricity revenues based on
forward market prices.
Wages: projected headcount in line with expected
activity. Salary increases based on inflation
expectations.
Credit losses: historical assumptions regarding
provisions have been updated to reflect the current
Irish market environment.
Market share: average percentage
immediately prior to business plan. For
the Services business, the market share
is based on historical growth trends and
planned sales activities by individual
market sectors.
Adjusted for: expectations of growth or
decline to reflect competitive
differences. For the Services business,
adjustments are made for new product
offerings and continued penetration into
new markets.
Wages: projected headcount in line with expected
activity. Salary increases based on inflation
expectations.
Future developments: reduction in costs to reflect
expected savings.
Customer acquisition: based on experience of
costs required to support acquisition, renewal and
other servicing activities.
Credit losses: historical assumptions regarding
provisions have been updated to reflect the current
North American environment.
Energy Supply
& Services –
NA Business
Existing customers: based on
contractual terms.
New customers and renewals: based
on gross margins achieved historically.
Connected
Home
Future sales: based on gross margins
achieved in the period leading up to the
date of the business plan.
Adjusted for: recurring revenue
subscriptions by driving service
led propositions.
Market share: based on historical
growth trends and planned sales
activities by individual market sector.
Adjusted for: prices based on
contractual terms for fixed price
contracts and forward market curves
for both gas and electricity in Canada
and the US.
Market share: based on current growth
trends and planned sales activities by
individual market sector.
Adjusted for: new product offerings and
continued penetration into new markets.
One-off revenues based on current
external rates. Recurring revenues
based on expected package price and
increase in number of products per
customer to 3.0.
Wages: projected headcount in line with expected
activity. Salary increases based on 3.5% salary
growth.
Future developments: reduction in costs to reflect
expected savings.
Customer acquisition: based on experience of
costs required to support acquisition, renewal and
other servicing activities.
Credit losses: historical assumptions regarding
provisions have been updated to reflect the current
North American environment.
Wages: projected headcount in line with expected
activity. Salary increases based on inflation
expectations.
Future developments: costs to increase in line with
customer growth, adjusted to reflect planned
business process efficiencies.
Credit losses: historical assumptions regarding
provisions have been updated to reflect the current
UK and US environment.
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Notes to the Financial Statements
Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CGU
Distributed
Energy &
Power
Energy
Marketing &
Trading
Gross margin
Existing customers: based on
contractual terms.
New customers and renewals: based
on gross margins in the period leading
up to the date of the business plan
and estimates of future profitability.
Asset-backed business:
Existing customers: based on
contractual terms.
New customers and renewals: based
on gross margins in the period leading
up to the date of the business plan
and estimates of future profitability.
Trading business:
Existing and new markets:
management’s estimate of future
trading performance.
Revenues
Customer contracts: customer book
immediately prior to business plan.
Adjusted for: growth forecasts.
Asset-backed business: customer book
immediately prior to business plan.
Adjusted for: growth forecasts.
Operating costs
Wages: projected headcount in line with expected
activity. Salary increases based on inflation
expectations.
Credit losses: estimated bad debt and allowances
based on historical collection rights and trends
which are evaluated by the business.
Wages: projected headcount in line with expected
activity. Salary increases based on inflation
expectations. Bonuses: in line with expected
business performance.
Future development: increase in costs to support
growth forecasts, adjusted for planned business
process efficiencies.
Overlift and underlift
Off-take arrangements for gas and oil produced from joint operations are often such that it is not practical for each participant to receive
or sell its precise share of the overall production during the period. This results in short-term imbalances between cumulative production
entitlement and cumulative sales, referred to as overlift and underlift.
An overlift payable, or underlift receivable, is recognised at the balance sheet date within trade and other payables or trade and other
receivables respectively, and is measured at market value, with movements in the period recognised within cost of sales.
Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires
an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether the
arrangement conveys a right to use the asset or assets. Leases are classified as finance leases whenever the terms of the lease transfer
substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases. Assets held under
finance leases are capitalised and included in PP&E at their fair value, or if lower, at the present value of the minimum lease payments,
each determined at the inception of the lease. The obligations relating to finance leases, net of finance charges in respect of future
periods, are included within bank loans and other borrowings, with the amount payable within 12 months included in bank overdrafts
and loans within current liabilities.
Lease payments are apportioned between finance charges and the reduction of the finance lease obligation so as to achieve a constant
rate of interest on the remaining balance of the liability. Finance charges are charged directly against income.
Payments under operating leases are charged to the Group Income Statement on a straight-line basis over the term of the relevant lease.
Inventories
Inventories are valued on a weighted-average cost basis, at the lower of cost, or estimated net realisable value after allowance for
redundant and slow-moving items.
Decommissioning costs
Provision is made for the net present value of the estimated cost of decommissioning gas and oil production facilities at the end of the
producing lives of fields, and storage facilities and power stations at the end of their useful lives, based on price levels and technology
at the balance sheet date.
When this provision relates to an asset with sufficient future economic benefits, a decommissioning asset is recognised and included as
part of the associated PP&E and depreciated accordingly. If there is an indication that the new carrying amount of the asset is not fully
recoverable, the asset is tested for impairment and an impairment loss is recognised where necessary. Changes in these estimates
and changes to the discount rates are dealt with prospectively and reflected as an adjustment to the provision and corresponding
decommissioning asset included within PP&E. The unwinding of the discount on the provision is included in the Group Income Statement
within interest expense.
Non-current assets and disposal groups held for sale and discontinued operations
Non-current assets (and disposal groups) classified as held for sale are measured at the lower of carrying amount and fair value less costs
of disposal. No depreciation is charged in respect of non-current assets classified as held for sale.
Non-current assets and disposal groups are classified as held for sale if their carrying amount will be recovered through a sale transaction
rather than through continuing use. This condition is regarded as met only when the sale is highly probable, the asset (or disposal group)
is available for immediate sale in its present condition and the Directors are committed to the sale which should be expected to qualify for
recognition as a completed sale within one year from the date of classification.
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Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The profits or losses and cash flows that relate to a major component of the Group that has been sold or is classified as held for sale
are presented separately from continuing operations as discontinued operations within the Group Income Statement and Group Cash
Flow Statement.
Pensions and other post employment benefits
The Group operates a number of defined benefit and defined contribution pension schemes. The cost of providing benefits under the
defined benefit schemes is determined separately for each scheme using the projected unit credit actuarial valuation method. Actuarial
gains and losses are recognised in the period in which they occur in the Group Statement of Comprehensive Income.
The cost of providing retirement pensions and other benefits is charged to the Group Income Statement over the periods benefiting from
employees’ service. Past service cost is recognised immediately. Costs of administering the schemes are charged to the Group Income
Statement. Net interest, being the change in the net defined benefit liability or asset due to the passage of time is recognised in the Group
Income Statement net finance cost.
The net defined benefit liability or asset recognised in the Group Balance Sheet represents the present value of the defined benefit
obligation of the schemes, and the fair value of the schemes’ assets. The present value of the defined benefit obligation is determined by
discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency
in which the benefits are paid, and that have terms of maturity approximating to the terms of the related pension liability.
Payments to defined contribution retirement benefit schemes are recognised in the Group Income Statement as they fall due.
Provisions
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, that can be
measured reliably, and it is probable that the Group will be required to settle that obligation. Provisions are measured at the best
estimate of the expenditure required to settle the obligation at the balance sheet date, and are discounted to present value where
the effect is material.
Where discounting is used, the increase in the provision due to the passage of time is recognised in the Group Income Statement within
interest expense. Onerous contract provisions are recognised where the unavoidable costs of meeting the obligations under a contract
exceed the economic benefits expected to be received under it. Contracts to purchase or sell energy are reviewed on a portfolio basis
given the fungible nature of energy, whereby it is assumed that the highest priced purchase contract supplies the highest priced sales
contract and the lowest priced sales contract is supplied by the lowest priced purchase contract.
Taxation
Current tax, including UK corporation tax, UK petroleum revenue tax and foreign tax is provided at amounts expected to be paid
(or recovered) using the tax rates and laws that have been enacted or substantively enacted by the balance sheet date. From time to time,
the Group may have open tax issues with a number of revenue authorities. Where an outflow of funds is believed to be probable and a
reliable estimate of the dispute can be made, management provides for its best estimate of the liability. These estimates take into account
the specific circumstances of each dispute and relevant external advice. Each item is considered separately and on a basis that provides
the better prediction of the outcome.
Deferred tax is recognised in respect of all temporary differences identified at the balance sheet date, except to the extent that the
deferred tax arises from the initial recognition of goodwill (if impairment of goodwill is not deductible for tax purposes) or the initial
recognition of an asset or liability in a transaction which is not a business combination and at the time of the transaction affects
neither accounting profit nor taxable profit and loss. Temporary differences are differences between the carrying amount of the Group’s
assets and liabilities and their tax base.
Deferred tax liabilities may be offset against deferred tax assets within the same taxable entity or qualifying local tax group. Any remaining
deferred tax asset is recognised only when, on the basis of all available evidence, it can be regarded as probable that there will be suitable
taxable profits, within the same jurisdiction, in the foreseeable future, against which the deductible temporary difference can be utilised.
Deferred tax is provided on temporary differences arising on subsidiaries, joint ventures and associates, except where the timing of the
reversal of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or liability settled,
based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Measurement of deferred tax
liabilities and assets reflects the tax consequences expected from the manner in which the asset or liability is recovered or settled.
Financial instruments
Financial assets and financial liabilities are recognised in the Group Balance Sheet when the Group becomes a party to the contractual
provisions of the instrument. Financial assets are derecognised when the Group no longer has the rights to cash flows, the risks and
rewards of ownership or control of the asset. Financial liabilities are derecognised when the obligation under the liability is discharged,
cancelled or expires.
(a) Trade receivables
Trade receivables are initially recognised at fair value, which is usually the original invoice amount and are subsequently held at amortised
cost using the effective interest rate method less an allowance for any uncollectible amounts. Provision is made when there is objective
evidence that the Group may not be able to collect the trade receivable. Balances are written off when recoverability is assessed as being
remote. If collection is due in one year or less, receivables are classified as current assets, if not they are presented as non-current assets.
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Notes to the Financial Statements
Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(b) Trade payables
Trade payables are initially recognised at fair value, which is usually the original invoice amount and are subsequently held at amortised
cost using the effective interest rate method. If payment is due within one year or less, payables are classified as current liabilities, if not
they are presented as non-current liabilities.
(c) Share capital
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares are shown in equity as a deduction
from the proceeds received. Own equity instruments that are reacquired (treasury or own shares) are deducted from equity. No gain or loss
is recognised in the Group Income Statement on the purchase, sale, issue or cancellation of the Group’s own equity instruments.
(d) Cash and cash equivalents
Cash and cash equivalents comprise cash in hand and current balances with banks and similar institutions, which are readily convertible to
known amounts of cash and which are subject to insignificant risk of changes in value and have an original maturity of three months or less.
For the purpose of the Group Cash Flow Statement, cash and cash equivalents consist of cash and cash equivalents as defined above,
net of outstanding bank overdrafts.
(e) Interest-bearing loans and other borrowings
All interest-bearing loans and other borrowings with banks and similar institutions are initially recognised at fair value net of directly
attributable transaction costs. After initial recognition, interest-bearing loans and other borrowings are subsequently measured at
amortised cost using the effective interest method, except when they are the hedged item in an effective fair value hedge relationship
where the carrying value is also adjusted to reflect the fair value movements associated with the hedged risks. Such fair value movements
are recognised in the Group Income Statement. Amortised cost is calculated by taking into account any issue costs, discount or premium.
(f) Available-for-sale financial assets
Available-for-sale financial assets are those non-derivative financial assets that are designated as available-for-sale, which are recognised
initially at fair value in the Group Balance Sheet. Available-for-sale financial assets are re-measured subsequently at fair value with
gains and losses arising from changes in fair value recognised directly in equity and presented in the Group Statement of Comprehensive
Income, until the asset is disposed of or is determined to be impaired, at which time the cumulative gain or loss previously recognised in
equity is included in the Group Income Statement for the period. Accrued interest or dividends arising on available-for-sale financial assets
are recognised in the Group Income Statement.
At each balance sheet date the Group assesses whether there is objective evidence that available-for-sale financial assets are impaired.
If any such evidence exists, cumulative losses recognised in equity are removed from equity and recognised in the Group Income
Statement. The cumulative loss removed from equity represents the difference between the acquisition cost and current fair value,
less any impairment loss on that financial asset previously recognised in the Group Income Statement.
Impairment losses recognised in the Group Income Statement for equity investments classified as available-for-sale are not subsequently
reversed through the Group Income Statement. Impairment losses recognised in the Group Income Statement for debt instruments
classified as available-for-sale are subsequently reversed if an increase in the fair value of the instrument can be objectively related to
an event occurring after the recognition of the impairment loss.
(g) Financial assets at fair value through profit or loss
The Group holds investments in gilts which it designates at fair value through profit or loss. Investments are measured at fair value on initial
recognition and are re-measured to fair value in each subsequent reporting period. Gains and losses arising from changes in fair value are
recognised in the Group Income Statement within interest income or interest expense.
(h) Derivative financial instruments
The Group routinely enters into sale and purchase transactions for physical delivery of gas, power and oil. A portion of these transactions
take the form of contracts that were entered into and continue to be held for the purpose of receipt or delivery of the physical commodity
in accordance with the Group’s expected sale, purchase or usage requirements (‘own use’), and are not within the scope of IAS 39.
The assessment of whether a contract is deemed to be ‘own use’ is conducted on a Group basis without reference to underlying book
structures, business units or legal entities.
Certain purchase and sales contracts for the physical delivery of gas, power and oil are within the scope of IAS 39 due to the fact that
they net settle or contain written options. Such contracts are accounted for as derivatives under IAS 39 and are recognised in the Group
Balance Sheet at fair value. Gains and losses arising from changes in fair value on derivatives that do not qualify for hedge accounting
are taken directly to the Group Income Statement for the year.
The Group uses a range of derivatives for both trading and to hedge exposures to financial risks, such as interest rates, foreign exchange
and energy price risks, arising in the normal course of business. The use of derivative financial instruments is governed by the Group’s
policies which are approved by the Board of Directors. Further detail on the Group’s risk management policies is included within the
Strategic Report – Principal Risks and Uncertainties on pages 56 to 64 and in note S3.
The accounting treatment of derivatives is dependent on whether they are entered into for trading or hedging purposes. A derivative
instrument is considered to be used for hedging purposes when it alters the risk profile of an underlying exposure of the Group in line
with the Group’s risk management policies and is in accordance with established guidelines. Certain derivative instruments used for
hedging purposes are designated in hedge accounting relationships as described by IAS 39. In order to qualify for hedge accounting,
the effectiveness of the hedge must be reliably measurable and documentation describing the formal hedging relationship must be
prepared at the point of designation. The hedge must be highly effective in achieving its objective. The Group also holds derivatives
that are used for hedging purposes which are not designated in hedge accounting relationships and are held for trading.
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Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
All derivatives are recognised at fair value on the date on which the derivative is entered into and are re-measured to fair value at each
reporting date. Derivatives are carried as assets when the fair value is positive and as liabilities when the fair value is negative. Derivative
assets and derivative liabilities are offset and presented on a net basis only when both a legal right of set-off exists and the intention to
net settle the derivative contracts is present.
The Group enters into certain energy derivative contracts covering periods for which observable market data does not exist. The fair
value of such derivatives is estimated by reference in part to published price quotations from active markets, to the extent that such
observable market data exists, and in part by using valuation techniques, the inputs to which include data that is not based on or derived
from observable markets. Where the fair value at initial recognition for such contracts differs from the transaction price, a fair value gain
or fair value loss will arise. This is referred to as a day-one gain or day-one loss. Such gains and losses are deferred (not recognised)
and amortised to the Group Income Statement based on volumes purchased or delivered over the contractual period until such time as
observable market data becomes available. When observable market data becomes available, any remaining deferred day-one gains or
losses are recognised within the Group Income Statement. Recognition of the gains or losses resulting from changes in fair value depends
on the purpose for issuing or holding the derivative. For derivatives that do not qualify for hedge accounting, any gains or losses arising
from changes in fair value are taken directly to the Group Income Statement and are included within gross profit or interest income and
interest expense. Gains and losses arising on derivatives entered into for speculative energy trading purposes are presented on a net
basis within revenue.
Derivatives embedded in other financial instruments or other host contracts are treated as separate derivatives when their risks and
characteristics are not closely related to those of the host contracts and the host contracts are not carried at fair value, with gains or
losses reported in the Group Income Statement. The closely related nature of embedded derivatives is reassessed when there is a change
in the terms of the contract that significantly modifies the future cash flows under the contract. Where a contract contains one or more
embedded derivatives, and providing that the embedded derivative significantly modifies the cash flows under the contract, the option
to fair value the entire contract may be taken and the contract will be recognised at fair value with changes in fair value recognised in the
Group Income Statement.
(i) Hedge accounting
For the purposes of hedge accounting, hedges are classified as either fair value hedges or cash flow hedges. Note S5 details the Group’s
accounting policies in relation to derivatives qualifying for hedge accounting under IAS 39.
Nuclear activity
The Group’s investment in Lake Acquisitions Limited (‘Nuclear’) is accounted for as an associate. The following accounting policies are
specific to this nuclear activity.
(a) Fuel costs – nuclear front end
Front end fuel costs consist of the costs of procurement of uranium, conversion and enrichment services and fuel element fabrication.
All costs are capitalised into inventory and charged to the Group Income Statement in proportion to the amount of fuel burnt.
(b) Fuel costs – nuclear back end
Advanced gas-cooled reactors (AGR)
Spent fuel extracted from the reactors is sent for reprocessing and/or long-term storage and eventual disposal of resulting waste
products. Back end fuel costs comprise of a loading related cost per tonne of uranium and a rebate/surcharge to this cost which
is dependent on the out-turn market electricity price in the year and are capitalised into inventory and charged to the Group Income
Statement in proportion to the amount of fuel burnt.
Pressurised water reactor (PWR)
Back end fuel costs are based on wet storage in station ponds followed by dry storage and subsequent direct disposal of fuel. Back
end fuel costs are capitalised into inventory on loading and are charged to the Group Income Statement in proportion to the amount
of fuel burnt.
(c) Nuclear property, plant and equipment and depreciation
The majority of the costs of the nuclear fleet is depreciated from the date of the Group acquiring its share of the fleet on a straight-line
basis, with remaining depreciable periods currently of up to 19 years.
Other expenditure including amounts spent on major inspections and overhauls of production plant is depreciated over the period until
the next outage which for AGR power stations is three years and for the PWR power station is 18 months.
(d) Nuclear Liabilities Fund (NLF) funding arrangements
Under the arrangements in place with the Secretary of State, the NLF will fund, subject to certain exceptions, qualifying uncontracted
nuclear liabilities and qualifying decommissioning costs.
In part consideration for the assumption of these liabilities by the Secretary of State and the NLF, the former British Energy Group agreed
to pay fixed decommissioning contributions each year and £150,000 (indexed to RPI) for every tonne of uranium in PWR fuel loaded into
the Sizewell B reactor after the date of these arrangements.
(e) NLF and nuclear liabilities receivables
The UK Government indemnity is provided to indemnify any future shortfall on NLF funding of qualifying uncontracted nuclear liabilities
(including PWR back end fuel services) and qualifying nuclear decommissioning costs such that the receivable equals the present value
of the associated qualifying nuclear liabilities (apart from a small timing difference due to timing of receipts from NLF).
(f) Nuclear liabilities
Nuclear liabilities represent provision for liabilities in respect of the costs of waste management of spent fuel and nuclear decommissioning.
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Notes to the Financial Statements
Supplementary information
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(g) Unburnt fuels at shutdown
Due to the nature of the nuclear fuel process there will be quantities of unburnt fuel in the reactors at station closure. The costs relating
to this unburnt fuel (final core) are fully provided for at the balance sheet date. The provision is based on a projected value per tonne
of fuel remaining at closure, discounted back to the balance sheet date and recorded as a long term liability.
S3. FINANCIAL RISK MANAGEMENT
The Group’s normal operating, investing and financing activities expose it to a variety of financial risks: market risk (including
commodity price risk, currency risk and interest rate risk), credit risk and liquidity risk. The Group’s overall financial risk management
processes are designed to identify, manage and mitigate these risks.
Further detail on the Group’s overall risk management processes is included within the Strategic Report – Principal Risks and
Uncertainties on pages 56 to 64.
The Group Financial Risk Management Committee (GFRMC) continued to advise on consolidated Group-wide commodity price risks
according to objectives, targets and policies set out by the Board. Commodity price risk management is carried out in accordance with
individual business unit policies and directives including appropriate escalation routes.
Treasury risk management, including management of currency risk, interest rate risk and liquidity risk is carried out by a central
Group Treasury function in accordance with the Group’s financing and treasury policy, as approved by the Board.
The wholesale credit risks associated with commodity trading and treasury positions are managed in accordance with the Group’s
credit risk policy and collateral risk policy. Downstream customer credit risk management is carried out in accordance with individual
business unit credit policies.
Market risk management
Market risk is the risk of loss that results from changes in market prices (commodity prices, foreign exchange rates and interest rates).
The level of market risk to which the Group is exposed at a point in time varies depending on market conditions, expectations of future
price or market rate movements and the composition of the Group’s physical asset and contract portfolios.
(a) Commodity price risk management
The Group is exposed to commodity price risk in its upstream assets, energy procurement contracts, downstream and proprietary
energy trading activities and uses specific limits to manage the exposure to commodity prices associated with the Group’s activities to
an acceptable level. The Group uses Profit at Risk (PaR) limits to control exposures to market prices. These are complemented by other
limits including Value at Risk (VaR), volumetric or stop-loss limits to control risk around trading activities.
(i) Energy procurement, upstream and downstream activities
The Group’s energy procurement, upstream and downstream activities consist of equity gas and liquids production, equity power
generation, bilateral procurement and sales contracts, market-traded purchase and sales contracts and derivative positions transacted
with the intent of securing gas and power for the Group’s downstream customers in the UK, North America and the Republic of Ireland
from a variety of sources at an optimal cost. The Group actively manages commodity price risk by optimising its asset and contract
portfolios and making use of volume flexibility.
The Group’s commodity price risk exposure in its energy procurement, upstream and downstream activities is driven by the cost of
procuring gas and electricity to serve its downstream customers and selling gas, oil and electricity from its upstream production, which
varies with wholesale commodity prices. The primary risk is that market prices for commodities will fluctuate between the time that sales
prices are fixed or tariffs are set and the time at which the corresponding procurement cost is fixed, thereby potentially reducing expected
margins or making sales unprofitable.
The Group’s downstream activities are also exposed to volumetric risk in the form of an uncertain consumption profile arising from a range
of factors, including the weather, energy consumption changes, customer attrition and the economic climate. There is also risk associated
with ensuring that there is sufficient commodity available to secure supply to customers. The Group’s upstream activities are also exposed
to volumetric risk in the form of uncertain production profiles.
In order to manage the exposure to market prices associated with the Group’s energy procurement, upstream and downstream activities
the Group uses a specific set of limits (including volumetric, VaR, PaR and stop-loss) established by the Board, Executive Committee,
GFRMC or business unit Financial Risk Committees.
PaR measures the estimated potential loss in a position or portfolio of positions associated with the movement of a commodity price
for a given confidence level, over the remaining term of the position or contract. VaR measures the estimated potential loss for a given
confidence level over a predetermined holding period. The standard confidence level used is 95%. In addition, regular stress and scenario
tests are performed to evaluate the impact on the portfolio of possible substantial movements in commodity prices.
The Group measures and manages the commodity price risk associated with the Group’s entire energy procurement, upstream and
downstream portfolio. Only certain of the Group’s energy procurement, upstream and downstream contracts constitute financial
instruments under IAS 39 (note S6).
As a result, while the Group manages the commodity price risk associated with both financial and non-financial energy procurement,
upstream and downstream contracts, it is the notional value of energy contracts being carried at fair value that represents the exposure
of the Group’s energy procurement, upstream and downstream activities to commodity price risk according to IFRS 7: ‘Financial
instruments: disclosures’. This is because energy contracts that are financial instruments under IAS 39 are accounted for on a fair value
basis and changes in fair value immediately impact profit or equity. Conversely, energy contracts that are not financial instruments under
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
169
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Notes to the Financial Statements
Supplementary information
S3. FINANCIAL RISK MANAGEMENT
IAS 39 are accounted for as executory contracts and changes in fair value do not immediately impact profit or equity, and as such, are not
exposed to commodity price risk as defined by IFRS 7. So whilst the PaR or VaR associated with energy procurement and downstream
contracts that are outside the scope of IAS 39 are monitored for internal risk management purposes; only those energy contracts within
the scope of IAS 39 are within the scope of the IFRS 7 disclosure requirements.
(ii) Proprietary energy trading
The Group’s proprietary energy trading activities consist of physical and financial commodity purchases and sales contracts taken on
with the intent of benefiting from changes in market prices or differences between buying and selling prices. The Group conducts its
trading activities in the over-the-counter market and through exchanges in the UK, North America and continental Europe. The Group
is exposed to commodity price risk as a result of its proprietary energy trading activities because the value of its trading assets and
liabilities will fluctuate with changes in market prices for commodities.
The Group sets volumetric and VaR limits to manage the commodity price risk exposure associated with the Group’s proprietary energy
trading activities. VaR measures the estimated potential loss at a 95% confidence level over a one-day holding period. The carrying value
of energy contracts used in proprietary energy trading activities at 31 December 2016 is disclosed in note 19.
As with any modelled risk measure, there are certain limitations that arise from the assumptions used in the VaR calculation. VaR assumes
that historical price behaviours will continue in the future and that the Group’s trading positions can be unwound or hedged within the
predetermined holding period. Furthermore, the use of a 95% confidence level, by definition, does not take into account changes in value
that might occur beyond this confidence level.
(b) Currency risk management
The Group is exposed to currency risk on foreign currency denominated forecast transactions, firm commitments, monetary assets and
liabilities (transactional exposure) and on its net investments in foreign operations (translational exposure). IFRS 7 only requires disclosure
of currency risk arising on financial instruments denominated in a currency other than the functional currency of the commercial operation
transacting. As a result, for the purposes of IFRS 7, currency risk excludes the Group’s net investments in international operations as well
as foreign currency denominated forecast transactions and firm commitments.
(i) Transactional currency risk
The Group is exposed to transactional currency risk on transactions denominated in currencies other than the underlying functional
currency of the commercial operation transacting. The Group has been increasing its international presence through acquisition and
the primary functional currencies remain pounds sterling in the UK, Canadian dollars in Canada, US dollars in the US, Norwegian krone
in Norway and euros in the Netherlands and the Republic of Ireland, with the addition of Danish krone in Denmark following the acquisition
of Neas Energy. The risk is that the functional currency value of cash flows will vary as a result of movements in exchange rates.
Transactional exposure arises from the Group’s energy procurement and upstream activities, where many transactions are denominated
in foreign currencies. In addition, in order to optimise the cost of funding, the Group has, in certain cases, issued foreign currency
denominated debt or entered into foreign currency loans, primarily in US dollars, euros, Japanese yen or Hong Kong dollars.
It is the Group’s policy to hedge material transactional exposures using derivatives to fix the functional currency value of non-functional
currency cash flows, except where there is an economic hedge inherent in the transaction. At 31 December 2016, there were no material
unhedged non-functional currency monetary assets or liabilities, firm commitments or probable forecast transactions (2015: nil), other than
transactions which have an inherent economic hedge and foreign currency borrowings used to hedge translational exposures.
(ii) Translational currency risk
The Group is exposed to translational currency risk as a result of its net investments in North America and Europe. The risk is that the
pound sterling value of the net assets of foreign operations will decrease with changes in foreign exchange rates. The Group’s policy
is to protect the pounds sterling book value of its net investments in foreign operations where appropriate, subject to certain parameters
monitored by the GFRMC, by holding foreign currency debt, entering into foreign currency derivatives, or a mixture of both.
The Group manages translational currency risk taking into consideration the cash impact of any hedging activity as well as the risk
to the net asset numbers in the Group’s Financial Statements. The translation hedging programme including the potential cash impact
is monitored by the GFRMC.
(c) Interest rate risk management
In the normal course of business the Group borrows to finance its operations. The Group is exposed to interest rate risk because the
fair value of fixed rate borrowings and the cash flows associated with floating rate borrowings will fluctuate with changes in interest rates.
The Group’s policy is to manage the interest rate risk on long-term borrowings by ensuring the exposure to floating interest rates remains
within a 30% to 70% range, including the impact of interest rate derivatives.
The return generated on the Group’s cash balance is also exposed to movements in short term interest rates. The Group manages cash
balances to protect against adverse changes in rates whilst retaining liquidity.
(d) Sensitivity analysis
IFRS 7 requires disclosure of a sensitivity analysis that is intended to illustrate the sensitivity of the Group’s financial position and performance
to changes in market variables (commodity prices, foreign exchange rates and interest rates) as a result of changes in the fair value or cash
flows associated with the Group’s financial instruments. The sensitivity analysis provided discloses the effect on profit or loss and equity
at 31 December 2016, assuming that a reasonably possible change in the relevant risk variable had occurred at 31 December 2016,
and has been applied to the risk exposures in existence at that date to show the effects of reasonably possible changes in price on
profit or loss and equity. Reasonably possible changes in market variables used in the sensitivity analysis are based on implied volatilities,
where available, or historical data for energy prices and foreign exchange rates. Reasonably possible changes in interest rates are based
on management judgement and historical experience.
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Notes to the Financial Statements
Supplementary information
S3. FINANCIAL RISK MANAGEMENT
The sensitivity analysis has been prepared based on 31 December 2016 balances and on the basis that the balances, the ratio of fixed
to floating rates of debt and derivatives, the proportion of energy contracts that are financial instruments, the proportion of financial
instruments in foreign currencies and the hedge designations in place at 31 December 2016 are all constant. Excluded from this analysis
are all non-financial assets and liabilities and energy contracts that are not financial instruments under IAS 39. The sensitivity to foreign
exchange rates relates only to monetary assets and liabilities denominated in a currency other than the functional currency of the
commercial operation transacting, and excludes the translation of the net assets of foreign operations to pounds sterling.
The sensitivity analysis provided is hypothetical only and should be used with caution as the impacts provided are not necessarily
indicative of the actual impacts that would be experienced. This is because the Group’s actual exposure to market rates is changing
constantly as the Group’s portfolio of commodity, debt and foreign currency contracts changes. Changes in fair values or cash flows
based on a variation in a market variable cannot be extrapolated because the relationship between the change in market variable and
the change in fair value or cash flows may not be linear. In addition, the effect of a change in a particular market variable on fair values or
cash flows is calculated without considering interrelationships between the various market rates or mitigating actions that would be taken
by the Group. The sensitivity analysis provided excludes the impact of proprietary energy trading assets and liabilities because the VaR
associated with the Group’s proprietary energy trading activities is less than £5 million.
(i) Transactional currency risk
The Group has performed an analysis of the sensitivity of the Group’s financial position and performance to changes in foreign exchange
rates. The Group deems 10% movements to US dollar, Canadian dollar and euro currency rates relative to pounds sterling to be reasonably
possible. The impact of such movements on profit and equity, both before and after taxation, is immaterial to the Group except for US dollar
where a 10% upward movement would increase profit by £99 million and a 10% downward movement would decrease profit by
£149 million.
(ii) Interest rate risk
The Group has performed an analysis of the sensitivity of the Group’s financial position and performance to changes in interest rates.
The Group deems a one percentage point move in UK, US and euro interest rates to be reasonably possible. The impact of such
movements on profit and equity, both after taxation, is immaterial.
(iii) Commodity price risk
The impacts of reasonably possible changes in commodity prices on profit and equity, both after taxation, based on the assumptions set
out above are as follows:
Energy prices
UK gas (p/therm)
UK power (£/MWh)
UK coal (US$/tonne)
UK emissions (€/tonne)
UK oil (US$/bbl)
North American gas (US cents/therm)
North American power (US$/MWh)
Incremental profit/(loss)
UK energy prices (combined) – increase/(decrease)
North American energy prices (combined) – increase/(decrease)
2016
Reasonably
possible
change in variable
% (ii)
+/–15
+/–14
+/–19
+/–23
+/–14
+/–4
+/–6
Base price
(i)
49
46
65
7
58
37
32
2015
Reasonably
possible
change in variable
% (ii)
+/–15
+/–11
+/–9
+/–11
+/–15
+/–4
+/–6
2015
Impact on
profit (ii)
£m
52/(63)
93/(93)
Base price
(i)
34
36
43
8
47
25
34
2016
Impact on
profit (ii)
£m
82/(86)
117/(117)
(i)
(ii)
The base price represents the average forward market price over the duration of the active market curve used in the sensitivity analysis provided.
The reasonably possible change in variable and the impact on profit are calculated using both the active and inactive market curves for all UK energy prices.
The impact on equity of such price changes is immaterial.
Credit risk management
Credit risk is the risk of loss associated with a counterparty’s inability or failure to discharge its obligations under a contract. The Group
continually reviews its rating thresholds for counterparty credit limits, and updates these as necessary based on a consistent set of
principles. It continues to operate within its limits. In both the US and Europe, there is an effort to maintain a balance between exchange
base trading and bilateral transactions. This allows for a reasonable balance between counterparty credit risk and large liquidity
requirements. In addition the Group actively manages the trade-off between credit and liquidity risks by optimising the use of contracts
with collateral obligations and physically settled contracts without collateral obligations.
The continued downward pressure in global commodity prices during the year has added financial pressure to many of our counterparties
and, in some cases, has had a detrimental impact on their financial strength and resulting credit risk profile. These pressures have been and
will continue to be taken into account in counterparty credit reviews. During the year, many large European utilities have been downgraded
lowering the overall credit assessment of the industry although market access has not been significantly impaired because of this.
Centrica plc Annual Report and Accounts 2016
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171
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Notes to the Financial Statements
Supplementary information
S3. FINANCIAL RISK MANAGEMENT
The Group is exposed to credit risk in its treasury, trading, energy procurement and downstream activities. Credit risk from financial
assets is measured by counterparty credit rating as follows:
AAA to AA
AA– to A–
BBB+ to BBB–
BB+ to BB–
B+ or lower
Unrated (ii)
Derivative financial
instruments with
positive fair values
£m
8
918
673
117
50
107
1,873
Receivables from
treasury, trading
and energy
procurement
counterparties
£m
83
532
317
144
76
90
1,242
2016
Cash and cash
equivalents
£m
1,118
878
37
3
–
–
2,036
Derivative financial
instruments with
positive fair values
£m
16
497
462
307
13
81
1,376
Receivables from
treasury, trading
and energy
procurement
counterparties
£m
7
560
237
134
1
108
1,047
2015
Cash and cash
equivalents
(restated) (i)
£m
404
701
31
–
–
22
1,158
(i)
(ii)
Cash and cash equivalents for 2015 have been restated. See note 1 for further information.
The unrated counterparty receivables primarily comprise amounts due from subsidiaries of rated entities, exchanges or clearing houses.
Details of how credit risk is managed across the asset categories are provided below.
(a) Treasury, trading and energy procurement activities
Wholesale counterparty credit exposures are monitored by individual counterparty and by category of credit rating, and are subject to
approved limits. The Group uses master netting agreements to reduce credit risk and net settles payments with counterparties where
net settlement provisions exist (see note S6 for details of amounts offset). In addition, the Group employs a variety of other methods to
mitigate credit risk: margining, various forms of bank and parent company guarantees and letters of credit. See note 24(c) for details of
cash posted or received under margin or collateral agreements.
100% of the Group’s credit risk associated with its treasury, trading and energy procurement activities is with counterparties in related
energy industries or with financial institutions.
IFRS 7 requires disclosure of information about the exposure to credit risk arising from financial instruments only. Only certain of the
Group’s energy procurement contracts constitute financial instruments under IAS 39. As a result, whilst the Group manages the credit risk
associated with both financial and non-financial energy procurement contracts, it is the carrying value of financial assets within the scope
of IAS 39 (note S6) that represents the maximum exposure to credit risk in accordance with IFRS 7.
(b) Downstream activities
In the case of business customers, credit risk is managed by checking a company’s creditworthiness and financial strength both before
commencing trade and during the business relationship. For residential customers, creditworthiness is ascertained normally before
commencing trade to determine the payment mechanism required to reduce credit risk to an acceptable level. Certain customers will only
be accepted on a prepayment basis or with a security deposit. In some cases, an ageing of receivables is monitored and used to manage
the exposure to credit risk associated with both business and residential customers. In other cases, credit risk is monitored and managed
by grouping customers according to method of payment or profile.
Liquidity risk management and going concern
Liquidity risk is the risk that the Group is unable to meet its financial obligations as they fall due. The Group experiences significant
movements in its liquidity position due primarily to the seasonal nature of its business and margin cash arrangements associated with
certain wholesale commodity contracts. To mitigate this risk the Group maintains significant committed facilities and holds cash on
deposit. See note 24(b) for further information.
172
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Notes to the Financial Statements
Supplementary information
S3. FINANCIAL RISK MANAGEMENT
Maturity profiles
Maturities of derivative financial instruments, provisions, borrowings and finance leases are provided in the following tables (all amounts are
remaining contractual undiscounted cash flows):
Due for payment 2016
Energy and interest derivatives in a loss position
that will be settled on a net basis
Gross energy procurement contracts and related
derivatives carried at fair value (i)
Foreign exchange derivatives that will be settled
on a gross basis:
Outflow
Inflow
Financial liabilities within provisions
Borrowings (bank loans, bonds, commercial
paper, overdrafts and interest)
Finance leases: (ii)
Minimum lease payments
Capital elements of leases
Due for payment 2015
Energy and interest derivatives in a loss position
that will be settled on a net basis
Gross energy procurement contracts and related
derivatives carried at fair value (i)
Foreign exchange derivatives that will be settled
on a gross basis:
Outflow
Inflow
Financial liabilities within provisions
Borrowings (bank loans, bonds, commercial
paper, overdrafts and interest) (iii)
Finance leases: (ii)
Minimum lease payments
Capital elements of leases
<1
year
£m
1 to 2
years
£m
2 to 3
years
£m
3 to 4
years
£m
4 to 5
years
£m
>5
years
£m
(143)
(84)
(27)
(19)
(3)
3
(8,435)
(4,441)
(3,024)
(2,666)
(2,271)
(7,728)
(6,205)
6,308
(229)
(1,086)
1,150
(50)
(191)
187
(25)
(684)
840
(22)
(928)
1,078
(22)
(113)
146
(58)
(534)
(694)
(353)
(328)
(913)
(7,123)
(52)
(39)
<1
year
£m
(53)
(43)
1 to 2
years
£m
(54)
(47)
2 to 3
years
£m
(56)
(53)
3 to 4
years
£m
(46)
(45)
4 to 5
years
£m
(384)
(111)
(39)
(8)
(11)
(6)
(6)
>5
years
£m
–
(7,040)
(3,421)
(2,135)
(2,047)
(2,604)
(10,448)
(4,106)
4,071
(268)
(565)
554
(92)
(117)
107
(43)
(125)
106
(29)
(30)
19
(26)
(912)
808
(48)
(896)
(417)
(681)
(327)
(405)
(7,544)
(50)
(43)
(41)
(36)
(43)
(38)
(45)
(41)
(46)
(44)
(49)
(48)
(i)
(ii)
(iii)
Proprietary energy trades are excluded from this maturity analysis as we do not take physical delivery of volumes traded under these contracts. The associated cash flows are expected to
be equal to the contract fair value at the balance sheet date. See note 19 for further details.
The difference between the total minimum lease payments and the total capital elements of leases is due to future finance charges.
Current bank overdrafts, loans and other borrowings have been restated for 2015. See note 1 for further details.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
173
173
Notes to the Financial Statements
Supplementary information
S4. OTHER EQUITY
This section summarises the Group’s other equity reserve movements.
1 January 2015
Revaluation of available-for-sale securities
Actuarial loss
Employee share schemes:
Increase in own shares
Exercise of awards
Value of services provided
Cash flow hedges:
Net gains
Transferred to income and expense
Transferred to assets and liabilities
Share of other comprehensive income/(loss)
of joint ventures and associates, net of taxation
Taxation on above items
Exchange adjustments
31 December 2015
Revaluation of available-for-sale securities
Transfer of available-for-sale reserve to income
statement
Actuarial loss
Employee share schemes:
Increase in own shares
Exercise of awards
Value of services provided
Cash flow hedges:
Net gains
Transferred to income and expense
Transferred to assets and liabilities
Share of other comprehensive (loss)/income
of joint ventures and associates, net of taxation
Taxation on above items
Exchange adjustments
31 December 2016
Cash
flow
hedging
reserve
£m
(25)
–
–
Foreign
currency
translation
reserve
£m
(341)
–
–
Actuarial
gains and
losses
reserve
£m
(316)
–
(321)
Available-
for-sale
reserve
(AFS)
£m
18
5
–
Treasury
and own
shares
reserve
£m
(256)
–
–
Share-
based
payments
reserve
£m
95
–
–
Merger and
capital
redemption
reserve
£m
493
–
–
–
–
–
20
(12)
7
3
(6)
–
(13)
–
–
–
–
–
–
161
(129)
(4)
(4)
(3)
–
8
–
–
–
–
–
–
–
–
(221)
(562)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(8)
50
3
(592)
–
–
(1,174)
–
–
–
–
–
–
–
–
513
(49)
65
194
(7)
(1,514)
–
–
–
–
–
–
–
–
–
23
9
(5)
–
–
–
–
–
–
–
–
(1)
–
26
(11)
69
–
–
–
–
–
–
–
(198)
–
–
–
(17)
35
–
–
–
–
–
–
–
(180)
Total
£m
(332)
5
(321)
(11)
24
45
20
(12)
7
(5)
42
(218)
(756)
9
(5)
(1,174)
(17)
3
46
161
(129)
(4)
–
(45)
45
–
–
–
–
(2)
–
93
–
–
–
–
(32)
46
–
–
–
–
–
–
–
–
–
–
–
–
493
–
–
–
–
–
–
–
–
–
–
–
–
107
–
–
–
493
61
190
506
(1,109)
Merger reserve
During February 1997, BG plc (formerly British Gas plc) demerged certain businesses (grouped together under GB Gas Holdings Limited
(GBGH)) to form Centrica plc. Upon demerger, the share capital of GBGH was transferred to Centrica plc and was recorded at the
nominal value of shares issued to BG plc shareholders. In accordance with the Companies Act 1985, no premium was recorded
on the shares issued. On consolidation, the difference between the nominal value of the Company’s shares issued and the amount
of share capital and share premium of GBGH at the date of demerger was credited to a merger reserve.
Capital redemption reserve
In accordance with the Companies Act 1985, the Company has transferred to the capital redemption reserve an amount equal to the
nominal value of shares repurchased and subsequently cancelled. Up to 31 December 2016 the cumulative nominal value of shares
repurchased and subsequently cancelled was £26 million (2015: £26 million).
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Notes to the Financial Statements
Supplementary information
S4. OTHER EQUITY
Own shares reserve
The own shares reserve reflects the cost of shares in the Company held in the Centrica employee share ownership trusts to meet
the future requirements of the Group’s share-based payment plans.
Treasury shares reserve
Treasury shares are acquired equity instruments of the Company.
Share-based payments reserve
The share-based payments reserve reflects the obligation to deliver shares to employees under the Group’s share schemes in return
for services provided.
Foreign currency translation reserve
The foreign currency translation reserve comprises exchange adjustments on the translation of the Group’s foreign operations. Historically
the Group has hedged its net investments in these foreign operations and the opening balance of the foreign currency translation reserve
includes exchange translation adjustments on borrowings and derivatives classified as net investment hedges under the requirements of
IAS 39. Note S5 provides further detail on historical net investment hedges.
Cash flow hedging reserve
The cash flow hedging reserve comprises fair value movements on instruments designated as cash flow hedges under the requirements
of IAS 39. Amounts are transferred from the cash flow hedging reserve to the Group Income Statement or Group Balance Sheet as and
when the hedged item affects the Group Income Statement or Group Balance Sheet which is, for the most part, on receipt or payment
of amounts denominated in foreign currencies and settlement of interest on debt instruments. Note S5 provides further detail on cash
flow hedging.
S5. HEDGE ACCOUNTING
For the purposes of hedge accounting, hedges are classified either as fair value hedges, cash flow hedges or, in previous periods,
hedges of net investments in foreign operations.
The fair values of derivatives and primary financial instruments in hedge accounting relationships at 31 December were as follows:
31 December
Fair value hedges
Cash flow hedges
Assets
£m
158
151
2016
Liabilities
£m
(5)
(3)
Assets
£m
129
28
2015
Liabilities
£m
(2)
(69)
The Group’s accounting policies in relation to derivatives qualifying for hedge accounting under IAS 39 are described below.
Fair value hedges
A derivative is designated as a hedging instrument and its relationship to a recognised asset or liability is classified as a fair value hedge
when it hedges the exposure to changes in the fair value of that recognised asset or liability. The Group’s fair value hedges consist of
interest rate swaps used to protect against changes in the fair value of fixed-rate, long-term debt due to movements in market interest
rates. Any gain or loss from re-measuring the hedging instrument to fair value is recognised immediately in the Group Income Statement.
Any gain or loss on the hedged item attributable to the hedged risk is adjusted against the carrying amount of the hedged item and
recognised in the Group Income Statement within net finance cost. The Group discontinues fair value hedge accounting if the hedging
instrument expires or is sold, terminated or exercised, the hedge no longer qualifies for hedge accounting or the Group revokes the
designation. Any adjustment to the carrying amount of a hedged financial instrument for which the effective interest method is used
is amortised to the Group Income Statement. Amortisation may begin as soon as an adjustment exists and shall begin no later than
when the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged.
Gains or losses arising on fair value hedges net of gains or losses arising on hedged items attributable to the hedged risk for the years
ended 31 December 2016 and 31 December 2015 were immaterial.
Cash flow hedges
A derivative is classified as a cash flow hedge when it hedges exposure to variability in cash flows that is attributable to a particular risk
either associated with a recognised asset, liability or a highly probable forecast transaction. The Group’s cash flow hedges consist
primarily of:
● forward foreign exchange contracts used to protect against the variability of functional currency denominated cash flows associated
with non-functional currency denominated highly probable forecast transactions;
● interest rate swaps used to protect against the variability in cash flows associated with floating-rate borrowings due to movements
in market interest rates; and
● cross-currency interest rate swaps and forward foreign exchange contracts used to protect against the variability in cash flows
associated with borrowings denominated in non-functional currencies.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
175
175
Notes to the Financial Statements
Supplementary information
S5. HEDGE ACCOUNTING
The portion of the gain or loss on the hedging instrument which is effective is recognised directly in equity while any ineffectiveness
is recognised in the Group Income Statement. The gains or losses that are initially recognised in the cash flow hedging reserve in the
Group Statement of Comprehensive Income are transferred to the Group Income Statement in the same period in which the highly
probable forecast transaction affects income. Where the hedged item is the cost of a non-financial asset or liability, the amounts taken
to equity are transferred to the initial carrying amount of the non-financial asset or liability on its recognition. Hedge accounting is
discontinued when the hedging instrument expires or is sold, terminated or exercised without replacement or rollover, no longer qualifies
for hedge accounting or the Group revokes the designation. At that point in time, any cumulative gain or loss on the hedging instrument
recognised in equity remains in equity until the highly probable forecast transaction occurs. If the transaction is no longer expected to
occur, the cumulative gain or loss recognised in equity is recognised in the Group Income Statement.
Note S4 details movements in the cash flow hedging reserve. The ineffective portion of gains and losses on cash flow hedging is
immaterial and is recognised immediately in the Group Income Statement.
Net investment hedges
Historically the Group engaged in net investment hedging (NIH) whereby it would obtain foreign currency debt issued in the same currency
as its net investment in a foreign operation. Such hedges of net investments in foreign operations are accounted for similarly to cash flow
hedges. Any gain or loss on the effective portion of the hedge is recognised in equity; any gain or loss on the ineffective portion of the
hedge is recognised in the Group Income Statement. In 2009 the Group ceased to NIH, however the opening balance of the foreign
currency translation reserve includes cumulative exchange translation adjustments on borrowings and derivatives classified as a NIH under
the requirements of IAS 39. These balances will be recycled to the Group Income Statement on disposal of the relevant foreign operation.
S6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. The Group has documented internal policies for determining fair
value, including methodologies used to establish valuation adjustments required for credit risk.
(a) Fair value hierarchy
Financial assets and financial liabilities measured and held at fair value are classified into one of three categories, known as hierarchy
levels, which are defined according to the inputs used to measure fair value as follows:
● Level 1: fair value is determined using observable inputs that reflect unadjusted quoted market prices for identical assets and liabilities;
● Level 2: fair value is determined using significant inputs that may be directly observable inputs or unobservable inputs that are
corroborated by market data; and
● Level 3: fair value is determined using significant unobservable inputs that are not corroborated by market data and may be used with
internally developed methodologies that result in management’s best estimate of fair value.
31 December
Financial assets
Derivative financial instruments:
Energy derivatives
Interest rate derivatives
Foreign exchange derivatives
Treasury gilts designated at fair value through profit or loss
Debt instruments
Equity instruments (ii)
Total financial assets at fair value
Financial liabilities
Derivative financial instruments:
Energy derivatives
Interest rate derivatives
Foreign exchange derivatives
Total financial liabilities at fair value
Level 1
£m
Level 2
£m
Level 3
£m
81
–
–
130
64
34
309
1,350
158
244
–
–
–
1,752
40
–
–
–
–
4
44
2016
Total
£m
1,471
158
244
130
64
38
2,105
Level 1
£m
Level 2
£m
Level 3 (i)
£m
17
–
–
124
60
27
228
1,172
129
96
–
–
30
1,427
(38)
–
–
–
–
3
(35)
2015
Total
£m
1,151
129
96
124
60
60
1,620
(20)
–
–
(20)
(1,369)
(36)
(105)
(1,510)
(63)
–
–
(63)
(1,452)
(36)
(105)
(1,593)
(220)
–
–
(220)
(1,449)
(28)
(157)
(1,634)
(114)
–
–
(114)
(1,783)
(28)
(157)
(1,968)
(i)
(ii)
Included within Level 3 energy derivative assets are liabilities of £53 million, which were presented within derivative assets on the Group Balance Sheet in 2015, as a result of being netted off
the associated Level 2 trades with the same counterparty, in line with the netting policy described in note S2.
Level 2 equity instruments relate to shares acquired in Enercare Inc.
176
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Notes to the Financial Statements
Supplementary information
S6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The reconciliation of the Level 3 fair value measurements during the year is as follows:
Level 3 financial instruments
1 January (i)
Total realised and unrealised gains/(losses):
Recognised in Group Income Statement
Purchases, sales, issuances and settlements (net)
Transfers between Level 2 and Level 3 (ii)
Foreign exchange movements
Other (iii)
31 December
Total gains/(losses) for the year for Level 3 financial instruments
held at the end of the reporting year (iv)
Financial assets
£m
2016
Financial liabilities
£m
Financial assets
£m
2015
Financial liabilities
£m
(35)
(114)
15
(321)
69
6
4
–
–
44
89
60
(2)
–
(7)
–
(63)
(4)
(63)
26
2
3
(18)
(35)
8
195
(41)
(15)
(14)
82
(114)
(3)
(i)
(ii)
(iii)
(iv)
Included within the opening balance of financial assets in 2016 are £53 million of liabilities, which were presented within the derivative assets in the Group Balance Sheet at the end of 2015 as
a result of being netted off the associated Level 2 trades with the same counterparty, in line with the netting policy described in note 2.
Transfers between levels are deemed to occur at the beginning of the reporting period.
Other movements reflect the margin collateral balances which have now been offset against the related Level 3 derivative.
£89 million gains (2015: £8 million gains) for the year for Level 3 financial assets held at the end of the reporting year were recognised within certain re-measurements and no gains or losses
(2015: nil) were recognised in other comprehensive income. £4 million losses (2015: £3 million losses) for the year for Level 3 financial liabilities held at the end of the reporting year were
recognised within exceptional items and certain re-measurements and no gains or losses (2015: nil) were recognised in other comprehensive income.
(b) Valuation techniques used to derive Level 2 and Level 3 fair values and Group valuation process
Level 2 interest rate derivatives and foreign exchange derivatives comprise interest rate swaps and forward foreign exchange contracts.
Interest rate swaps are fair valued using forward interest rates extracted from observable yield curves. Forward foreign exchange
contracts are fair valued using forward exchange rates that are quoted in an active market.
Level 2 energy derivatives are fair valued by comparing and discounting the difference between the expected contractual cash flows for
the relevant commodities and the quoted prices for those commodities in an active market. The average discount rate applied to value
this type of contract during 2016 was 1% (2015: 1%) (Europe) and 3% (2015: 3%) (North America) per annum.
For Level 3 energy derivatives, the main input used by the Group pertains to deriving expected future commodity prices in markets that
are not active as far into the future as some of our contractual terms. This applies to certain contracts within the UK and US. Fair values
are then calculated by comparing and discounting the difference between the expected contractual cash flows and these derived future
prices using an average discount rate of 1% (2015: 2%) (UK) and 7% (2015: 7%) (US) per annum for 2016.
Active period of markets
UK (years)
North America (years)
Gas
3
5
Power
3
Up to 5
Coal
3
N/A
Emissions
3
Up to 5
Oil
3
3
Because the Level 3 energy derivative valuations involve the prediction of future commodity market prices, sometimes a long way into the
future, reasonably possible alternative assumptions for gas, power, coal, emissions or oil prices may result in a higher or lower fair value
for Level 3 financial instruments. Given the relative size of these fair values, it is unlikely that the impact of these reasonably possible
changes would be significant when judged in relation to the Group’s profit and loss or total asset value.
It should be noted that the fair values disclosed in the tables above only concern those contracts entered into which are within the scope
of IAS 39. The Group has numerous other commodity contracts which are outside of the scope of IAS 39 and are not fair valued. The
Group’s actual exposure to market rates is constantly changing as the Group’s portfolio of energy contracts changes.
The Group’s valuation process includes specific teams of individuals that perform valuations of the Group’s derivatives for financial
reporting purposes, including Level 3 valuations. The Group has an independent team that derives future commodity price curves based
on available external data and these prices feed in to the energy derivative valuations. The price curves are subject to review and approval
by the Group’s Executive Committee and valuations of all derivatives, together with other contracts that are not within the scope of
IAS 39, are also reviewed regularly as part of the overall risk management process.
Where the fair value at initial recognition for contracts which extend beyond the active period differs from the transaction price, a day-one
gain or loss will arise. Such gains and losses are deferred and amortised to the Group Income Statement based on volumes purchased
or delivered over the contractual period until such time as observable market data becomes available (see note S2 for further detail).
The amount that has yet to be recognised in the Group Income Statement relating to the differences between the transaction prices
and the amounts that would have arisen had valuation techniques used for subsequent measurement been applied at initial recognition,
less subsequent releases, is immaterial.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
177
177
Notes to the Financial Statements
Supplementary information
S6. FAIR VALUE OF FINANCIAL INSTRUMENTS
(c) Fair value of financial assets and liabilities held at amortised cost
The carrying value of the Group’s financial assets and liabilities measured at amortised cost are approximately equal to their fair value
except as listed below:
31 December
Bank loans
Bonds
Level 1
Level 2
Obligations under finance leases
Notes
24(d)
24(d)
24(d)
24(d)
Carrying value
£m
(148)
(5,849)
(101)
(233)
Fair value
£m
(223)
(6,651)
(133)
(251)
2016
Fair value
hierarchy
Level 2
Level 1
Level 2
Level 2
Carrying value
£m
(222)
(5,795)
(77)
(250)
Fair value
£m
(279)
(6,078)
(113)
(272)
2015
Fair value
hierarchy
Level 2
Level 1
Level 2
Level 2
Financial liabilities
The fair values of bonds classified as Level 1 within the fair value hierarchy are based on quoted market prices. The fair values of Level 2
bonds and bank loans have been determined by discounting cash flows with reference to relevant market rates of interest. The fair values
of overdrafts, short-term loans and commercial paper are assumed to equal their book values due to the short-term nature of these
amounts. The fair values of obligations under finance leases have been determined by discounting contractual cash flows with reference
to the Group’s cost of borrowing.
Other financial instruments
Due to their nature and/or short-term maturity, the fair values of trade and other receivables, cash and cash equivalents, trade and other
payables and provisions are estimated to approximate their carrying values.
(d) Financial assets and liabilities subject to offsetting, master netting arrangements and similar arrangements
31 December 2016
Derivative financial assets
Derivative financial liabilities
Balances arising from commodity contracts
Accrued energy income
Accruals for commodity costs
Cash and financing arrangements
Cash and cash equivalents
Bank loans and overdrafts
Securities
31 December 2015
Derivative financial assets
Derivative financial liabilities
Balances arising from commodity contracts
Accrued energy income
Accruals for commodity costs
Cash and financing arrangements
Cash and cash equivalents
Bank loans and overdrafts (ii)
Securities
Related amounts not offset in the
Group Balance Sheet (i)
Gross amounts
of recognised
financial instruments
£m
8,054
(7,774)
Gross amounts of
recognised financial
instruments offset in the
Group Balance Sheet
£m
(6,181)
6,181
Net amounts
presented in the
Group Balance
Sheet
£m
1,873
(1,593)
280
Financial
instruments
£m
(513)
513
5,452
(4,605)
2,063
(251)
232
(3,058)
3,058
2,394
(1,547)
(27)
27
–
2,036
(224)
232
(80)
80
(76)
76
–
Collateral
£m
(21)
336
Net amount
£m
1,339
(744)
595
–
–
2,314
(1,467)
–
–
(29)
1,960
(148)
203
Gross amounts
of recognised
financial instruments
£m
7,990
(8,582)
Gross amounts of
recognised financial
instruments offset in the
Group Balance Sheet
£m
(6,614)
6,614
Net amounts
presented in the
Group Balance
Sheet
£m
1,376
(1,968)
(592)
4,859
(4,121)
1,182
(544)
244
(2,934)
2,934
1,925
(1,187)
(24)
24
–
1,158
(520)
244
Related amounts not offset in the
Group Balance Sheet (i)
Financial
instruments
£m
(401)
401
(183)
183
(298)
298
–
Collateral
£m
(74)
244
Net amount
£m
901
(1,323)
(422)
–
–
1,742
(1,004)
–
–
(28)
860
(222)
216
(i)
The Group has arrangements in place with various counterparties in respect of commodity trades which provide for a single net settlement of all financial instruments covered by the
arrangement in the event of default or termination, or other circumstances arising whereby either party is unable to meet its obligations. The above table shows the potential impact of these
arrangements being enforced by offsetting the relevant amounts within each Group Balance Sheet class of asset or liability, but does not show the impact of offsetting across Group Balance
Sheet classes.
(ii)
Restated for reclassification of £298 million of overdrawn bank balances from cash and cash equivalents to current bank overdrafts, bank loans and other borrowings. See note 1 for further details.
178
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
Supplementary information
S7. FIXED-FEE SERVICE AND INSURANCE CONTRACTS
This section includes fixed-fee service (FFS) and insurance contract disclosures for services related to UK Home and NA Home.
FFS contracts in North America are entered into with home and business services customers.
FFS contracts in the UK are entered into with home services customers by British Gas Services Limited (BGSL). Insurance contracts
in the UK are entered into with home services customers by British Gas Insurance Limited (BGIL), authorised by the PRA and regulated
by the FCA and the PRA.
Product offerings include central heating, boiler and controls, plumbing and drains and electrical appliance insurance cover.
FFS contracts continue until cancelled by either party; insurance contracts normally provide cover for 12 months with the option
of renewal.
The contracts which protect policyholders against the risk of breakdowns result in the transfer of an element of risk to the contract
provider. Benefits provided to customers vary in accordance with terms and conditions of the contracts entered into; however, they
generally include maintenance, repair and/or replacement of the items affected.
The levels of risk exposure and service provision to customers under contract terms are dependent on the occurrence of uncertain future
events, in particular the nature and frequency of faults and the cost of repair or replacement of the items affected. Accordingly, the timing
and amount of future cash outflows associated with the contracts is uncertain. The key terms and conditions that affect future cash flows
are as follows:
● provision of labour and parts for repairs, dependent on the agreement and associated level of service;
● a specified number of safety and maintenance inspections are carried out as set out in the agreement (usually once a year);
● no limit to the number of call-outs to carry out repair work; and
● limits on certain maintenance and repair costs.
Revenue is recognised over the life of contracts having regard to the incidence of risk, in particular the seasonal propensity of claims
which span the life of the contract as a result of emergency maintenance being available throughout the contract term. Costs incurred
to settle claims represent principally the engineer workforce employed by Centrica within home services and the cost of parts utilised
in repair or maintenance. These costs are accounted for over a 12-month period with adjustments made to reflect the seasonality
of workload over a given year.
Weather conditions and the seasonality of repairs both affect the profile of the workload and associated costs incurred across the year.
The risk exposure of these uncertain events is actively managed by undertaking the following risk mitigation activities:
● an initial service visit is provided to customers taking up most central heating contracts and in some instances pre-existing faults may
lead to the contract being cancelled and no further cover being provided;
● an annual maintenance inspection is performed as part of most central heating contracts to help identify and prevent issues developing
into significant maintenance or breakdown claims; and
● contract limits are applied to certain types of maintenance and repair work considered to be higher risk in terms of frequency and cost.
The costs of FFS claims and insurance claims incurred during the year were £48 million (2015: £42 million) and £391 million
(2015: £381 million) respectively and are included in the table below in ‘Expenses relating to FFS and insurance contracts’. All claims are
settled immediately and in full. Due to the short average lead time between claims occurrence and settlement, no material provisions were
outstanding at the balance sheet date (2015: nil).
Total revenue
Expenses relating to FFS and insurance contracts
Deferred income
Accrued income
2016
£m
1,177
(1,013)
(97)
29
2015
£m
1,173
(986)
(73)
24
The Group considers whether estimated future cash flows under the contracts will be sufficient to meet expected future costs. Any deficiency
is charged immediately to the Group Income Statement. Claims frequency is sensitive to the reliability of appliances as well as the impact
of weather conditions. The contracts are not exposed to any interest rate risk or significant credit risk and do not contain any embedded
derivatives.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
179
179
Notes to the Financial Statements
Supplementary information
S8. 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:
Joint ventures:
Wind farms (as defined in note 6)
Associates:
Nuclear (as defined in note 6)
Other
Sale
of goods
and services
£m
Purchase
of goods
and services
£m
Amounts
owed from (i)
£m
2016
Amounts
owed to
£m
Sale
of goods
and services
£m
Purchase
of goods
and services
£m
Amounts
owed from
£m
2015
Amounts
owed to
£m
7
–
4
11
(80)
120
(43)
(617)
(5)
(702)
–
–
120
(57)
–
(100)
14
–
3
17
(123)
232
(113)
(639)
(9)
(771)
–
2
234
(61)
–
(174)
(i)
Amounts owed from Lincs Wind Farm Limited include a shareholder loan of £113 million classified as held for sale, as shown in note 12(c).
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 £13 million (2015: £17 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 (2015: nil). The balance of the
provision at 31 December 2016 was nil (2015: nil).
At the balance sheet date, there were back-to-back committed facilities with Lake Acquisition Limited’s facilities to EDF Energy Nuclear
Generation Group Limited totalling £120 million at Centrica’s share, but nothing has been drawn down at 31 December 2016.
Key management personnel comprise members of the Board and Executive Committee, a total of 18 individuals at 31 December 2016
(2015: 16).
Remuneration of key management personnel
Year ended 31 December
Short-term benefits
Post employment benefits
Share-based payments
Remuneration of the Directors of Centrica plc
Year ended 31 December
Total emoluments (i)
Gains made by Directors on the exercise of share options
Amounts receivable under long-term incentive schemes
Contributions into pension schemes
(i)
These emoluments were paid for services performed on behalf of the Group. No emoluments related specifically to services performed for the Company.
S9. AUDITORS’ REMUNERATION
Year ended 31 December
Fees payable to the Company’s auditors for the audit of the Company’s individual and consolidated
Financial Statements (i)
Audit of the Company’s subsidiaries
Total fees related to the audit of the parent and subsidiary entities
Fees payable to the Company’s auditors and its associates for other services:
Audit-related assurance services
Corporate finance services
Tax advisory services
All other services
Fees in respect of pension scheme audits
(i)
Including £0.3 million (2015: £0.3 million) for the audit of the Ofgem Consolidated Segmental Statement.
180
180
2016
£m
15.8
1.1
7.8
24.7
2016
£m
9.8
–
–
0.8
2015
£m
12.3
1.9
5.4
19.6
2015
£m
6.4
–
–
0.7
2016
£m
2015
£m
5.6
1.7
7.3
1.0
0.4
–
0.8
9.5
0.1
5.3
1.4
6.7
2.0
–
–
0.3
9.0
0.1
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
Supplementary information
S9. AUDITORS’ REMUNERATION
It is the Group’s policy to seek competitive tenders for all major consultancy and advisory projects. Appointments are made taking into
account factors including expertise, experience and cost. In addition, the Audit Committee has approved a detailed policy defining the
types of work for which the Company’s auditors can tender and the approvals required. In the past, the Company’s auditors have been
engaged on assignments in addition to their statutory audit duties where their expertise and experience with the Group are particularly
important, including due diligence reporting and corporate finance support for acquisitions and disposals.
S10. RELATED UNDERTAKINGS
The Group has a large number of related undertakings principally in the UK, US, Norway, Canada, Denmark, the Netherlands and the
Republic of Ireland. These are listed below.
(a) Subsidiary undertakings
Investments held directly by Centrica plc with 100% voting rights
31 December 2016
Centrica Beta Holdings Limited
Centrica Holdings Limited
Centrica Trading Limited
Investments held indirectly by Centrica plc with 100% voting rights
Principal activity
Holding company
Country of incorporation/
registered address key (i)
United Kingdom / A
Holding company
United Kingdom / A
Non-trading
United Kingdom / A
Class of shares held
Ordinary shares
Ordinary shares
Ordinary shares
31 December 2016
1773648 Alberta Ltd.
8401268 Canada Inc.
Accord Energy (Trading) Limited
Accord Energy Limited
Airtron Inc.
Alertme.com GmbH
Alertme.com Inc.
Astrum Solar Inc.
Atform Limited
AWHR America's Water Heater Rentals LLC
Benjamin Franklin Franchising LLC
BGPGS Limited (ii)
BMS Setpoint Limited (ii)
BMS Solutions Limited (iii)
Bord Gáis Energy Limited
Bounce Energy Inc.
Bowland Resources (No.2) Limited
Bowland Resources Limited
Brae Canada Ltd.
British Gas Energy Procurement Limited
British Gas Energy Services Limited (iii)
British Gas Finance Limited
British Gas Housing Services Limited (ii)
British Gas Insurance Limited
British Gas Limited
British Gas New Heating Limited
British Gas Services Limited
British Gas Social Housing Limited
British Gas Solar Limited
British Gas Trading Limited
Business Gas Limited
BuyMax LLC
Principal activity
Gas and/or oil exploration and products and/or
trading
Gas and/or oil exploration and products and/or
trading
Country of incorporation/
registered address key (i) Class of shares held
Ordinary shares
Canada / B
Canada / C
Ordinary shares
Dormant
Dormant
United Kingdom / A
United Kingdom / A
Home and/or commercial services
United States / D
Non-trading
Germany / E
Energy management products and services
United States / F
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Home and/or commercial services
United States / G
Ordinary shares
Dormant
United Kingdom / A
Ordinary shares
Home and/or commercial services
United States / D
Membership interest
Home and/or commercial services
United States / H
Membership interest
In liquidation
United Kingdom / A
In liquidation
United Kingdom / A
Dormant
United Kingdom / A
Energy supply and power generation
Republic of Ireland / I
Energy supply
United States / D
Gas and/or oil exploration and production
United Kingdom / A
Gas and/or oil exploration and production
United Kingdom / A
Gas and/or oil exploration and production
Canada / B
Energy management products and services
United Kingdom / A
Energy supply
United Kingdom / A
Vehicle leasing
United Kingdom / A
In liquidation
United Kingdom / A
Insurance provision
United Kingdom / A
Dormant
United Kingdom / A
Electrical and gas installations
United Kingdom / A
Servicing and installation of heating systems
United Kingdom / A
Home services
United Kingdom / A
Dormant
United Kingdom / A
Energy supply
United Kingdom / A
Dormant
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary and
preference shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Home and/or commercial services
United States / H
Membership interest
British Gas Services (Commercial) Limited
Servicing and installation of heating systems
United Kingdom / A
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
181
181
Notes to the Financial Statements
Supplementary information
S10. RELATED UNDERTAKINGS
31 December 2016
Caythorpe Gas Storage Limited
Centrica (BOW) Limited
Centrica (DSW) Limited
Centrica (IOM) Limited
Centrica (Lincs) Wind Farm Limited
Centrica 25 Limited (ii)
Centrica 27 Limited (ii)
Centrica Alpha Finance Limited
Centrica America Limited
Centrica Barry Limited
Centrica Brigg Limited
Centrica Combined Common Investment Fund
Limited
Centrica Connected Home Canada Inc. (iv)
Centrica Connected Home Limited (v)
Principal activity
Gas storage
Country of incorporation/
registered address key (i)
United Kingdom / J
Class of shares held
Ordinary shares
Dormant
Dormant
Dormant
United Kingdom / A
United Kingdom / A
Isle of Man / K
Holding company
United Kingdom / A
In liquidation
United Kingdom / A
In liquidation
United Kingdom / A
Dormant
Dormant
United Kingdom / A
United Kingdom / A
Power generation
United Kingdom / A
Power generation
United Kingdom / A
Dormant
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Energy management products and services
Canada / B
Ordinary shares
Energy management products and services
United Kingdom / A
Ordinary and
preference shares
Centrica Connected Home US Inc. (iv)
Energy management products and services
United States / D
Ordinary shares
Centrica Delta Limited
Centrica Directors Limited
Centrica Distributed Generation Limited (v)
Centrica Electric Limited (ii)
Centrica Energy (Trading) Limited
Centrica Energy Limited
Centrica Energy Marketing Limited
Centrica Energy Operations Limited
Centrica Energy Renewable
Investments Limited
Centrica Energy Tolling BV
Centrica Engineers Pension Trustees Limited
Centrica Epsilon Limited (ii)
Centrica F3 Developments Limited
Centrica Finance (Canada) Limited
Centrica Finance (Scotland) Limited
Centrica Finance (US) Limited
Centrica Finance Investments Limited
Centrica Finance Norway Limited
Centrica Gamma Holdings Limited
Centrica HoldCo GP LLC
Centrica Ignite GP Limited
Centrica Ignite LP Limited
Centrica India Offshore Private Limited
Centrica Infrastructure BV
Centrica Infrastructure Limited
Centrica Insurance Company Limited
Centrica International BV
Centrica International C BV (iv)
Centrica Jersey Limited
Centrica KL Limited
Centrica KPS Limited
Centrica Lake Limited
Centrica Langage Limited
Centrica Leasing (KL) Limited
Centrica Leasing (PB) Limited (ii)
182
182
Dormant
Dormant
Isle of Man / L
United Kingdom / A
Power generation
United Kingdom / A
In liquidation
United Kingdom / A
Wholesale energy trading
United Kingdom / A
Wholesale energy trading
United Kingdom / A
Wholesale energy trading
United Kingdom / A
Dormant
Dormant
United Kingdom / A
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Non-trading
Netherlands / M
Ordinary shares
Dormant
United Kingdom / A
In liquidation
United Kingdom / A
Ordinary shares
Ordinary shares
In liquidation
United Kingdom / N
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
Holding company
United Kingdom / N
Ordinary shares
Holding company
United Kingdom / A
Non-trading
United Kingdom / A
Ordinary shares
Ordinary shares
Group financing
Jersey / O
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
Holding company
United States / D
Membership interest
Investment company
United Kingdom / A
Investment company
United Kingdom / A
Business services
India / P
Ordinary shares
Ordinary shares
Ordinary shares
Construction, ownership and exploitation
of infrastructure
Netherlands / M
Ordinary shares
Dormant
United Kingdom / N
Ordinary shares
Insurance provision
Isle of Man / K
Ordinary and
preference shares
Group financing
Netherlands / M
Ordinary shares
Holding company
Netherlands / M
Ordinary shares
Dormant
Jersey / Q
Ordinary shares
Power generation
United Kingdom / A
Power generation
United Kingdom / A
Holding company
United Kingdom / A
Power generation
United Kingdom / A
Dormant
United Kingdom / A
In liquidation
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
Supplementary information
S10. RELATED UNDERTAKINGS
31 December 2016
Centrica LNG Company Limited
Centrica LNG UK Limited
Centrica Nederland BV
Centrica Nigeria Limited
Centrica No.12 Limited
Centrica Nominees No.1 Limited
Centrica North Sea Gas Exploration Limited (ii)
Centrica North Sea Gas Limited
Centrica North Sea Limited
Centrica North Sea Oil Limited
Centrica Norway Limited (vi)
Centrica Offshore UK Limited
Centrica Onshore Processing UK Limited
Centrica Overseas Holdings Limited
Centrica PB Limited
Centrica Pension Plan Trustees Limited
Centrica Pension Trustees Limited
Centrica Production (DMF) Limited (ii)
Centrica Production (GMA) Limited (ii)
Centrica Production (Services) Limited
Centrica Production Limited
Centrica Production Nederland BV
Centrica Production Trustees Limited (vii)
Centrica Renewable Energy Limited
Centrica Resources (Armada) Limited
Centrica Resources (Nigeria) Limited
Centrica Resources (Norge) AS
Centrica Resources (UK) Limited
Centrica Resources Limited
Centrica Resources Petroleum UK Limited
Centrica Retail Holdings Netherlands BV
Centrica Secretaries Limited
Centrica SHB Limited
Centrica Storage Holdings Limited
Centrica Storage Limited
Centrica Trinidad and Tobago Limited
Centrica Trust (No.1) Limited
Centrica Upstream Investment Limited
Centrica US Holdings Inc.
CH4 Energy Limited
CH4 Old Limited (ii)
Cheltenham Renovators Limited (ii)
CID1 Limited
CIU1 Limited
Clockwork Acquisition II Inc.
Clockwork Inc.
Clockwork IP LLC
Combined Power (South) Limited (iv)
CSA Offshore Services (Proprietary) Limited
DEML Investments Limited
DER Development No.10 Ltd.
Direct Energy (B.C.) Limited
Direct Energy Business LLC
Principal activity
LNG trading
Country of incorporation/
registered address key (i) Class of shares held
United Kingdom / A
Ordinary shares
LNG trading
United Kingdom / A
Ordinary shares
Holding company
Netherlands / M
Ordinary shares
Holding company
United Kingdom / A
Dormant
Dormant
United Kingdom / A
United Kingdom / A
In liquidation
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Gas and/or oil exploration and production
United Kingdom / N
Ordinary shares
Gas and/or oil exploration and production
United Kingdom / A
Ordinary shares
Gas and/or oil exploration and production
United Kingdom / N
Ordinary shares
Gas and/or oil exploration and production
United Kingdom / A
Gas and/or oil exploration and production
United Kingdom / J
Dormant
United Kingdom / J
Holding company
United Kingdom / A
Power generation
United Kingdom / A
Dormant
Dormant
United Kingdom / A
United Kingdom / A
In liquidation
United Kingdom / A
In liquidation
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Business services
United Kingdom / N
Ordinary shares
Dormant
United Kingdom / N
Ordinary shares
Gas and/or oil exploration and production
Netherlands / M
Ordinary Shares
In liquidation
United Kingdom / N
Ordinary shares
Holding company
United Kingdom / A
Gas and/or oil exploration and production
United Kingdom / A
Gas and/or oil exploration and production
Non-trading
Nigeria / R
Norway / S
Gas and/or oil exploration and production
United Kingdom / A
Dormant
United Kingdom / A
Dormant
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Holding company
Netherlands / M
Ordinary shares
Dormant
United Kingdom / A
Power generation
United Kingdom / A
Holding company
United Kingdom / J
Gas storage
United Kingdom / J
Business services
Trinidad and
Tobago /
T
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Dormant
Dormant
United Kingdom / A
Ordinary shares
United Kingdom / N
Ordinary shares
Holding company
United States / D
Ordinary shares
Dormant
United Kingdom / A
In liquidation
United Kingdom / A
In liquidation
United Kingdom / A
Dormant
Dormant
United Kingdom / A
United Kingdom / A
Home and/or commercial services
United States / D
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Home and/or commercial services
United States / D
Ordinary shares
Holding company
United States / D
Membership interest
Power generation
United Kingdom / A
Ordinary shares
Business services
South Africa / U
Ordinary shares
Holding company
Holding company
Energy supply and/or services
Canada / V
Canada / B
Canada / C
Ordinary shares
Ordinary shares
Ordinary shares
Energy supply and/or services
United States / D
Membership interest
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
183
183
Notes to the Financial Statements
Supplementary information
S10. RELATED UNDERTAKINGS
31 December 2016
Direct Energy Business Marketing LLC
Direct Energy GP LLC
Direct Energy Holdings (Alberta) Inc.
Direct Energy HVAC Services Ltd.
Direct Energy Investments LLC
Direct Energy Leasing LLC
Direct Energy Marketing Inc.
Direct Energy Marketing Limited
Direct Energy Operations LLC
Direct Energy Services LLC
Direct Energy Services Retail Inc.
Direct Energy US Home Services Inc.
Drips Limited
Dyno Developments Limited
Dyno Holdings Limited (ii)
Dyno Kil (Franchising) Limited (ii)
Dyno-Plumbing Limited
Dyno-Rod Limited
Dyno-Security Services Limited
Dyno-Services Limited
ECL Contracts Limited
ECL Investments Limited
Econergy Limited (vii)
Electricity And Gas Recoveries Limited (ii)
Electricity Direct (UK) Limited
Elswick Energy Limited
EN1 Property Holdings Limited (ii)
ENER-G Cogen International Limited (iv)
ENER-G Cogen LLC (iv)
ENER-G Combined Power Limited (iv)
ENER-G Energia Technologia Zrt. (iv)
ENER-G Group Inc. (iv)
ENER-G Italia Srl (iv)
ENER-G Nagykanizsa Kft (iv)
ENER-G Nedalo BV (iv)
ENER-G Power2 Limited (iv)
ENER-G Rudox Holdings LLC (iv)
ENER-G Rudox Inc. (iv)
ENER-G Technologii Energetice Srl (iv)
Energy America LLC
Energy And Building Management Solutions
Limited (ii)
Energy For Tomorrow
First Choice Power LLC (iv)
Flowgem Limited (iv)
Gateway Energy Services Corporation
GB Gas Holdings Limited
Generation Green Solar Limited (iv)
GF One Limited
GF Two Limited
GLID Limited
Goldbrand Development Limited
184
184
Principal activity
Energy supply and/or services
Country of incorporation/
registered address key (i) Class of shares held
Membership interest
United States / D
Holding company
United States / D
Membership interest
Home and/or commercial services
Home and/or commercial services
Canada / B
Canada / B
Ordinary shares
Ordinary shares
Energy supply and/or services
United States / D
Membership interest
Home and/or commercial services
United States / D
Membership interest
Wholesale energy trading
United States / D
Ordinary and
preference shares
Energy supply and/or services
Canada / V
Ordinary shares
Energy supply and/or services
United States / D
Membership interest
Energy supply and/or services
United States / D
Membership interest
Home and/or commercial services
United States / D
Home and/or commercial services
United States / D
Dormant
Dormant
United Kingdom / A
United Kingdom / A
In liquidation
United Kingdom / A
In liquidation
United Kingdom / A
Dormant
United Kingdom / A
Operation of a franchise network
United Kingdom / A
Dormant
Dormant
Dormant
Dormant
United Kingdom / A
United Kingdom / A
United Kingdom / A
United Kingdom / A
In liquidation
United Kingdom / A
In liquidation
United Kingdom / A
Dormant
United Kingdom / A
Gas and/or oil exploration and production
United Kingdom / A
In liquidation
United Kingdom / A
Holding company
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Energy management products and services
United States / D
Membership interest
Energy management products and services
United Kingdom / A
Ordinary shares
Energy management products and services
Hungary / W
Ordinary shares
Energy management products and services
United States / D
Ordinary shares
Energy management products and services
Italy / X
Membership interest
Energy management products and services
Hungary / W Membership interest
Energy management products and services
Netherlands / Y
Holding company
United Kingdom / A
Ordinary shares
Ordinary shares
Holding company
United States / D
Membership interest
Energy management products and services
United States / Z
Ordinary shares
Energy management products and services
Romania / AA
Ordinary shares
Energy supply
United States / D
Membership interest
In liquidation
United Kingdom / A
Ordinary shares
Not-for-profit energy services
United Kingdom / A
Limited by
guarantee
Energy supply and/or services
United States / AB Membership interest
Home and/or commercial services
United Kingdom / A
Ordinary shares
Energy supply
United States / AC
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
Dormant community benefit society
United Kingdom / A
Membership interest
In liquidation
United Kingdom / AD
Ordinary shares
In liquidation
United Kingdom / AD
Ordinary shares
Holding company
United Kingdom / A
Dormant
United Kingdom / A
Ordinary shares
Ordinary shares
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
Supplementary information
S10. RELATED UNDERTAKINGS
31 December 2016
Hillserve Limited
Home Assistance UK Limited
Home Warranty Holdings Corp.
Home Warranty of America Inc. (viii)
Home Warranty of America Inc. (viii)
Humberland Limited
Hydrocarbon Resources Limited
JK Environmental Services (UK) Limited (ii)
Killingholme Pensions Limited (ii)
Masters Inc.
Mister Sparky Franchising LLC
Neas d.o.o. Beograd (iv)
Neas Energy A/S (iv)
Neas Energy GmbH (iv)
Neas Energy Limited (iv)
Neas Energy Singapore Pte. Ltd (iv)
Neas Fondsmæglerselskab A/S (iv)
Neas Invest A/S (iv)
New Millennium Academy LLC
Newco Five Limited (ii)
Newco One Limited
Newnova Limited (iii)
Newnova Old Limited (iii)
North Sea Infrastructure Partners Limited
NSGP (Ensign) Limited
NSIP (ETS) Limited
NSIP (Holdings) Limited
One Hour Air Conditioning Franchising LLC
P.H. Jones Facilities Management Ltd.
P.H. Jones Group Limited
Panoramic Power Ltd.
Pioneer Shipping Limited (v)
Quality A/C Service LLC
Repair and Care Limited
RSG Holding Corp.
Scottish Gas Limited (vii)
Semplice Energy Limited (ii)
Solar Technologies Group Limited
Solar Technologies Limited
Soren Limited
SuccessWare Inc.
Utility North A/S (iv)
UWIN LLC
Principal activity
Dormant
Intermediary services, including claims handling and
administration services
Country of incorporation/
registered address key (i) Class of shares held
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Insurance provision
United States / D
Ordinary shares
Home and/or commercial services
United States / AE
Ordinary shares
Home and/or commercial services
United States / AF
Ordinary shares
Gas and/or oil exploration and production
United Kingdom / A
Dormant
United Kingdom / A
In liquidation
United Kingdom / A
In liquidation
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Home and/or commercial services
United States / G
Ordinary shares
Home and/or commercial services
United States / AG Membership interest
Dormant
Serbia / AH
Ordinary shares
Energy services and wholesale energy trading
Denmark / AI
Ordinary shares
Energy services and wholesale energy trading
Germany / AJ
Ordinary shares
Energy services and wholesale energy trading
United Kingdom / A
Ordinary shares
Energy services and wholesale energy trading
Singapore / AK
Ordinary shares
Non-trading
Dormant
Denmark / AI
Denmark / AI
Ordinary shares
Ordinary shares
Home and/or commercial services
United States / H
Membership interest
In liquidation
United Kingdom / A
Dormant
Dormant
Dormant
Dormant
United Kingdom / A
United Kingdom / A
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
United Kingdom / N
Ordinary shares
Gas and/or oil exploration and production
Jersey / AL
Ordinary shares
Gas supply
United Kingdom / A
Ordinary shares
Dormant
United Kingdom / N
Ordinary shares
Home and/or commercial services
United States / AG Membership interest
Servicing and maintenance of heating systems
United Kingdom / A
Holding company
United Kingdom / A
Ordinary shares
Ordinary shares
Energy management products and services
Israel / AM
Ordinary shares
Sea freight water transport
United Kingdom / A
Ordinary Shares
Home and/or commercial services
United States / AN Membership interest
Dormant
United Kingdom / A
Ordinary shares
Holding company
United States / D
Ordinary shares
In liquidation
United Kingdom / N
Ordinary shares
In liquidation
United Kingdom / A
Dormant
Dormant
Dormant
United Kingdom / A
United Kingdom / A
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Home and/or commercial services
United States / H
Ordinary shares
In liquidation
Denmark / AI
Ordinary shares
Home and/or commercial services
United States / AG Membership interest
For list of registered addresses, refer to note S10(d).
(i)
(ii)
(iii)
Dissolved on 2 February 2017.
British Gas Energy Services Limited (renamed Building Management Solutions Integrators Limited on 18 January 2017), BMS Solutions Limited, Newnova Limited and Newnova Old Limited
were disposed of on 31 January 2017.
(iv)
(v)
Acquired or established in 2016.
Pioneer Shipping Limited, Centrica Distributed Generation Limited and Centrica Connected Home Limited were renamed during the year (previously Centrica Shipping Limited, Centrica RPS
Limited and Alertme.com Limited respectively).
(vi)
(vii)
(viii)
Centrica Norway Limited is operating in Norway as Centrica Energi NUF.
Dissolved on 21 January 2017.
Home Warranty of America Inc. is registered as separate entities in the states of California and Illinois.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
185
185
Notes to the Financial Statements
Supplementary information
S10. RELATED UNDERTAKINGS
(b) Subsidiary undertakings – partnerships
31 December 2016
CF 2016 LLP
CFCEPS LLP
CFCPP LLP
CFCPS LLP
CPL Retail Energy LP
CQ Energy Canada Partnership
Principal activity
Group financing
Group financing
Group financing
Group financing
Energy supply
Holding entity
CQ Energy Canada Resources Partnership
Gas and/or oil exploration and production
Direct Energy LP
Direct Energy Partnership
Direct Energy Resources Partnership
Finance Scotland 2016 Limited Partnership
Finance Scotland CEPS Limited Partnership
Finance Scotland CPP Limited Partnership
Finance Scotland CPS Limited Partnership
Ignite Social Enterprise LP
WTU Retail Energy LP
(i)
For list of registered addresses, refer to note S10(d).
Energy supply
Energy supply
Holding entity
Group financing
Group financing
Group financing
Group financing
Social enterprise investment fund
Energy supply
Country of incorporation/
registered address key (i)
United Kingdom / A
United Kingdom / A
United Kingdom / A
United Kingdom / A
United States / D
Canada / AO
Canada / AP
United States / AB
Canada / B
Canada / B
United Kingdom / N
United Kingdom / N
United Kingdom / N
United Kingdom / N
United Kingdom / A
United States / D
Class of shares held
Membership interest
Indirect
interest and
voting
rights (%)
100.0%
Membership interest
100.0%
Membership interest
100.0%
Membership interest
100.0%
Membership interest
100.0%
Membership interest
Membership interest
60.0%
60.0%
Membership interest
100.0%
Membership interest
100.0%
Membership interest
100.0%
Membership interest
100.0%
Membership interest
100.0%
Membership interest
100.0%
Membership interest
100.0%
Membership interest
100.0%
Membership interest
100.0%
The following partnerships are fully consolidated into the Group accounts and the Group has taken advantage of the exemption (as
confirmed by regulation 7 of the Partnerships (Accounts) Regulations 2008) not to prepare or file separate accounts for these entities:
● Finance Scotland 2016 Limited Partnership
● Finance Scotland CEPS Limited Partnership
● Finance Scotland CPP Limited Partnership
● Finance Scotland CPS Limited Partnership
● Centrica Finance Limited Partnership (dissolved in December 2016)
● Ignite Social Enterprise LP.
(c) Joint arrangements and associates
31 December 2016
Joint ventures (ii)
509760 Alberta Ltd.
Allegheny Solar 1 LLC
Celtic Array Limited
Eurowind Polska VI Sp z.o.o. (iii)
Greener Ideas Limited (iii)
Lincs Wind Farm Limited (iv)
Rhiannon Wind Farm Limited
Three Rivers Solar 1 LLC
Three Rivers Solar 2 LLC
Vindpark Keblowo Aps (iii)
Associates (ii)
Lake Acquisitions Limited
Veolia CHP Ireland Limited (v)
Principal activity
Country of incorporation/
registered address key (i)
Class of shares held
Gas and/or oil exploration and production
Energy supply and/or services
Canada / AQ
United States / AR
Ordinary shares
Membership interest
Development of an offshore windfarm
United Kingdom / A
Poland / AW
Republic of Ireland / AS
Ordinary shares
Ordinary shares
Ordinary shares
Operation of an onshore windfarm
Development of flexible power
generation sites
Operation of an offshore windfarm
Dormant
Energy supply and/or services
Energy supply and/or services
Operation of an onshore windfarm
United Kingdom / N
United Kingdom / A
United States / AR
United States / AR
Denmark / AT
Ordinary shares
Ordinary shares
Membership interest
Membership interest
Ordinary shares
Indirect
interest and
voting
rights (%)
43.0%
40.0%
50.0%
50.0%
50.0%
50.0%
50.0%
40.0%
40.0%
50.0%
United Kingdom / AU
Energy supply and power generation Republic of Ireland / AV
Holding company
Ordinary shares
Ordinary shares
20.0%
20.0%
(i)
(ii)
(iii)
(iv)
(v)
For list of registered addresses, refer to note S10(d).
Further information on the principal joint ventures and associate investments held by the Group is disclosed in notes 6 and 14.
Acquired in 2016.
Lincs Wind Farm Limited was disposed of on 17 February 2017.
Veolia CHP Ireland Limited was renamed during the year (previously Dalkia Chp Limited).
All Group companies principally operate within their country of incorporation.
186
186
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
Supplementary information
S10. RELATED UNDERTAKINGS
(d) List of registered addresses
Registered
address key
A
B
C
D
E
F
G
H
I
J
K
L
M
N
O
P
Q
R
S
T
U
V
W
X
Y
Z
AA
AB
AC
AD
AE
AF
AG
AH
AI
AJ
AK
AL
AM
AN
AO
AP
AQ
AR
AS
AT
AU
AV
AW
Address
Millstream, Maidenhead Road, Windsor, SL4 5GD, United Kingdom
2323 32nd Avenue N.E., Calgary, AB T2E 6Z3, Canada
1700-1185 West Georgia Street, Vancouver BC V6E 4E6, Canada
3411 Silverside Road Rodney Building #104, Wilmington, DE 19810, United States
Thomas-Wimmer-Ring 1-3, 80539, Munich, Germany
1521 Concord Pike #303, Wilmington, DE 19803, United States
2 Wisconsin Circle #700, Chevy Chase, MD 20815, United States
12747 Olive Boulevard #300, St. Louis, MO 63141, United States
1 Warrington Place, Dublin, 2, Republic of Ireland
20 Kingston Road, Staines-upon-Thames, TW18 4LG, United Kingdom
St George's Court, Upper Church Street, Douglas, IM1 1EE, Isle of Man
33-37 Athol Street, Douglas, IM1 1LB, Isle of Man
Polarisavenue 39, 2132 JH Hoofddorp, Netherlands
IQ Building, 15 Justice Mill Lane, Aberdeen, AB11 6EQ, United Kingdom
47 Esplanade, St Helier, JE1 0BD, Jersey
G-74, LGF, Kalkaji, New Delhi, South Delhi, Delhi, 110019, India
26 New Street, St Helier, JE2 3RA, Jersey
Sterling Towers, 20 Marina, Lagos, Nigeria
Veritasveien 25, 4007 Stavanger, Norway
Eleven Albion, Corner Albion and Dere Streets, Port of Spain, Trinidad and Tobago
No.12A Sooty Street, Cnr Reddersburg & Virginia Street, Amberfield Glen, Rooihuiskraal, North Centurion Gauteng, 0175, South Africa
333 Bay Street, Toronto ON M5H 2R2, Canada
H-1106 Budapest Jászberényi út 24-36, Hungary
Milan (MI), Via Emilio Cornalia 26, Italy
Wiegerbruinlaan 2A, 1422 CB Uithoorn, Netherlands
Corporate Creations Network Inc., 811 Church Road #105, Cherry Hill NJ 08002, United States
15-23 Bucuresti Nord Street, Windsor Building, Ground Floor, Office No.1 Voluntari Ilfor County, Romania
4265 San Felipe #1100, Houston, TX 77027, United States
15 North Mill Street, Nyack, NY 10960, United States
1 More London Place, London, SE1 2AF, United Kingdom
1430 Truxtun Avenue, Bakersfield, CA 93301, United States
350 S. Northwest Highway #300, Park Ridge, IL 60068, United States
11380 Prosperity Farms Road #221E, Palm Beach Gardens, FL 33410, United States
Makedonska 30 (Eurocentar) 3rd Floor, 11000 Belgrade, Serbia
Skelagervej 1, DK 9000 Aalborg, Denmark
Schillerstr.7, 40721 Hilden (bei Düsseldorf), Germany
220 Orchard Road, #05-01 Midpoint Orchard, Singapore 238852
13 Castle Street, St Helier, JE4 5UT, Jersey
P.O.B 29671, 9 Ahad Ha’am Street, Tel Aviv 6129601, Israel
8275 South Eastern Avenue #200, Las Vegas, NV 89123, United States
237 4th Ave S.W., Calgary, AB T2P 4K3, Canada
525 8th Ave S.W., Calgary, AB T2P 1G1, Canada
855 2nd Street S.W., Calgary, AB T2P NJ8, Canada
1209 Orange Street, Wilmington, New Castle County, DE 19801, United States
Webworks, Eglinton Street, Cork, Republic of Ireland
Mariagervej 58B, DK 9500 Hobro, Denmark
40 Grosvenor Place, London, SW1X 7EN, United Kingdom
Innovation House, DCU Innovation Campus, 11 Old Finglas Road, Glasnevin, Dublin, 11, Republic of Ireland
17 Karsko, Dolice, Przelewice, 73-115, Pyrzyckie, Zachodniopomorskie, Poland
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
187
187
Notes to the Financial Statements
Supplementary information
S10. RELATED UNDERTAKINGS
(e) Summarised financial information
Material joint ventures and associates
Management has determined that the investments in Lake Acquisitions Limited and Lincs Wind Farm Limited are sufficiently material
to warrant further disclosure on an individual basis. Accordingly, the Group presents summarised financial information, along with
reconciliations to the amounts included in the consolidated Group Financial Statements, for these investees.
Lake Acquisitions Limited
Summarised Statement of Total Comprehensive Income
Year ended 31 December
Revenue
Operating profit before interest and tax
Associate
information
reported to
Group
£m
3,116
1,011
Unadjusted
20% share
£m
623
202
Fair value
and other
adjustments
£m
–
(65)
Profit for the year
Other comprehensive income/(loss)
Total comprehensive income
778
318
1,096
156
64
220
(43)
–
(43)
Summarised Balance Sheet
Associate
information
reported to
Group
£m
3,220
1,351
Unadjusted
20% share
£m
644
270
Fair value
and other
adjustments
£m
–
(56)
1,042
(38)
1,004
208
(8)
200
(26)
–
(26)
2016
Group
share
£m
623
137
113
64
177
2016
31 December
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Associate
information
reported to
Group
£m
13,957
3,157
(746)
(8,743)
7,625
Unadjusted
20% share
£m
2,791
631
(149)
(1,749)
1,524
Fair value
and other
adjustments
(i)
£m
879
7
–
(148)
738
Associate
information
reported to
Group
£m
12,775
2,800
(883)
(7,613)
7,079
Unadjusted
20% share
£m
2,555
560
(177)
(1,523)
1,415
Fair value
and other
adjustments
(i)
£m
929
13
–
(162)
780
Group
share
£m
3,670
638
(149)
(1,897)
2,262
(i)
Before cumulative impairments of £586 million (2015: £586 million) of the Group’s associate investment.
During the year, dividends of £110 million (2015: £166 million) were paid by the associate to the Group.
Lincs Wind Farm Limited
Summarised Statement of Total Comprehensive Income
Year ended 31 December
Revenue
Depreciation and amortisation
Other costs of sales and operating costs
Profit before interest and tax
Net finance cost
Taxation
Loss for the year
Other comprehensive (loss)/income
Total comprehensive loss
Joint venture
information
reported to
Group
£m
113
(49)
(43)
21
(49)
7
(21)
(16)
(37)
Unadjusted
50% share
£m
57
(25)
(22)
10
(25)
4
(11)
(8)
(19)
Fair value
and other
adjustments
£m
–
–
–
–
–
–
–
–
–
2016
Group
share
£m
57
(25)
(22)
10
(25)
4
(11)
(8)
(19)
Joint venture
information
reported to
Group
£m
125
(49)
(45)
31
(54)
13
(10)
3
(7)
Unadjusted
50% share
£m
62
(24)
(23)
15
(27)
6
(6)
2
(4)
Fair value
and other
adjustments
£m
–
–
–
–
–
–
–
–
–
2015
Group
share
£m
644
214
182
(8)
174
2015
Group
share
£m
3,484
573
(177)
(1,685)
2,195
2015
Group
share
£m
62
(24)
(23)
15
(27)
6
(6)
2
(4)
188
188
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE FINANCIAL STATEMENTS
Notes to the Financial Statements
Supplementary information
S10. RELATED UNDERTAKINGS
Summarised Balance Sheet
31 December
Non-current assets
Current assets (i)
Current liabilities (i)
Non-current liabilities (i)
Net assets
Joint venture
information
reported to
Group (i)
£m
859
36
(86)
(704)
105
Unadjusted
50% share
£m
429
18
(43)
(352)
52
Fair value
and other
adjustments
£m
3
–
–
–
3
2016
Group
share
£m
432
18
(43)
(352)
55
Joint venture
information
reported to
Group (i)
£m
943
116
(187)
(730)
142
Unadjusted
50% share
£m
472
58
(94)
(365)
71
Fair value
and other
adjustments
£m
3
–
–
–
3
2015
Group
share
£m
475
58
(94)
(365)
74
(i)
Current assets includes £7 million (2015: £76 million) of cash and cash equivalents. Non-current liabilities and current liabilities include £651 million (2015: £682 million) and £33 million
(2015: £59 million) of borrowings respectively.
Other material joint arrangements owned by the Group that are classified as joint operations and accounted for in accordance with
IFRS 11 (see note S2) are detailed below. This list excludes interests in fields where there is no party with overall control since the
arrangement does not fulfil the IFRS 11 definition of joint control.
Joint operations – fields/assets
31 December 2016
Cygnus
Location
UK North Sea
Percentage holding
in ordinary shares and
net assets
49
Material non-controlling interests
The Group has two subsidiary undertakings with a non-controlling interest: CQ Energy Canada Partnership and its 100% subsidiary,
CQ Energy Canada Resources Partnership.
Non-
controlling
interests
%
Loss for
the year
£m
Total
comprehensive
income
£m
2016
Distributions
to non-
controlling
interests (i)
£m
Total
equity
£m
Non-
controlling
interests
%
Loss for
the year
£m
Total
comprehensive
loss
£m
2015
Distributions
to non-
controlling
interests
£m
Total
equity
£m
40
(10)
26
178
(12)
40
(137)
(172)
164
–
31 December
CQ Energy Canada
Partnership
(i)
Includes a £2 million accrual in relation to declared and approved dividends.
Summarised financial information
The summarised financial information disclosed is shown on a 100% basis. It represents the consolidated position of CQ Energy Canada
Partnership and its subsidiary that would be shown in its consolidated financial statements prepared in accordance with IFRS under
Group accounting policies before intercompany eliminations.
Summarised Statement of Total Comprehensive Income
Year ended 31 December
Revenue
Loss for the year
Other comprehensive income/(loss)
Total comprehensive income/(loss)
Summarised Balance Sheet
31 December
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Summarised Cash Flow
Year ended 31 December
Net decrease in cash and cash equivalents
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
2016
£m
201
(25)
90
65
2016
£m
1,040
66
(77)
(521)
508
2016
£m
(8)
2015
£m
252
(342)
(88)
(430)
2015
£m
922
70
(96)
(432)
464
2015
£m
(6)
189
189
Company Statement of Changes in Equity
1 January 2015
Profit for the year
Other comprehensive income/(loss):
Revaluation of available-for-sale securities
Cash flow hedges – net gains
Cash flow hedges – transferred to income and expense
Actuarial loss
Taxation on above items
Other equity movements:
Employee share schemes
Scrip dividend
Dividends paid to equity holders
Taxation on share-based payments
31 December 2015
Profit for the year
Other comprehensive income/(loss):
Revaluation of available-for-sale securities
Cash flow hedges – net gains
Cash flow hedges – transferred to income and expense
Actuarial loss
Taxation on above items
Other equity movements:
Employee share schemes
Scrip dividend
Dividends paid to equity holders
Issue of share capital
31 December 2016
Share
capital
£m
311
–
Share
premium
£m
931
–
Retained
earnings
£m
1,716
303
Other
equity
(note II)
£m
(184)
–
Capital
redemption
reserve
£m
26
–
–
–
–
–
–
–
6
–
–
317
–
–
–
–
–
–
–
4
–
21
342
–
–
–
–
–
–
204
–
–
1,135
–
–
–
–
–
–
–
121
–
673
1,929
–
–
–
–
–
2
–
(598)
–
1,423
1,540
–
–
–
–
–
1
–
(651)
–
2,313
1
4
(2)
(14)
1
58
–
–
(2)
(138)
–
7
135
(124)
(60)
8
32
–
–
–
(140)
–
–
–
–
–
–
–
–
–
26
–
–
–
–
–
–
–
–
–
–
26
Total
equity
£m
2,800
303
1
4
(2)
(14)
1
60
210
(598)
(2)
2,763
1,540
7
135
(124)
(60)
8
33
125
(651)
694
4,470
As permitted by section 408(3) of the Companies Act 2006 no Income Statement or Statement of Comprehensive Income is presented.
The Directors propose a final dividend of 8.40 pence per share (totalling £461 million) for the year ended 31 December 2016. Details of
the dividends are given in note 11 to the consolidated Group Financial Statements.
Details of the Company’s share capital are provided in the Group Statement of Changes in Equity and note 25 to the consolidated Group
Financial Statements.
The notes on pages 192 to 200 form part of these Financial Statements, along with note 25 to the consolidated Group Financial Statements.
190
190
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTSSTRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS COMPANY FINANCIAL STATEMENTS
Company Balance Sheet
31 December
Non-current assets
Other intangible assets
Investments
Deferred tax assets
Trade and other receivables
Derivative financial instruments
Retirement benefit assets
Securities
Current assets
Trade and other receivables
Derivative financial instruments
Cash and cash equivalents
Total assets
Current liabilities
Derivative financial instruments
Trade and other payables
Provisions for liabilities
Financial liabilities
Non-current liabilities
Derivative financial instruments
Trade and other payables
Provisions for liabilities
Retirement benefit liabilities
Financial liabilities
Total liabilities
Net assets
Share capital
Share premium
Capital redemption reserve
Retained earnings (i)
Other equity
Total shareholders’ equity
Notes
IV
V
VI
VII
VIII
XV
X
VII
VIII
XI
VIII
XII
XIII
XIV
VIII
XII
XIII
XV
XIV
XVI
XVI
XVI
XVI
II
2016
£m
46
2,305
13
1,704
464
–
215
4,747
12,428
315
1,480
14,223
18,970
(196)
(7,808)
(6)
(321)
(8,331)
(60)
(84)
(3)
(86)
(5,936)
(6,169)
(14,500)
4,470
342
1,929
26
2,313
(140)
4,470
2015
£m
4
2,306
6
1,411
160
9
200
4,096
10,925
215
441
11,581
15,677
(207)
(6,282)
–
(428)
(6,917)
(64)
(92)
(5)
(50)
(5,786)
(5,997)
(12,914)
2,763
317
1,135
26
1,423
(138)
2,763
(i)
Retained earnings includes a net profit after taxation of £1,540 million (2015: £303 million).
The Financial Statements on pages 190 to 200, of which the notes on pages 192 to 200 form part, along with note 25 to the consolidated
Group Financial Statements, were approved and authorised for issue by the Board of Directors on 23 February 2017 and were signed
on its behalf by:
Iain Conn
Group Chief Executive
Jeff Bell
Group Chief Financial Officer
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
191
191
Notes to the Company Financial Statements
I. PRINCIPAL ACCOUNTING POLICIES OF THE COMPANY
Basis of preparation
The Company Financial Statements have been prepared in accordance with Financial Reporting Standard 101: ‘Reduced disclosure
framework’ (FRS 101). In preparing these Financial Statements, the Company applies the recognition, measurement and disclosure
requirements of International Financial Reporting Standards as adopted by the EU (‘Adopted IFRSs’), but makes amendments where
necessary in order to comply with Companies Act 2006 and sets out below where advantage of the FRS 101 disclosure exemptions
has been taken.
In these Financial Statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
● a Cash Flow Statement and related notes;
● comparative period reconciliations for tangible fixed assets and intangible assets;
● disclosures in respect of transactions with wholly owned subsidiaries;
● disclosures in respect of capital management; and
● the effects of new but not yet effective IFRSs.
No Income Statement or Statement of Comprehensive Income is presented for the Company as permitted by the Companies Act 2006
(section 408(3)). The Company profit after tax for the year was £1,540 million (2015: £303 million).
As the consolidated Group Financial Statements of Centrica plc, which are available from the registered office, include the equivalent
disclosures, the Company has also taken the exemptions under FRS 101 available in respect of the following disclosures:
● IFRS 2: ‘Share-based payment’ in respect of Group settled share-based payments; and
● certain disclosures required by IFRS 13: ‘Fair value measurement’ and the disclosures required by IFRS 7: ‘Financial instruments: disclosures’.
Restatements
In March 2016, the IFRS Interpretations Committee issued an agenda decision regarding the treatment of offsetting and cash-pooling
arrangements in accordance with IAS 32: ‘Financial instruments: presentation’. This provided additional guidance on when bank
overdrafts in cash-pooling arrangements would meet the requirement for offsetting in accordance with IAS 32. Following this additional
guidance, the Group has reviewed its cash-pooling arrangements and has revised its presentation of bank overdrafts on the Group
Balance Sheet. There is no revision required for the Company Balance Sheet.
Measurement convention
The Company Financial Statements are prepared on the historical cost basis except for the following assets and liabilities, which are
stated at their fair values: derivative financial instruments, financial instruments classified as fair value through the profit or loss or as
available-for-sale, and the assets of defined benefit pension schemes. The liabilities of defined benefit pension schemes are measured
at the projected unit method of valuation. These Company Financial Statements are rounded to the nearest million pounds sterling.
Unless required or permitted by an IFRS, assets and liabilities or income and expenses, are not offset.
Going concern
The accounts have been prepared on a going concern basis, as described in the Directors’ Report and note 24(b) of the consolidated
Group Financial Statements.
Critical accounting judgements and key sources of estimation uncertainty
The critical accounting judgements and key sources of estimation uncertainty are set out in note 3 of the consolidated Group
Financial Statements.
The key accounting judgement of the Company is the carrying value of its investments in subsidiary undertakings and receivables from
these undertakings. The Company does not deem its investments in subsidiary undertakings to be impaired and supports this judgement
through its impairment review process as detailed below. This impairment review process identified that some receivables from Group
undertakings were not fully recoverable and accordingly a bad debt provision of £87 million (2015: £262 million) was recognised against
receivables during the year and impairments of £404 million (2015: nil) made in previous years were reversed. There were no debt waivers
during the year (2015: £25 million).
Key sources of estimation uncertainty include:
● the fair value of derivative financial instruments classified as Level 2 within the fair value hierarchy as a result of the use of valuation
techniques, in addition to published price quotations in active markets, to determine these values; and
● the allocation of the Company’s share of pension scheme surplus/deficit, as detailed further within the accounting policies section of
these Company Financial Statements.
New standards effective during the year
From 1 January 2016, the following standards and amendments are effective in the Company’s Financial Statements:
● Amendment to IAS 1: ‘Presentation of financial statements’ related to the disclosure initiative;
● Amendment to IAS 16: ‘Property, plant and equipment’ and IAS 38: ‘Intangible assets’ related to the clarification of acceptable
methods of depreciation and amortisation;
● Amendment to IAS 19: ‘Employee benefits’ related to employee contributions to defined benefit plans;
● ‘Annual Improvement Project 2010-2012’; and
● ‘Annual Improvement Project 2012-2014’.
192
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS
Notes to the Company Financial Statements
I. PRINCIPAL ACCOUNTING POLICIES OF THE COMPANY
The accounting policies set out below have, unless otherwise stated, been applied consistently to all periods presented in these Company
Financial Statements.
Employee share schemes
The Group has a number of employee share schemes under which it makes equity-settled share-based payments as detailed in the
Remuneration Report on pages 83 to 99 and in note S2 to the consolidated Group Financial Statements. Equity-settled share-based
payments are measured at fair value at the date of grant (excluding the effect of non-market-based vesting conditions). The fair value
determined at the grant date is expensed on a straight-line basis together with a corresponding increase in equity over the vesting period,
based on the Group’s estimate of the number of awards that will vest and adjusted for the effect of non-market-based vesting conditions.
The issue of share incentives by the Company to employees of its subsidiaries represents additional capital contributions. When these
costs are recharged to the subsidiary undertaking, the investment balance is reduced accordingly.
Fair value is measured using methods detailed in note S2 to the consolidated Group Financial Statements.
Foreign currencies
The Company’s functional and presentational currency is pounds sterling. Transactions in foreign currencies are translated at the rate
of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into
pounds sterling at closing rates of exchange. Exchange differences on monetary assets and liabilities are taken to the Income Statement.
Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. Intangible assets consist of application software for
internal use. The cost of purchased application software, for example investments in financial and administrative systems, includes
contractors’ charges, materials, directly attributable labour and directly attributable overheads. Intangible assets are amortised on a
straight-line basis at rates sufficient to write off the cost, less estimated residual values, of individual assets over their estimated useful
lives of up to 10 years. Amortisation of assets under construction commences when the asset is operational.
Investments
Fixed asset investments in subsidiaries’ shares are held at cost in accordance with IAS 27: ‘Separate financial statements’, less any
provision for impairment as necessary.
Impairment
The Company’s accounting policies in respect of impairment of intangible assets and financial assets are consistent with those
of the Group.
The carrying values of investments in subsidiary undertakings are reviewed at each reporting date to determine whether there is any
indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated.
The recoverable amount of an investment in a subsidiary undertaking is the greater of its value in use and its fair value less costs of disposal.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects
current market assessments of the time value of money and the risks specific to the asset. Receivables from Group undertakings are
compared to their recoverable amount which is also assessed using the same estimated discounted future cash flow for each undertaking
as described above.
An impairment loss is recognised if the carrying amount of an asset exceeds its estimated recoverable amount.
Leases
The determination of whether an arrangement is, or contains, a lease is based on the substance of the arrangement and requires
an assessment of whether the fulfilment of the arrangement is dependent on the use of a specific asset or assets and whether the
arrangement conveys a right to use the asset or assets. Leases are classified as finance leases whenever the terms of the lease
transfer substantially all of the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.
Payments under operating leases are charged to the Income Statement on a straight-line basis over the term of the lease.
Pensions and other post employment benefits
The Company’s employees participate in a number of the Group’s defined benefit pension schemes. The total Group cost of providing
benefits under defined benefit schemes is determined separately for each of the Group’s schemes under the projected unit credit actuarial
valuation method. Actuarial gains and losses are recognised in full in the period in which they occur. The key assumptions used for the
actuarial valuation are based on the Group’s best estimate of the variables that will determine the ultimate cost of providing post
employment benefits, on which further detail is provided in note 22 to the consolidated Group Financial Statements.
The Company’s share of the total Group surplus or deficit at the end of the reporting period for each scheme is calculated in proportion
to the Company’s share of ordinary employer contributions to that scheme during the year; ordinary employer contributions are
determined by the pensionable pay of the Company’s employees within the scheme and the cash contribution rates set by the scheme
trustees. Current service cost is calculated with reference to the pensionable pay of the Company’s employees. The Company’s share
of the total Group interest on scheme liabilities, expected return on scheme assets and actuarial gains or losses is calculated in proportion
to ordinary employer contributions in the prior accounting period. Changes in the surplus or deficit arising as a result of the changes in the
Company’s share of total ordinary employer contributions are also treated as actuarial gains or losses.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
193
193
Notes to the Company Financial Statements
I. PRINCIPAL ACCOUNTING POLICIES OF THE COMPANY
Taxation
Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that
have been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised in respect of all temporary differences identified at the balance sheet date, except for differences arising on:
● the initial recognition of an asset or liability in a transaction which is not a business combination and which at the time of the transaction
affects neither accounting profit nor taxable profit; and
● investments in subsidiaries where the Company is able to control the timing of the reversal of the difference and it is probable that the
difference will not reverse in the foreseeable future.
Temporary differences are differences between the carrying amount of the Company’s assets and liabilities and their tax base.
Deferred tax assets and liabilities are offset when the Company has a legally enforceable right to offset current tax assets and liabilities and
the deferred tax assets and liabilities relate to taxes levied by the same tax authority.
Deferred tax assets that are not eligible for offset against deferred tax liabilities are recognised only when, on the basis of all available
evidence, it can be regarded as probable that there will be suitable taxable profits in the foreseeable future, against which the deductible
temporary difference can be utilised.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or the liability
is settled, based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Measurement
of deferred tax liabilities and assets reflects the tax consequences expected from the manner in which the asset or liability is recovered
or settled.
The tax expense for the period comprises current and deferred tax. Tax is recognised in the Income Statement, except to the extent that
it relates to items recognised in other comprehensive income or directly in equity. In this case, the tax is also recognised in other
comprehensive income or directly in equity, respectively.
Financial instruments
The Company’s accounting policies for financial instruments are consistent with those of the Group as disclosed in note S2 to the
consolidated Group Financial Statements. The Company’s financial risk management policies are consistent with those of the Group
and are described in the Strategic Report – Principal Risks and Uncertainties on pages 56 to 64 and in note S3 to the consolidated Group
Financial Statements.
Presentation of derivative financial instruments
In line with the Group’s accounting policy for derivative financial instruments, the Company has classified those derivatives held for the
purpose of treasury management as current or non-current, based on expected settlement dates.
Provisions
A provision is recognised when the Company has a present obligation (legal or constructive) as a result of a past event that can be
measured reliably and it is probable that an outflow of economic benefit will be required to settle the obligation.
194
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS
Notes to the Company Financial Statements
II. OTHER EQUITY
1 January 2015
Revaluation of available-for-sale securities
Actuarial loss
Employee share schemes:
Exercise of awards
Value of services provided
Increase in own shares
Cash flow hedges:
Net gains
Transferred to income and expense
Taxation on above items
31 December 2015
Revaluation of available-for-sale securities
Actuarial loss
Employee share schemes:
Exercise of awards
Value of services provided
Increase in own shares
Cash flow hedges:
Net gains
Transferred to income and expense
Taxation on above items
31 December 2016
Cash
flow
hedging
reserve
£m
(10)
–
–
Actuarial
gains and
losses
reserve
£m
(34)
–
(14)
Available-
for-sale
reserve
(AFS)
£m
21
1
–
Treasury
and own
shares
reserve
£m
(256)
–
–
Share-
based
payments
reserve
£m
95
–
–
–
–
–
4
(2)
(1)
(9)
–
–
–
–
–
135
(124)
(2)
–
–
–
–
–
–
2
(46)
–
(60)
–
–
–
–
–
11
(95)
–
–
–
–
–
–
22
7
–
–
–
–
–
–
(1)
28
69
–
(11)
–
–
–
(198)
–
–
35
–
(17)
–
–
–
(180)
(45)
45
–
–
–
(2)
93
–
–
(32)
46
–
–
–
–
107
Total
£m
(184)
1
(14)
24
45
(11)
4
(2)
(1)
(138)
7
(60)
3
46
(17)
135
(124)
8
(140)
III. DIRECTORS AND EMPLOYEES
Details of Directors’ remuneration, share-based payments and pension entitlements in the Remuneration Report on pages 83 to 99 form
part of these Company Financial Statements. Information on the main employee share-based payments is given in note S2 to the
consolidated Group Financial Statements. Details of the remuneration of key management personnel are given in note S8 to the
consolidated Group Financial Statements.
Employee costs
Year ended 31 December
Wages and salaries
Social security costs
Pension and other post retirement benefits costs
Share scheme costs
Capitalised employee costs
Average number of employees during the year
Year ended 31 December
Administration
Power
2016
£m
(78)
(8)
(5)
(4)
2
(93)
2016
Number
493
184
677
2015
£m
(56)
(5)
(6)
1
–
(66)
2015
Number
319
197
516
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
195
195
Notes to the Company Financial Statements
IV. OTHER INTANGIBLE ASSETS
Cost
1 January
Additions
Transfers
31 December
Accumulated amortisation
1 January
Charge for the year
Impairment
Transfers
31 December
NBV at 31 December
V. INVESTMENTS IN SUBSIDIARIES
Cost
1 January
Additions
Disposals
31 December
2016
£m
5
53
(9)
49
1
7
4
(9)
3
46
2015
(i)
£m
2,262
44
–
2,306
2016
(i)
£m
2,306
–
(1)
2,305
(i)
Disposals and additions include the net change in shares to be awarded under employee share schemes to employees of Group undertakings. Direct investments are held in Centrica
Holdings Limited, Centrica Trading Limited and Centrica Beta Holdings Limited, all of which are incorporated in England. Related undertakings are listed in note S10 to the consolidated
Group Financial Statements.
The Directors believe that the carrying value of the investments is supported by their realisable value.
VI. DEFERRED TAX
Deferred tax assets/(liabilities) arising on:
Pension schemes
Other
1 January
2016
£m
(Charge)/credit
to income
£m
Reserves
credit/(charge)
£m
31 December
2016
£m
8
(2)
6
(1)
–
(1)
11
(3)
8
18
(5)
13
Other deferred corporation tax assets primarily relate to other timing differences. Unrecognised deferred corporation tax assets amount
to nil at the balance sheet date (2015: nil).
VII. TRADE AND OTHER RECEIVABLES
31 December
Amounts owed by Group undertakings
Current tax assets
Prepayments
Due within
one year (i)
£m
12,404
21
3
12,428
2016
Due after more
than one year (ii)
£m
1,696
–
8
1,704
Due within
one year (i)
£m
10,921
–
4
10,925
2015
Due after more
than one year (ii)
£m
1,402
–
9
1,411
(i)
(ii)
The amounts receivable by the Company include £10,339 million (2015: £9,128 million) that bears interest at a quarterly rate determined by Group treasury and linked to the Group cost
of funds. The quarterly rates ranged between 2.4% and 4.7% per annum during 2016 (2015: 1.9% and 5.5%). The other amounts receivable from Group undertakings are interest-free.
All amounts receivable from Group undertakings are unsecured and repayable on demand. Amounts receivable by the Company are stated net of provisions of £765 million
(2015: £1,082 million).
The amounts receivable by the Company due after more than one year include £1,696 million (2015: £1,360 million) that bears interest at a quarterly rate determined by Group treasury and
linked to the Group cost of funds. The quarterly rates ranged between 4.4% and 7.1% per annum during 2016 (2015: 3.7% and 6.0%). In 2015, the other amounts receivable from Group
undertakings are interest-free. All amounts receivable from Group undertakings are unsecured and repayable in two to three years.
196
196
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS
Notes to the Company Financial Statements
VIII. DERIVATIVE FINANCIAL INSTRUMENTS
31 December
Derivative financial assets
Derivative financial liabilities
Due within
one year
£m
315
(196)
Due after more
than one year
£m
464
(60)
2016
Total
£m
779
(256)
Due within
one year
£m
215
(207)
Due after more
than one year
£m
160
(64)
2015
Total
£m
375
(271)
IX. FINANCIAL INSTRUMENTS
(a) Determination of fair values
The Company’s policy for the classification and valuation of financial instruments carried at fair value into one of the three hierarchy levels
determined in accordance with IFRS 13 are consistent with those of the Group, as detailed in note S6 to the consolidated Group Financial
Statements.
(b) Financial instruments carried at fair value
31 December
Financial assets designated as fair value through profit
or loss:
Treasury gilts
Derivative financial assets:
Held for trading:
Foreign exchange derivatives
In hedge accounting relationships:
Interest rate derivatives
Foreign exchange derivatives
Total financial assets at fair value through profit or loss
Available-for-sale financial assets:
Debt instruments
Equity instruments
Total financial assets at fair value
Derivative financial liabilities:
Held for trading:
Interest rate derivatives
Foreign exchange derivatives
In hedge accounting relationships:
Interest rate derivatives
Foreign exchange derivatives
Total financial liabilities
Total financial instruments
X. SECURITIES
31 December
Treasury gilts designated at fair value through profit or loss
Debt instrument
Equity instrument
Short-term investments
Level 1
£m
Level 2
£m
Level 3
£m
2016
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
2015
Total
£m
130
–
–
130
124
–
–
124
–
480
–
–
130
64
21
215
–
–
–
–
–
215
158
141
779
–
–
779
(30)
(220)
(6)
–
(256)
523
–
–
–
–
–
–
–
–
–
–
–
–
–
480
–
222
158
141
909
64
21
994
(30)
(220)
(6)
–
(256)
738
–
–
124
58
18
200
–
–
–
–
–
200
129
24
375
–
–
375
(25)
(175)
(3)
(68)
(271)
104
–
–
–
–
–
–
–
–
–
–
–
–
–
222
129
24
499
58
18
575
(25)
(175)
(3)
(68)
(271)
304
2015
£m
124
58
18
200
2016
£m
130
64
21
215
£85 million (2015: £76 million) of investments were held in trust, on behalf of the Company, as security in respect of the Centrica
Unfunded Pension Scheme (refer to note XV).
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
197
197
Notes to the Company Financial Statements
XI. CASH AND CASH EQUIVALENTS
31 December
Cash at bank and in hand
Deposits at call (i)
(i)
Term deposits are presented as cash equivalents if they have a maturity of three months or less from the date of acquisition.
2016
£m
2
1,478
1,480
2015
£m
32
409
441
XII. TRADE AND OTHER PAYABLES
31 December
Amounts owed to Group undertakings (i)
Other taxation and social security
Accruals and other creditors
Due within
one year
£m
(7,740)
(2)
(66)
(7,808)
2016
Due after more
than one year
£m
(84)
–
–
(84)
Due within
one year
£m
(6,223)
(5)
(54)
(6,282)
2015
Due after more
than one year
£m
(92)
–
–
(92)
(i)
The amounts payable by the Company include £7,239 million (2015: £4,980 million) that bears interest at a quarterly rate determined by Group treasury and linked to the Group cost of funds.
The quarterly rates ranged between 2.4% and 4.7% per annum during 2016 (2015: 1.9% and 5.5%).
XIII. PROVISIONS FOR LIABILITIES
Current provisions for liabilities
Restructuring
Other
Non-current provisions for liabilities
Other
1 January
2016
£m
–
–
–
1 January
2016
£m
(5)
(5)
Charged in
the year
£m
(4)
(1)
(5)
Charged in
the year
£m
–
–
Utilised
£m
1
–
1
Utilised
£m
–
–
Transfers (i)
£m
–
(2)
(2)
31 December
2016
£m
(3)
(3)
(6)
Transfers (i)
£m
2
2
31 December
2016
£m
(3)
(3)
(i)
Includes transfers to/from other balance sheet accounts, including retirement benefit obligations.
Other provisions principally represent estimated liabilities for contractual settlements and National Insurance in respect of employee share
scheme liabilities. The National Insurance provision is based on a share price of 234.1 pence at 31 December 2016 (2015: 218.1 pence).
XIV. FINANCIAL LIABILITIES
31 December
Bank loans and overdrafts
Bonds
Interest accruals
Due within
one year
£m
(38)
(162)
(121)
(321)
2016
Due after more
than one year
£m
(148)
(5,788)
–
(5,936)
Due within
one year
£m
–
(308)
(120)
(428)
2015
Due after more
than one year
£m
(222)
(5,564)
–
(5,786)
Disclosures in respect of the Group’s financial liabilities are provided in note 24 to the consolidated Group Financial Statements.
198
198
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS
Notes to the Company Financial Statements
XV. PENSIONS
(a) Summary of main schemes
The Company’s employees participate in the following Group defined benefit pension schemes: Centrica Pension Plan (CPP), Centrica
Pension Scheme (CPS) and Centrica Unfunded Pension Scheme. Its employees also participate in the defined contribution section of
the Centrica Pension Scheme. Information on these schemes is provided in note 22 to the consolidated Group Financial Statements.
Together with the Centrica Engineers Pensions Scheme (CEPS), CPP and CPS form the significant majority of the Group’s and
Company’s defined benefit obligation and are referred to below and in the consolidated Group Financial Statements as the
‘Registered Pension Schemes’.
(b) Accounting assumptions, risks and sensitivity analysis
The accounting assumptions, risks and sensitivity analysis for the Registered Pension Schemes are provided in note 22 to the
consolidated Group Financial Statements.
(c) Movements in the year
1 January
Items included in the Company Income Statement:
Current service cost
Past service credit
Interest on scheme liabilities
Expected return on scheme assets
Other movements:
Actuarial (loss)/gain
Employer contributions
Benefits paid from schemes
Transfers from provisions for liabilities
31 December
Presented in the Company Balance Sheet as:
31 December
Defined benefit pension assets
Defined benefit pension liabilities
Pension liabilities
£m
(368)
2016
Pension assets
£m
327
Pension liabilities
£m
(366)
2015
Pension assets
£m
339
(5)
4
(14)
–
(175)
–
11
(2)
(549)
–
–
–
12
115
20
(11)
–
463
(6)
1
(14)
–
7
–
10
–
(368)
2016
£m
–
(86)
(86)
2016
£m
115
8
(183)
(60)
(57)
(117)
–
–
–
13
(21)
6
(10)
–
327
2015
£m
9
(50)
(41)
2015
£m
(21)
(7)
14
(14)
(43)
(57)
Of the pension schemes liabilities, £62 million (2015: £50 million) relates to the Centrica Unfunded Pension Scheme.
(d) Analysis of the actuarial losses recognised in reserves (note II)
Year ended 31 December
Actuarial gain/(loss) (actual return less expected return on pension scheme assets)
Experience gain/(loss) arising on the scheme liabilities
Changes in assumptions underlying the present value of the schemes’ liabilities
Actuarial loss recognised in reserves before adjustment for taxation
Cumulative actuarial losses recognised in reserves at 1 January, before adjustment for taxation
Cumulative actuarial losses recognised in reserves at 31 December, before adjustment for taxation
(e) Pension scheme contributions
Note 22 to the consolidated Group Financial Statements provides details of the triennial review carried out at 31 March 2015 in respect
of the UK Registered Pension Schemes and the asset-backed contribution arrangements set up in 2012, 2013 and 2016. Under IAS 19,
the Company’s contribution and trustee interest in the Scottish Limited Partnerships are recognised as scheme assets.
The Company estimates that it will pay £4 million of employer contributions during 2017 at an average rate of 33% of pensionable pay
together with contributions via the salary sacrifice arrangement of £1 million.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
199
199
Notes to the Company Financial Statements
XV. PENSIONS
(f) Pension scheme assets
31 December
Equities
Diversified asset funds
Corporate bonds
High-yield debt
Liability matching assets
Property
Cash pending investment
Asset-backed contribution assets
Group pension scheme assets (i)
Company share of the above
(i)
Total pension scheme assets for the UK pension schemes.
Quoted
£m
1,970
50
1,274
309
1,241
–
276
–
5,120
Unquoted
£m
307
–
–
1,296
844
319
–
406
3,172
2016
£m
2,277
50
1,274
1,605
2,085
319
276
406
8,292
2016
£m
463
Quoted
£m
1,867
47
1,717
167
874
–
60
–
4,732
Unquoted
£m
219
–
–
780
556
315
–
243
2,113
2015
£m
2,086
47
1,717
947
1,430
315
60
243
6,845
2015
£m
327
XVI. SHAREHOLDERS’ EQUITY AND RESERVES
The Directors propose a final dividend of 8.40 pence per share (totalling £461 million) for the year ended 31 December 2016. Details of the
dividends are given in note 11 to the consolidated Group Financial Statements.
Details of the Company’s share capital are provided in the Group Statement of Changes in Equity and note 25 to the consolidated Group
Financial Statements. Movements in equity are shown in the Company Statement of Changes in Equity.
XVII. COMMITMENTS
At 31 December 2016, the Company had commitments of £56 million (2015: £67 million) relating to contracts for outsourced services,
£1 million (2015: £1 million) of annual lease payments in respect of land and buildings non-cancellable operating lease commitments
expiring in less than one year and £6 million (2015: £5 million) of guaranteed operating commitments of a subsidiary undertaking expiring
in more than five years. The Company’s commitment in respect of its agreement with Cheniere is detailed in note 23 to the consolidated
Group Financial Statements.
The Company enters into parent company guarantee arrangements and letters of credit in relation to its subsidiary undertakings.
The Company has assessed the likelihood of these guarantees being called, or letters of credit being drawn upon, as remote.
XVIII. RELATED PARTIES
Following the disposal of a loan relating to Lincs Wind Farm Limited in 2015, the Company received no interest and fees in 2016
(2015: £11 million) and received no repayments (2015: £189 million).
200
200
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS NOTES TO THE COMPANY FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
GAS AND LIQUIDS RESERVES (UNAUDITED)
Gas and Liquids Reserves (Unaudited)
The Group’s estimates of reserves of gas and liquids are reviewed as part of the full year reporting process and updated accordingly.
A number of factors affect the volumes of gas and liquids reserves, including the available reservoir data, commodity prices and future
costs. Due to the inherent uncertainties and the limited nature of reservoir data, estimates of reserves are subject to change as additional
information becomes available.
The Group discloses 2P gas and liquids reserves, representing the central estimate of future hydrocarbon recovery. Reserves for Centrica
operated fields are estimated by in-house technical teams composed of geoscientists and reservoir engineers. Reserves for non-operated
fields are estimated by the operator, but are subject to internal review and challenge.
As part of the internal control process related to reserves estimation, an assessment of the reserves, including the application of the
reserves definitions is undertaken by an independent technical auditor. An annual reserves assessment has been carried out by DeGoyler
and MacNaughton for the Group’s global reserves. From 2017 onwards, annual reserves assessments will be carried out by Gaffney,
Cline and Associates. Reserves are estimated in accordance with a formal policy and procedure standard.
The Group has estimated 2P gas and liquids reserves in Europe, Canada and Trinidad and Tobago.
The principal fields in Europe are Kvitebjørn, Statfjord, Cygnus, Maria, South and North Morecambe, Rhyl, Oda (formerly Butch), Chiswick
and Valemon. The principal field in Trinidad and Tobago is NCMA-1. The principal field in Centrica Storage is the Rough field. The
European and Trinidad and Tobago reserves estimates are consistent with the guidelines and definitions of the Society of Petroleum
Engineers, the Society of Petroleum Evaluation Engineers and the World Petroleum Council’s Petroleum Resources Management System
using accepted principles.
The principal fields in Canada are Panther, Stolberg, Alderson, Wildcat Hills, Turner, Hanlan, Laprise, Glacier, Medicine Hat 1, Carrot
Creek and Channel Lake. The Canadian field reserves estimates have been evaluated in accordance with the Canadian Oil and Gas
Evaluation Handbook (COGEH) reserves definitions and are consistent with the guidelines and definitions of the Society of Petroleum
Engineers and the World Petroleum Council.
Estimated net 2P reserves of gas
(billion cubic feet)
1 January 2016
Revisions of previous estimates (iii)
Acquisitions/(disposals) of reserves in place (iv)
Production (v)
31 December 2016
Estimated net 2P reserves of liquids
(million barrels)
1 January 2016
Revisions of previous estimates (iii)
Production (v)
31 December 2016
Estimated net 2P reserves
(million barrels of oil equivalent)
31 December 2016 (vi)
Europe
1,422
(10)
(6)
(181)
1,225
Europe
115
7
(16)
106
Europe
310
Canada
(i)
887
(4)
4
(66)
821
Canada
(i)
17
2
(1)
18
Trinidad and
Tobago
(ii)
69
4
–
(21)
52
Trinidad and
Tobago
(ii)
–
–
–
–
Exploration &
Production
2,378
(10)
(2)
(268)
2,098
Exploration &
Production
132
9
(17)
124
Canada
(i)
155
Trinidad and
Tobago
(ii)
9
Exploration &
Production
474
Centrica
Storage
176
–
–
(9)
167
Centrica
Storage
–
–
–
–
Centrica
Storage
28
Total
2,554
(10)
(2)
(277)
2,265
Total
132
9
(17)
124
Total
502
(i)
(ii)
The Canada reserves represent the Group’s 60% interest in the natural gas and liquid assets owned by the CQ Energy Canada Partnership.
The Trinidad and Tobago reserves are subject to a production sharing contract and accordingly have been stated on an entitlement basis (including tax barrels). The Group’s entire portfolio
of Trinidad and Tobago assets are a disposal group held for sale. See note 12(c).
Revision of previous estimates including those associated with North and South Morecambe, York, Grove, Eris, Statfjord, Kvitebjørn and Valemon areas in Europe.
Reflects the divestment of Skene and Buckland in Europe and the disposal of interests in the Peace River Arch area, offset by the acquisition of interests in the Hanlan Robb area in Canada.
Represents total sales volumes of gas and oil produced from the Group’s reserves.
Includes the total of estimated gas and liquids reserves at 31 December 2016 in million barrels of oil equivalent.
(iii)
(iv)
(v)
(vi)
Liquids reserves include oil, condensate and natural gas liquids.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
201
201
Five Year Summary (Unaudited)
Year ended 31 December
Group revenue
Operating profit before exceptional items and certain re-measurements:
2012
(restated) (i)
£m
23,942
2013
(restated) (i)
£m
26,571
2014
(restated) (i)
£m
29,408
2015
(restated) (i)
£m
27,971
2016
£m
27,102
Energy Supply & Services – UK & Ireland
Energy Supply & Services – North America
Connected Home
Distributed Energy & Power
Energy Marketing & Trading
Exploration & Production
Central Power Generation
Centrica Storage
Adjusted operating profit – operating profit before exceptional items
and certain re-measurements
Share of joint ventures’ and associates’ interest and taxation
Exceptional items and certain re-measurements after taxation
Profit/(loss) attributable to owners of the parent
Earnings per ordinary share
Adjusted earnings per ordinary share
Dividend per share declared in respect of the year
Assets and liabilities
31 December
Goodwill and other intangible assets
Other non-current assets
Net current (liabilities)/assets
Non-current liabilities
Net assets/(liabilities) of disposal groups held for sale
Net assets
Debt, net of cash, cash equivalents and securities:
Net debt
Cash flows
1,097
310
–
9
84
811
210
89
2,610
(48)
2,562
(77)
1,245
Pence
24.0
25.5
16.4
1,057
276
(27)
(30)
117
1,019
111
63
2,586
(68)
2,518
(383)
950
Pence
18.4
25.9
17.0
2012
£m
4,122
11,690
(446)
(9,439)
–
5,927
2013
£m
4,724
10,993
(470)
(10,192)
202
5,257
858
138
(23)
(17)
136
455
81
29
1,657
(89)
1,568
(1,932)
(1,012)
Pence
(20.2)
18.0
13.5
2014
£m
4,600
9,974
(1,492)
(10,011)
–
3,071
891
323
(49)
(32)
66
95
128
37
1,459
(61)
1,398
(1,717)
(747)
Pence
(14.9)
17.2
12.0
2015
£m
3,824
7,790
(521)
(9,718)
(33)
1,342
906
314
(50)
(26)
161
187
75
(52)
1,515
(48)
1,467
777
1,672
Pence
31.4
16.8
12.0
2016
£m
4,383
8,218
1,220
(11,173)
196
2,844
(3,945)
(4,942)
(5,196)
(4,747)
(3,473)
Year ended 31 December
Cash flow from operating activities before exceptional payments
Payments relating to exceptional charges
Net cash flow from investing activities
Cash flow before cash flow from financing activities
2012
£m
3,086
(266)
(2,558)
262
2013
£m
3,164
(224)
(2,351)
589
2014
£m
1,342
(125)
(651)
566
2015
£m
2,278
(81)
(611)
1,586
2016
£m
2,669
(273)
(803)
1,593
(i)
Segmental operating profit for 2012-2015 has been restated in the new reporting segments. See note 1 for further information.
202
202
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS FIVE YEAR SUMMARY (UNAUDITED)
FINANCIAL STATEMENTS
OFGEM CONSOLIDATED SEGMENTAL STATEMENT
Ofgem Consolidated Segmental Statement
INDEPENDENT AUDITOR’S REPORT TO THE DIRECTORS OF CENTRICA PLC AND ITS LICENSEES
Our Opinion
We have audited the statement (the ‘Consolidated Segmental Statement’ or ‘CSS’) of Centrica plc and its Licensees (as listed in
footnote (i)) for the year ended 31 December 2016 in accordance with the terms of our agreement dated 3 January 2017. The CSS has
been prepared by the Directors of Centrica plc and its Licensees based on the requirements of Ofgem’s Standard Condition 19A of the
Gas and Electricity Supply Licences and the Standard Condition 16B of the Electricity Generation Licences (together, the ‘Licences’) and
the basis of preparation on pages 210 to 213.
In our opinion the accompanying CSS of Centrica plc and its Licensees for the year ended 31 December 2016 is prepared, in all material
respects, in accordance with:
● the requirements of Ofgem’s Standard Condition 19A of the Gas and Electricity Supply Licences and Standard Condition 16B of the
Electricity Generation Licences established by the regulator; and
● the basis of preparation on pages 210 to 213.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (ISAs). Our responsibilities under those standards are
further described in the Auditor’s responsibilities for the audit of the CSS section of our report. We are independent of Centrica plc in
accordance with the ethical requirements that are relevant to our audit of the CSS in the United Kingdom, and we have fulfilled our other
ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our opinion.
Emphasis of matter – Basis of Accounting and Restriction on Distribution
Without modifying our opinion, we draw attention to pages 210 to 213 of the CSS, which describes the basis of preparation. The CSS is
prepared in order for Centrica plc and its Licensees to meet the Licence requirement of the Regulator Ofgem rather than in accordance
with a generally accepted accounting framework. The CSS should therefore be read in conjunction with both the Licences and the basis
of preparation on pages 210 to 213. This basis of preparation is not the same as segmental reporting under IFRS and/or statutory
reporting. As a result, the schedule may not be suitable for another purpose.
This report, including our opinion, has been prepared solely for the Board of Directors of Centrica plc and its Licensees in accordance with
the agreement between us, to assist the Directors in reporting on the CSS to the Regulator Ofgem.
We permit this report to be disclosed in the Financial Statements section of the Annual Report and Accounts of Centrica plc for the year
ended 31 December 2016 and the Financial Statements section of the website (ii) www.centrica.com, to enable the Directors to show they
have addressed their governance responsibilities by obtaining an independent assurance report in connection with the CSS. To the fullest
extent permitted by law, we do not accept or assume responsibility to anyone other than the Board of Directors and Centrica plc and its
Licensees for our work or this report except where terms are expressly agreed between us in writing.
Responsibilities of Management and those charged with governance for the CSS
Management is responsible for the preparation of the CSS in accordance with the Licences and the basis of preparation on pages 210
to 213 and for maintaining the underlying accounting records and such internal controls as management determine is necessary to enable
the preparation of the CSS that is free from material misstatement, whether due to fraud or error.
In preparing the CSS alongside the Centrica plc Annual Report and Accounts, management is responsible for assessing the Centrica plc
group’s ability to continue as a going concern, disclosing, as applicable in the Centrica plc Annual Report and Accounts, matters relating
to going concern and using the going concern basis of accounting unless management either intends to liquidate the Group or to cease
operations, or has no realistic alternative but to do so.
Those charged with governance are responsible for overseeing the Group’s financial reporting process.
Auditor’s responsibilities for the audit of the CSS
Our objectives are to obtain reasonable assurance about whether the CSS as a whole is free from material misstatement, whether due to
fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a
guarantee that an audit conducted in accordance with ISAs will always detect a material misstatement when it exists. Misstatements can
arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the
economic decisions of users taken on the basis of this CSS. The materiality level that we used in planning and performing our audit is set
at £30 million for each of the segments.
As part of an audit in accordance with ISAs, we exercise professional judgement and maintain professional scepticism throughout the
audit. We also:
● Identify and assess the risks of material misstatement of the CSS, whether due to fraud or error, design and perform audit procedures
responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not
detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery,
intentional omissions, misrepresentations, or the override of internal control;
● Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control;
● Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates, if any, and related
disclosures made by management; and
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
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Ofgem Consolidated Segmental Statement
INDEPENDENT AUDITORS’ REPORT TO THE DIRECTORS OF CENTRICA PLC AND ITS LICENSEES
● Conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on the audit evidence
obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Group’s ability to
continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor’s report
to the related disclosures in the CSS (and, by cross reference, in the Centrica plc Annual Report and Accounts, where applicable) or,
if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date
of our auditor’s report. However, future events or conditions may cause the Group to cease to continue as a going concern.
We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and
significant audit findings, including any significant deficiencies in internal control that we identify during our audit.
We also provide those charged with governance with a statement that we have complied with relevant ethical requirements regarding
independence, and to communicate with them all relationships and other matters that may reasonably be thought to bear on our
independence, and where applicable, related safeguards.
The engagement partner on the audit resulting in this independent auditor’s report is Charles Bowman.
PricewaterhouseCoopers LLP
London
23 February 2017
(i)
(ii)
British Gas Trading Limited, Neas Energy Limited, Centrica Langage Limited, Centrica SHB Limited, Centrica Barry Limited, Centrica KPS Limited, Centrica PB Limited and
Centrica KL Limited.
The maintenance and integrity of Centrica plc’s website is the responsibility of the Directors of Centrica plc; the work carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the CSS since it was initially presented on the website.
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Ofgem Consolidated Segmental Statement
Introduction
The Ofgem Consolidated Segmental Statement (CSS) and required regulatory information on pages 205 to 215 are provided in order
to comply with Standard Condition 16B of the Electricity Generation Licences and Standard Condition 19A of the Electricity and Gas
Supply Licences.
The CSS and supporting information is prepared by the Directors in accordance with the Segmental Statements Guidelines issued
by Ofgem. The CSS has been derived from and reconciled to the Centrica plc Annual Report and Accounts for the year ended
31 December 2016 which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted
by the European Union (EU) and therefore comply with Article 4 of the EU IAS Regulation and the Companies Act 2006.
Centrica plc operational reporting structure
Below is a summary of the Centrica plc Group’s (Group) operational reporting structure. The CSS financial data has been extracted from
the Centrica plc Annual Report and Accounts 2016 operating segments rather than with reference to specific legal entities. Certain
activities included in the Group’s operating segments have been excluded from the Generation and Supply segments of the CSS on the
basis they are non-licensed activities (for example Business Services and trading activity unrelated to Generation or Supply) as illustrated
below. The Centrica plc Annual Report and Accounts 2016 provides operating segment results in note 4. A full reconciliation between the
relevant operating segment results and those disclosed for ‘Domestic Supply’, ‘Non-Domestic Supply’ and ‘Generation’ in this CSS is
provided at the end of the report.
Ofgem reporting structure
Reporting/operating segments
Activities included in CSS
Activities excluded from CSS
Centrica plc
Energy Supply & Services
UK Home
Domestic Supply
Home Services
Business Services
UK & Ireland Distributed Energy
North America Distributed Energy
Other Trading
Energy Supply & Services
UK Business
Non-Domestic Supply
Distributed Energy & Power
Energy Marketing & Trading
Optimisation of Generation
Peaking Plants (Generation)
Central Power Generation
Nuclear (Generation)
Renewables (Generation)
Thermal (Generation)
Out of scope segments:
• Energy Supply & Services
North America
• Energy Supply & Services Ireland
• Connected Home
• Exploration & Production
• Centrica Storage
Centrica plc Annual Report and Accounts 2016
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205
205
Ofgem Consolidated Segmental Statement
Centrica plc operational reporting structure
Centrica plc is the ultimate parent company of all 100% owned licensees. The individual supply and generation licences are held in legal
entities whose licensed activities are reported as part of the Centrica plc Annual Report and Accounts 2016 within the operating segments
shown above. The individual supply and generation licences held in subsidiaries, joint ventures or associates of Centrica plc during 2016
are detailed below:
Licensee
British Gas Trading Limited
Neas Energy Limited (i)
Centrica Langage Limited
Centrica SHB Limited
Centrica Brigg Limited
Centrica Barry Limited
Centrica KPS Limited
Centrica RPS Limited
Centrica PB Limited
Centrica KL Limited
Lincs Wind Farm Limited
Glens of Foudland Wind Farm Limited (ii)
Lynn Wind Farm Limited (ii)
Inner Dowsing Wind Farm Limited (ii)
EDF Energy Nuclear Generation Limited (iii)
Licence
Supply
Supply
Generation
Generation
Exempt
Generation
Generation
Exempt
Generation
Generation
Generation
Exempt
Exempt
Exempt
Generation
Ownership
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50% Joint venture
50% Joint venture
50% Joint venture
50% Joint venture
20% Associate
(i)
(ii)
(iii)
Neas Energy Limited was acquired on 5 October 2016. It holds a supply licence but currently does not supply any UK customers.
Centrica plc Group disposed of its 50% share of Glens of Foudland Wind Farm Limited, Lynn Wind Farm Limited and Inner Dowsing Wind Farm Limited on 7 March 2016.
The Group holds a 20% investment in Lake Acquisitions Limited which indirectly owns 100% of EDF Energy Nuclear Generation Limited.
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STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS OFGEM CONSOLIDATED SEGMENTAL STATEMENT
Ofgem Consolidated Segmental Statement
OFGEM CONSOLIDATED SEGMENTAL STATEMENT
Year ended 31 December 2016
Electricity Generation
Total revenue
Sales of electricity & gas
Other revenue
Total operating
costs
Direct fuel costs
Direct costs
Network costs
Environmental
and social
obligation costs
Other direct costs
Indirect costs
WACOF/E/G
EBITDA
DA
EBIT
Volume
Average customer
numbers/sites
£m
Unit Nuclear (i) Thermal (i)
532.0
507.3
24.7
576.1
570.1
6.0
£m
£m
Electricity Supply
Gas Supply
Renewables
Aggregate
Generation
Business
Domestic
Non-
Domestic
72.2 1,180.3 3,208.7 1,459.1
18.2 1,095.6 3,127.7 1,459.1
–
54.0
81.0
84.7
Domestic
4,498.5
4,420.9
77.6
Non-
Domestic
538.8
538.8
–
Aggregate
Supply
Business
9,705.1
9,546.5
158.6
£m
£m
£m
£m
£m
£m
£m
£/MWh, P/th
£m
£m
£m
TWh, MThms
(326.9) (557.5)
(326.6)
(180.1)
(41.8)
(97.1)
(209.2)
(42.1)
(35.5)
–
(18.8)
(10.2)
(919.9) (3,280.6) (1,448.3)
(611.0)
(423.7)
(655.1)
(408.1)
(371.4)
(94.1)
(1,206.3)
(1,510.6)
(952.4)
(3,751.6)
(1,733.7)
(1,244.4)
(1,103.4)
(486.6)
(271.0)
(125.7)
(108.0)
(8,967.1)
(3,822.0)
(3,535.8)
(2,535.2)
–
(167.1)
(20.6)
(7.5)
249.2
(137.0)
112.2
13.0
(90.8)
(47.5)
(50.8)
(41.3)
(25.5)
(25.1)
(50.6)
10.1
–
(8.6)
(16.7)
–
36.7
(26.5)
10.2
0.5
(90.8)
(223.2)
(88.1)
N/A
260.4
(188.6)
71.8
N/A
(508.0)
(50.2)
(563.7)
(54.6)
(71.9)
(54.0)
(125.9)
22.1
(262.5)
(21.2)
(182.2)
(48.5)
10.8
(8.9)
1.9
12.6
(94.2)
(46.8)
(773.5)
(48.9)
746.9
(68.0)
678.9
3,548.7
–
(17.7)
(89.9)
(50.8)
52.2
(4.3)
47.9
533.2
(864.7)
(135.9)
(1,609.3)
N/A
738.0
(135.2)
602.8
N/A
‘000s
N/A
N/A
N/A
N/A 6,341.9
496.3
7,992.3
237.4
N/A
Supply EBIT
Supply PAT
Supply PAT
margin
£m
margin
(3.9)%
(105.3)
(3.3)%
0.1%
1.6
0.1%
15.1%
567.7
12.6%
8.9%
40.5
7.5%
6.2%
504.5
5.2%
2015 Summarised CSS
Year ended 31 December 2015
Electricity Generation
Total revenue
EBIT
Unit
£m
£m
Nuclear
(i)
596.3
172.9
Thermal
(i) Renewables
Aggregate
Generation
Business
Domestic
Domestic
(ii)
(ii)
124.0 1,163.7 3,306.4 1,682.5 4,935.5
614.6
8.3
Non-
Domestic
(48.8)
29.5
84.9
Electricity Supply
Gas Supply
Aggregate
Supply
Business
Non-
Domestic
677.9 10,602.3
606.9
32.8
443.4
(117.5)
Supply EBIT
Supply PAT
Supply PAT
margin
£m
margin
0.3%
6.7
0.2%
(2.9%)
(38.9)
(2.3%)
12.5%
493.9
10.0%
4.8%
26.1
3.9%
5.7%
487.8
4.6%
(i)
(ii)
The Nuclear and Thermal segments represent conventional electricity generation.
2015 comparatives for Domestic Supply have been restated to remove the performance of Connected Home segment which is now deemed to be a separate business unit and unrelated to
the licensed Supply business. 2015 comparatives have also been restated between Domestic Electricity Supply and Domestic Gas Supply to reallocate a portion of bad debt charge
(£7.5 million) to the correct fuel. For Domestic Electricity Supply, Total Revenue has been reduced by £3.0 million, EBIT increased by £13.7 million and PAT increased by £11.2 million.
For Domestic Gas Supply, Total Revenue has been reduced by £4.1 million, EBIT increased by £34.8 million and PAT increased by £28.4 million.
Centrica plc Annual Report and Accounts 2016
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207
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Ofgem Consolidated Segmental Statement
Glossary of terms
● ‘WACOF/E/G’ is weighted average cost of fuel (nuclear), electricity (supply) and gas (thermal and supply) calculated by dividing
direct fuel costs by volumes. For the Thermal sub-segment the cost of carbon emissions is added to direct fuel costs before
dividing by the generated volume.
● ‘EBITDA’ is earnings before interest, tax, depreciation and amortisation, and is calculated by subtracting total operating costs
from revenue.
● ‘DA’ is depreciation and amortisation.
● ‘EBIT’ is earnings before interest and tax, and is calculated by subtracting total operating costs, depreciation and amortisation
from total revenue.
● ‘Supply EBIT margin’ is a profit margin expressed as a percentage and calculated by dividing EBIT by total revenue and multiplying
by 100 for the Supply segment.
● ‘Supply PAT’ is profit after tax but before interest and is calculated by subtracting Group adjusted tax from EBIT for the Supply
segment.
● ‘Supply PAT margin’ is a profit margin expressed as a percentage and calculated by dividing Supply PAT by total revenue and
multiplying by 100 for the Supply segment.
● ‘Volume’ for Supply is supplier volumes at the meter point (ie net of losses); Generation volume is the volume of power that can
actually be sold in the wholesale market (ie generation volumes after losses up to the point where power is received under the
Balancing and Settlement Code but before subsequent losses).
● ‘Average customer numbers/sites’ are calculated by adding average monthly customer numbers/sites (as defined in the basis
of preparation) and dividing by 12.
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Ofgem Consolidated Segmental Statement
BUSINESS FUNCTIONS TABLE
Year ended 31 December 2016 – analysis of business functions (i)
The table below illustrates where the business functions reside.
Operates and maintains generation assets
Responsible for scheduling decisions
Responsible for interactions with the Balancing Market
Responsible for determining hedging policy
Responsible for implementing hedging policy/makes decision to buy and sell energy
Interacts with wider market participants to buy/sell energy
Holds unhedged positions (either short or long)
Procures fuel for generation
Procures allowances for generation
Holds volume risk on positions sold (either internal or external)
Matches own generation with own supply
Forecasts total system demand
Forecasts wholesale price
Forecasts customer demand
Determines retail pricing and marketing strategies
Bears shape risk after initial hedge until market allows full hedge
Bears short-term risk for variance between demand and forecast
Generation
–
–
(output) (demand)
(output) (demand)
(market and
(bilateral)
bilateral)
–
–
(iii)
(iv)
Supply Another part of business
–
–
–
–
–
(market and
bilateral) (ii)
(ii)
–
–
–
(ii) (iii)
–
(iv)
–
–
–
–
–
–
(iv)
–
–
–
(i)
(ii)
The table reflects the business functions that impact our UK segments.
The Group’s Supply and Generation businesses are separately managed. Both businesses independently enter into commodity purchases and sales with the market via Centrica Energy
Limited (CEL), our market-facing legal entity. CEL forms part of our non-licensed element of Energy Marketing & Trading function and also conducts trading for the purpose of making profits
in its own right. The Supply segment is also able to enter into market trades directly as part of its within day balancing activities (as well as external bilateral contracts).
(iii)
There are a small number of bilateral off-take contracts between wind farm joint ventures and Domestic and Non-Domestic Electricity Supply segments. Other than this small number of
bilateral contracts, ‘Matches own generation with own supply’ is undertaken in ‘Another part of the business’ (by CEL at market referenced prices), outside of the Generation and Supply
segments.
(iv)
A separate team forecasts the wholesale price for the benefit and use of the entire Group. This team does not formally reside in any particular segment but their costs are recharged across
the Group.
Key:
Function resides and profit/loss recorded in segment.
– Neither function nor profit/loss reside in segment.
Glossary of terms
● ‘Scheduling decisions’ means the decision to run individual generation units.
● ‘Responsible for interactions with the Balancing Market’ means interactions with the Balancing Mechanism in electricity.
● ‘Interacts with wider market participants to buy/sell energy’ means the business unit is responsible for interacting with wider market
participants to buy/sell energy, not the entity responsible for the buy/sell decision itself, which falls under ‘Responsible for implementing
hedging policy/makes decisions to buy/sell energy’.
● ‘Matches own generation with own supply’ means where there is some internal matching of generation and supply before either
generation or supply interact with the wider market.
● ‘Forecasts total system demand’ means forecasting total system electricity demand or total system gas demand.
● ‘Forecasts customer demand’ means forecasting the total demand of own supply customers.
● ‘Bears shape risk after initial hedge until market allows full hedge’ means the business unit which bears financial risk associated
with hedges made before the market allows fully shaped hedging.
● ‘Bears short-term risk for variance between demand and forecast’ means the business unit which bears financial risk associated
with too little or too much supply for own customer demand.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
209
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Ofgem Consolidated Segmental Statement
BASIS OF PREPARATION
The following notes provide a summary of the basis of preparation of the 2016 submission.
The Ofgem CSS segments our Supply and Generation activities and provides a measure of profitability, weighted average cost of fuel,
and volumes, in order to increase energy market transparency for consumers and other stakeholders.
These statements have been prepared by the Directors of Centrica plc and its Licensees in accordance with Standard Condition 16B of
the Electricity Generation Licences and Standard Condition 19A of the Electricity and Gas Supply Licences and the basis of preparation.
Throughout the basis of preparation the first paragraph number relates to the generation licence and the second to the supply licence
conditions respectively.
The financial data provided has been taken from the relevant licensee’s and affiliate’s financial information for the year ended
31 December 2016, included in the Centrica plc Annual Report and Accounts 2016 which have been prepared under IFRS as adopted
by the EU (in accordance with paragraph 3/19A.3).
The CSS has been prepared on a going concern basis, as described in the Directors’ Report and note 24(b) in the Centrica plc Annual
Report and Accounts 2016.
For the Generation segment, we have included the financial results from all activities that relate to our generation licences. For clarity the
following judgements have been made:
● Where a sub-segment (for example Nuclear, Thermal or Renewables) has undertaken trades to optimise the result of their underlying
generation (for example through our Energy Marketing & Trading business), the net revenue and result from these trades has been
included in the CSS sub-segment as they are considered to be related to our generation licences.
● The Group has a long-term tolling contract in respect of the Spalding power station, but does not specifically hold the generation
licence. This arrangement provides the Group with the right to nominate 100% of the plant capacity in return for a mix of capacity
payments and operating payments. We do not own the power station and the Group does not control the physical dispatch of the
asset. This contractual arrangement has been accounted for as a finance lease (under IFRS) and therefore the financial result and
volume has been included in the Thermal sub-segment, within the Generation segment.
● Brigg and Roosecote power stations had their licences revoked on 2 July 2015 (at their request) because they no longer required an
electricity generation licence and are now exempt. Whilst we do not specifically hold a generation licence for these power stations, the
financial results from these businesses have been included in the Thermal sub-segment and hence within the Generation segment.
● The Group has a 20% equity interest in eight nuclear power stations (through its indirect investment in EDF Energy Nuclear Generation
Limited). Although we do not specifically hold a generation licence for any of the nuclear stations, our gross share of the financial result
from this business (including any contractual arrangements) has been included in the Nuclear sub-segment and hence within the
Generation segment.
● The Group held equity interests in a number of wind farm joint ventures. Although we do not specifically hold a generation licence for
any of the wind farms owned by these entities, our gross share of the financial result from these businesses (including any contractual
arrangements) has been included in the Renewables sub-segment and hence within the Generation segment.
● Where power is purchased from third parties (for example from wind farms, power stations or other bilateral arrangements) and we do
not have an equity interest in, or a finance leasing arrangement (from an IFRS perspective) over the assets that generate this power, the
result related to these activities is excluded from the Generation segment. In all cases, the Generation segment reports direct fuel costs
and generation volumes on a consistent basis (if the purchase cost is a direct fuel cost, then the electricity generated is reported in
volume).
Domestic Supply represents the revenue and associated costs in supplying gas and electricity to residential customers in the UK.
Non-Domestic Supply represents the revenue and associated costs in supplying gas and electricity to business customers in the UK.
As a voluntary disclosure, to aid comparability, a summarised 2015 CSS with margins has been included within the report. The 2015
comparatives for Domestic Supply have been restated to remove the performance of the Connected Home segment which is now
deemed to be a separate business unit and unrelated to the licenced supply business. 2015 total revenue has been reduced by
£7.1 million, EBIT increased by £48.5 million and PAT increased by £39.6 million for Domestic Supply. In addition, 2015 comparatives
have also been restated to reallocate £7.5 million of bad debt charge from Domestic Gas Supply to Domestic Electricity Supply.
Revenues
Revenues, costs and profits of the Licensees have been defined below and prepared in compliance with the Group’s accounting policies
as detailed in notes 2, 3 and S2 of the Centrica plc Annual Report and Accounts 2016, except for joint ventures and associates which are
presented gross (in accordance with paragraph 4(a)/19A.4(a)).
● Revenue from sales of electricity and gas for the Supply segment is recognised on the basis of gas and electricity supplied during the
year to both domestic and non-domestic customers.
● Revenue from sales of electricity and gas includes an assessment of energy supplied to customers between the date of the last meter
reading and the year end (unread). For the respective Supply segments this means electricity and gas sales. Revenue for domestic
supply is after deducting dual fuel discounts where applicable, with the discount split evenly between electricity and gas. Government
mandated social tariffs and discounts, such as the Warm Home Discount, and other social discounts, have also been deducted from
Domestic Supply revenues directly, charged specifically to each fuel.
● Revenue from sales of electricity for the Generation segment is recognised on the basis of power supplied during the year. Power
purchases and sales entered into to optimise the performance of each of the power Generation segments are presented net within revenue.
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Ofgem Consolidated Segmental Statement
BASIS OF PREPARATION
● LEC revenues associated with Renewables are included within sales of electricity and gas because the certificates must be sold
with the electricity.
● The financial risks and rewards of owning and using the Group’s power stations reside entirely in the reported Generation segment.
● Other respective segmental revenues not related to the sale of gas or power have been separately disclosed. Other revenues include:
– £54.0 million (2015: £78.4 million) in Renewables principally relating to the sale of ROCs and services provided to joint ventures;
– Nil in Non-Domestic Electricity Supply relating to connections and metering installations (2015: £3.4 million);
– £81.0 million (2015: £67.8 million) in Domestic Electricity Supply and £77.6 million (2015: £75.8 million) in Domestic Gas Supply
primarily relating to New Housing Connections and smart meter installations; and
– £24.7 million (2015: £11.3 million) in Thermal principally relating to Supplementary Balancing Reserve (SBR), Short Term Operating
Reserve (STOR) and Triad revenue.
Direct fuel costs
Direct fuel costs for both Generation and Supply include electricity, gas, nuclear fuel and imbalance costs.
● Energy supply to Domestic and Non-Domestic energy customers is procured at a market referenced price, through a combination
of bilateral, OTC and exchange-based trades/contracts (see table below). Where energy is procured from within the Group it is also
at a market referenced price on an OTC basis (except for a small number of bilateral off-take contracts between wind farm joint
ventures and the Supply segments) (i). The market referenced prices used are those prevailing at the time of procurement, which
may differ from the price prevailing at the time of supply.
● Domestic and Non-Domestic fixed price products are hedged based upon anticipated demand at the start of the contract period.
The majority of the gas and power for Non-Domestic energy and Domestic energy tariff products is purchased in advance
(see table below).
● The exact Domestic and Non-Domestic purchasing patterns vary in response to the outlook for commodity markets and
commercial factors.
● The Generation segment purchases gas and sells all of its energy at market referenced prices. Gas for CCGTs is procured at market
referenced prices through a combination of OTC and exchange based trades/contracts. The cost to the power stations will reflect
market referenced prices at the time of procurement, and so may differ from the price prevailing at the time of physical supply.
How we procure electricity, gas and carbon:
Long form bilateral
contracts (‘bilateral’)
Individually negotiated contracts with non-standardised terms and conditions which may relate to size,
duration or flexibility. Pricing is predominantly indexed to published market referenced prices, adjusted for
transfer of risks, cost of carry and administration.
Over-the-counter (‘OTC’) Broker supported market of standardised products, predominantly performed via screen-based trading.
These transactions are between two parties, leaving both parties exposed to the other’s default with no
necessary intermediation of any exchange. An internal OTC price may be provided where market liquidity
prevents external trading, with prices that are reflective of market conditions at the time of execution.
Regulated electronic platform (notably ICE, APX, and N2EX) where standardised products are traded on
exchange through the intermediary of the clearing house which becomes the counterparty to the trade.
Membership of a clearing house is required which entails posting of cash or collateral as margin.
Exchange
WACOF/WACOE/WACOG:
● For Generation this represents the weighted average input cost of gas, carbon and nuclear fuel, shown as £/MWh, used by the
Generation business. Gas for CCGTs is procured at market referenced prices through a combination of OTC and exchange-based
trades/contracts. The cost to the power stations will reflect market referenced prices at the time of procurement, and so may differ
from the price prevailing at the time of physical supply.
● For Supply this covers the wholesale energy cost, the energy element of reconciliation by difference (RBD) costs and balancing
and shaping costs incurred by the Supply licensees. Again, gas and electricity is procured at market referenced prices through a
combination of bilateral, OTC and exchange-based trades/contracts. The cost for the Supply business will reflect market referenced
prices at the time of procurement, and so may differ from the price prevailing at the time of physical supply. Where gas is procured
using (predominantly indexed) bilateral contracts, the fuel cost is then allocated between Domestic and Non-Domestic Supply using
annually updated fixed percentages based on the historical split of tariff book volumes. Gas and Electricity balancing costs are allocated
between Domestic and Non-Domestic Supply based on their respective volumes multiplied by an appropriate industry referenced
price (for example APX or SAP).
● For electricity Supply the weighted average cost of electricity is shown as £/MWh. For gas Supply, the weighted average cost of gas
is shown as p/th.
(i)
Internal power off-take contracts are long-term power and associated renewable certificate sales from Generation owned assets to Domestic and Non-Domestic Electricity Supply.
Pricing is indexed to published market prices, adjusted for the transfer of risks specific to the asset.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
211
211
Ofgem Consolidated Segmental Statement
BASIS OF PREPARATION
Direct costs
Direct costs for Supply and Generation are broken down into network costs, environmental and social obligation costs and other
direct costs.
● Network costs for Supply and Generation include transportation costs, BSUOS and the transport element of RBD costs. Supply
transportation costs include transportation and LNG costs, including £40.8 million incurred by Gas Domestic Supply in 2016,
which enables the segment to secure supply by giving the ability to bring gas into the UK from overseas (2015: £42.2 million).
● Environmental and social obligation costs for Domestic Supply include ROCs, FIT and ECO. Non-Domestic Supply includes the
cost of LECs, ROCs and FIT. Within the Domestic and Non-Domestic segments, the costs of LECs, FIT and ROCs are included
within Electricity, and ECO is allocated between Electricity and Gas based on the relevant legislation. Environmental and social
obligation costs for the Generation segment relate to EU ETS carbon emission costs and carbon tax.
● Other direct costs for Generation include employee and maintenance costs.
● Other direct costs for Supply include brokers’ costs and sales commissions when the costs have given rise directly to revenue,
that is, producing a sale. They also include Elexon and Xoserve market participation and wider Smart metering programme costs.
Indirect costs
Indirect costs for Supply and Generation include operating costs such as sales and marketing, bad debt costs, costs to serve, IT,
HR, finance, property, staffing and billing and metering costs (including smart meter costs).
● Indirect costs for the Generation, Domestic and Non-Domestic Supply segments (including corporate and business unit recharges)
are allocated based on relevant drivers which include turnover, headcount, operating profit, net book value of fixed assets and
proportionate use/benefit. For Supply, indirect costs (including corporate recharges but excluding bad debt costs) are primarily
allocated between Electricity and Gas on the basis of customer numbers (Domestic) and sites (Non-Domestic). Bad debt costs are
allocated between Electricity and Gas on the basis of actual bad debt cost by individual contract in the billing system (Domestic),
and on the basis of revenues (Non-Domestic).
● 2015 indirect costs for Nuclear (within the Generation segment) included a one-off pension credit of £18.7 million. For 2016 there was
no such credit.
Other
● For Supply, depreciation and amortisation is allocated between Electricity and Gas on the basis of customer numbers (Domestic)
and sites (Non-Domestic).
● For the purposes of Supply PAT, tax is allocated between Gas and Electricity within both Domestic and Non-Domestic Supply based
on their relative proportions of EBIT. Note 4(c) of the Centrica plc Annual Report and Accounts 2016 provides details of the adjusted
operating profit after tax of the relevant operating segments.
● For the Domestic Supply segment, customer numbers are stated based on the number of district meter point reference numbers
(MPRNs) and meter point administration numbers (MPANs) in our billing system (for gas and electricity respectively), where it shows
an active point of delivery and a meter installation. As a result, our customer numbers do not include those meter points where a meter
may recently have been installed but the associated industry registration process has yet to complete, as the meter information will
not be present in our billing system.
● For the Non-Domestic Supply segment, sites are based on the number of distinct MPRNs and MPANs in our billing system for gas
and electricity respectively.
Transfer pricing for electricity, gas and generation licensees in accordance with paragraph 4(d)/19A.4(d)
There are no specific energy supply agreements between the Generation and Supply segments (apart from a small number of bilateral
off-take (i) contracts between wind farm joint ventures and Domestic and Non-Domestic Electricity Supply segments).
The Group continues to ensure transfer pricing methodologies are appropriate and up to date. In order to meet this requirement, the
Group ensured all transfer pricing and cost allocation methodologies were internally reviewed, updated and collated in a central repository.
Internal Audit performed a limited procedures review of the documentation in January 2015 to give comfort over compliance with the
Ofgem guidelines, with their next review planned for January 2018.
(i)
Internal power off-take contracts are long-term power and associated renewable certificate sales from Generation owned assets to Domestic and Non-Domestic Electricity Supply.
Pricing is indexed to published market prices, adjusted for the transfer of risks specific to the asset.
212
212
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS OFGEM CONSOLIDATED SEGMENTAL STATEMENT
Ofgem Consolidated Segmental Statement
BASIS OF PREPARATION
Treatment of joint ventures and associates
The share of results of joint ventures and associates for the year ended 31 December 2016 principally arises from the Group’s interests
in the entities listed on page 206.
Under paragraph 5 of the Conditions, the information provided in the CSS includes our gross share of revenues, costs, profits and
volumes of joint ventures and associates. In preparing the CSS, joint ventures and associates (which hold a UK generation licence or
exemption) are accounted for as follows:
● our proportionate share of revenues of joint ventures and associates has been included within revenue;
● our proportionate share of the profit before tax of joint ventures and associates has been included within EBIT and EBITDA; and
● our proportionate share of the generation volumes of joint ventures and associates has been included within the generation volumes.
For each of the above items, our share of the income and expenses of the joint ventures or associates has been combined line-by-line
within the relevant item of the CSS.
The Supply segment has investments in associates but because the investees’ businesses do not relate to the sale of gas and electricity,
the share of result (revenue of £0.7 million (2015: £2.0 million), EBIT loss of £0.5 million (2015: £1.0 million loss)) has been included net
within indirect costs rather than gross, on a line-by-line basis.
Exceptional items and certain re-measurements
Mark-to-market adjustments, profits or losses on disposal, restructuring costs, pension past service credits and impairment charges that
have been identified in the Centrica plc Annual Report and Accounts 2016 are excluded from the CSS. For further details of excluded
exceptional items and certain re-measurements see note 7 in the Centrica plc Annual Report and Accounts 2016.
The Nuclear sub-segment result includes a £20.9 million (2015: £19.6 million) profit from the revaluation of contingent valuation rights,
related to the original acquisition of the Nuclear investment. There has also been an inventory write-down of £5.5 million (2015: nil) and a
profit on disposal of the Killingholme power station site of £6.4 million (2015: nil) in the Thermal sub-segment. The Generation segment
includes a net impairment reversal of £1.8 million (2015: £7.3 million charge). These results have been included in the Generation segment
as they are not exceptional in size, nature or incidence, and do not materially change the Generation result.
The Non-Domestic Supply segment includes fines of £9.5 million for billing failures and £4.5 million for delays in smart meter roll-outs
(offset by a £4.0 million provision previously held). These items have been included in the Supply segment as they are not exceptional
in size and do not materially change the Non-Domestic result.
A reconciliation of the Segmental Statement revenue, EBIT, depreciation and Supply PAT to the 2016 audited Centrica plc Annual Report
and Accounts has been included in accordance with paragraphs 4(b) & (c)/19A.4 (b) & (c) and 6/19A.6.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
213
213
Ofgem Consolidated Segmental Statement
RECONCILIATION TO CENTRICA PLC ANNUAL REPORT AND ACCOUNTS
The reconciliation refers to the segmental analysis of the 2016 Centrica plc Annual Report and Accounts in note 4.
Generation
segment
2016
Domestic
Non-Domestic
Electricity
2016
Gas
2016
Electricity
2016
Gas
2016
Notes
Supply segment
–
667.2
161.0
–
–
828.2
9,252.0
–
–
(1,547.3)
2.5
7,707.2
2,030.5
–
–
(32.6)
–
1,997.9
– 3,208.7 4,498.5
–
–
–
–
–
–
685.0
(708.7)
(139.1)
1,459.1
–
–
–
538.8
–
–
–
514.9
–
1,180.3 3,208.7 4,498.5
–
–
1,459.1
–
538.8
–
75.0
(25.9)
–
49.1
810.0
–
–
(257.0)
553.0
50.0
–
–
(0.2)
49.8
–
26.3
(125.9)
–
678.9
–
(3.6)
71.8
–
(125.9)
–
678.9
1.9
–
–
1.9
47.9
–
–
47.9
1
2
3
4
5
6
7
1
3
6
7
)
m
£
(
e
u
n
e
v
e
R
Centrica plc Annual Report and Accounts
Segmental Analysis (i)
UK Home/Business
Central Power Generation
Distributed Energy & Power (DE&P)
Less UK Home Services and UK Business Services elements
Add UK Home Supply intra-segment revenue
Gas and Electricity allocation
Include share of JVs and associates
Exclude intra-segment revenues
Exclude non-Generation elements of DE&P revenues
Add Energy Marketing & Trading (EM&T) optimisation of
generation revenues
Ofgem Consolidated Segmental Statement
Centrica plc Annual Report and Accounts
Segmental Analysis (i)
UK Home/Business
Central Power Generation
Distributed Energy & Power (DE&P)
Less UK Home Services and UK Business Services elements
)
m
£
(
I
T
B
E
Gas and Electricity allocation
Exclude non-Generation elements of DE&P EBIT
Add Energy Marketing & Trading (EM&T) optimisation of
generation EBIT
Ofgem Consolidated Segmental Statement
214
214
STRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATIONFINANCIAL STATEMENTS OFGEM CONSOLIDATED SEGMENTAL STATEMENT
Ofgem Consolidated Segmental Statement
RECONCILIATION TO CENTRICA PLC ANNUAL REPORT AND ACCOUNTS
)
m
£
(
n
o
i
t
a
s
i
t
r
o
m
a
d
n
a
i
n
o
i
t
a
c
e
r
p
e
D
)
m
£
(
T
A
P
Centrica plc Annual Report and Accounts
Segmental Analysis (i)
UK Home/Business
Central Power Generation
Distributed Energy & Power (DE&P)
Less UK Home Services and UK Business Services elements
Gas and Electricity allocation
Include share of JVs and associates depreciation
Exclude non-Generation elements of DE&P depreciation
Ofgem Consolidated Segmental Statement
Centrica plc Annual Report and Accounts
Segmental Analysis (i)
UK Home/Business
Less UK Home Services and UK Business Services elements
Gas and Electricity allocation
Ofgem Consolidated Segmental Statement
Generation
segment
2016
Domestic
Non-Domestic
Electricity
2016
Gas
2016
Electricity
2016
Gas
2016
Notes
Supply segment
–
(26.8)
(15.0)
–
(41.8)
–
(163.2)
16.4
(188.6)
(162.0)
–
–
40.0
(122.0)
(13.3)
–
–
0.1
(13.2)
(54.0)
–
–
(54.0)
(68.0)
–
–
(68.0)
(8.9)
–
–
(8.9)
(4.3)
–
–
(4.3)
672.0
(209.6)
462.4
42.3
(0.2)
42.1
(105.3)
(105.3)
567.7
567.7
1.6
1.6
40.5
40.5
1
3
4
6
1
3
(i)
The table above reconciles the Generation segment to Central Power Generation and Distributed Energy & Power, the Domestic Supply segment to UK Home and the Non-Domestic Supply
segment to UK Business in note 4 to the 2016 Centrica plc Annual Report and Accounts. Also included in note 4 is a reconciliation to the IFRS compliant statutory result reported by the
Centrica plc Group.
Notes:
1. UK Home includes Home Services and UK Business includes Business Services which are non-licensed activities and have been
deducted to reconcile these CSS numbers.
2. UK Home Supply generated revenue of £2.5 million from sales to UK Home Services (EBIT of nil). This revenue is eliminated on
consolidation when reporting UK Home in the Centrica plc Annual Report but must be added back when reporting UK Home Supply
in the CSS.
3. The share of Domestic and Non-Domestic Revenues, Operating Profit (EBIT), Depreciation (including amortisation) and PAT
(adjusted operating profit after tax) as provided in note 4 of the Centrica plc Annual Report and Accounts 2016, has been split
between Gas and Electricity.
4. £685.0 million of revenues relating to the Group’s share of joint ventures and associates in Generation are included in the CSS –
£623.0 million relating to Nuclear revenues and £62.0 million relating to Renewables revenues. £178.1 million of EBIT in the Generation
segment relates to profit from joint ventures (£166.0 million profit relating to Nuclear and £12.1 million profit relating to Renewables).
Additionally, costs relating to the Group’s share of joint ventures and associates: £97.1 million direct fuel costs, £228.2 million direct
costs, £18.4 million indirect costs and £163.2 million depreciation and amortisation are included. The results of joint ventures and
associates are shown separately in the Centrica plc Annual Report and Accounts 2016 in notes 6 and 14.
5. £708.7 million of intra-segment revenues, split £635.9 million between the joint ventures and associates and the Generation segment
(included in the £685.0 million of joint venture and associate revenues) and £72.8 million between the CPG and EM&T segment (related
to power station tolls), are excluded from the CSS.
6. DE&P includes North America and UK & Ireland Distributed Energy. Revenues of £139.1 million, EBIT loss of £26.3 million and
depreciation of £16.4 million have consequently been excluded from the Generation segment of the CSS.
7. £514.9 million of revenues and an EBIT loss of £3.6 million relating to Centrica’s EM&T optimisation are included in the Generation
segment of the CSS.
Centrica plc Annual Report and Accounts 2016
Centrica plc Annual Report and Accounts 2016
215
215
Shareholder Information
This section provides shareholders with key information
to assist in the management of their shareholding.
MANAGING YOUR SHARES
Manage your shares online
We actively encourage our shareholders to receive
communications via email and view documents electronically
via our website, centrica.com. Receiving communications and
Company documents electronically saves your Company
money and reduces our environmental impact.
If you sign up for electronic communications, you will receive an
email to notify you that new shareholder documents are available
to view online, including the Annual Report and Accounts and
Annual Review, on the day they are published. You will also receive
alerts to let you know that you can cast your AGM vote online.
You can manage your shareholding online by registering for
Shareview at shareview.co.uk, a free, secure, online site where
you can access your information and complete a number of
functions including:
• viewing information about your shareholding or
dividend payments;
• updating your records, including changing your address
or bank mandate instructions; and
• appointing a proxy for the AGM.
Centrica FlexiShare
FlexiShare is an easy way to hold Centrica shares without a share
certificate. Your shares are held by a nominee company, Equiniti
Financial Services Limited, however, you are able to attend
and vote at general meetings as if the shares were held in your
own name. Holding your shares in this way is free and comes
with a number of benefits:
• low cost share dealing rates (full details of which are available
on centrica.com, together with dealing charges);
• quicker settlement periods for buying and selling shares; and
• no paper share certificates to lose.
Centrica.com
The Shareholder Centre on our website includes frequently
asked questions and forms that are available to download to:
• change your registered address;
• manage your dividend payments; and
• elect to join the scrip.
A wealth of other information is also available on our
website, including:
• regular updates about our business;
• financial results;
• comprehensive share price information;
• dividend payment dates and amounts;
• share and dividend history; and
• the Company’s Articles of Association.
This Annual Report and Accounts can also be viewed online
by visiting centrica.com/ar16.
General enquiries
Centrica’s share register is administered and maintained by
Equiniti, our Registrar, whom you can contact directly if you have
any questions about your shareholding which are not answered
here or on our website. You can contact Equiniti using the
following details:
Address: Equiniti, Aspect House, Spencer Road, Lancing,
West Sussex BN99 6DA United Kingdom
Telephone: 0371 384 2985*
Outside the UK: +44 (0)121 415 7061
Textphone: 0371 384 2255*
Outside the UK: +44 (0)121 415 7028
Website: help.shareview.co.uk
*
Calls to an 03 number cost no more than a national rate call to an 01 or
02 number. Lines open 8.30 am to 5.30 pm, Monday to Friday (UK time),
excluding public holidays in England and Wales.
When contacting Equiniti or registering via shareview.co.uk,
you should have your shareholder reference number at hand.
This can be found on your share certificate, dividend confirmation
or any other correspondence you have received from Equiniti.
If you hold less than 2,500 shares you will be able to change
your registered address or set up a dividend mandate instruction
over the phone, however, for security reasons, if you hold more
than 2,500 shares, you will need to put this in writing to Equiniti.
Together with Equiniti, we have introduced an electronic queries
service to enable our shareholders to manage their investment
at a convenient time. Details of this service can be found at
shareview.co.uk.
Duplicate documents
If you receive more than one copy of shareholder documents,
it is likely that you have multiple accounts on the share register,
perhaps with a slightly different name or address. To combine
your shareholdings, please contact Equiniti and provide them
with your shareholder reference numbers. This also helps us
to reduce our environmental impact and save paper.
Dividends
Dividends on Centrica shares are usually paid in June
and November. Details of the dividends for the year ended
31 December 2016 can be found in note 11 to the
Financial Statements on page 133.
If you elect to receive cash dividends you are encouraged to
have your dividends paid directly to your bank or building society
account. This means that you will receive the money on the day
it is paid which avoids the risk of your dividend cheque being
delayed or lost in the post. If you do choose to receive your
dividends in this way, an annual dividend confirmation will be
sent to you each year.
If you do not have a UK bank or building society account, Equiniti
is able to pay dividends in local currencies in over 90 countries.
For a small fee, you could have your dividends converted from
sterling and paid into your designated bank account, usually
within five days of the dividend being paid.
216
FINANCIAL STATEMENTSSTRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATION Unclaimed dividends
We have worked with a specialist tracing agency, ProSearch,
over a number of years to identify shareholders whose details
are not up to date and who have outstanding cash entitlements.
During 2015, we extended the tracing programme to identify
shareholders and former shareholders who did not take up the
rights issue undertaken by the Company in December 2008.
The rights issue was on the basis of three new Ordinary shares
for every eight existing Ordinary shares held by shareholders at
the close of business on 14 November 2008. Those shareholders
whose rights lapsed as they did not take up the option would
have received a cash payment equivalent to the number of shares
offered as part of the rights issue. ProSearch will try to contact
shareholders who have not received their cash entitlement.
To ensure you continue to receive all our communications and
mailings, please notify Equiniti when your address details change.
American Depositary Receipts (ADR)
We have an ADR programme, trading under the symbol CPYYY.
Centrica’s ratio is one ADR being equivalent to four ordinary shares.
Further information is available on our website or please contact:
ADR Depositary
Address: BNY Mellon Shareowner Services
PO Box 30170, College Station, TX 77842-3170, USA
Email: shrrelations@cpshareownerservices.com
Website: mybnymdr.com
Telephone: +1 888 269 2377 (toll-free in the US)
Outside the US: +1 201 680 6825
Annual General Meeting 2017 (2017 AGM)
The 2017 AGM will be held on Monday 8 May 2017 at 2.00 pm
at the QEII Centre, Broad Sanctuary, Westminster, London
SW1P 3EE. A separate notice convening the meeting is distributed
to shareholders which includes an explanation of the items of
business to be considered at the meeting.
Share dealing services
If you wish to buy or sell Centrica shares and hold a share
certificate, you can do this by using the services of a stockbroker
or high street bank, or through telephone or online services.
In order to sell your shares in this way, you will need to present
your share certificate at the time of sale. Alternatively, if you hold
your shares through FlexiShare, you can buy and sell through
City House Securities or Equiniti Financial Services Limited.
Details can be found on centrica.com/investorsShareholder-centre.
ShareGift
If you have a small number of shares and the dealing costs or
the minimum fee make it uneconomical to sell them, it is possible
to donate them to ShareGift, a registered charity, who provide
a free service to enable you to dispose charitably of such shares.
More information on this service can be found at sharegift.org
or by calling +44 (0)20 7930 3737.
Capital gains tax (CGT)
The information provided below is primarily for the purpose
of individual shareholders resident in the UK calculating their
personal tax liability. Shareholders who are in any doubt as
to their tax position or who are subject to tax in a jurisdiction
other than the UK should consult an appropriate
professional adviser.
Shareholders who held British Gas plc shares at demerger in
1997 would have received one Centrica share and one BG plc
(subsequently named BG Group plc, prior to the acquisition
of BG Group plc by Royal Dutch Shell plc in 2016) share for
each British Gas plc share held. The base cost distribution
of British Gas plc shares were allocated between Centrica plc
and BG plc, 27.053% and 72.947% respectively.
Due to the range of individual circumstances, shareholders are
advised to contact HM Revenue & Customs or seek independent
advice when calculating their CGT liability. Further information
about CGT can be found at gov.uk/tax-sell-shares or on
our website.
2017 calendar
8 May 2017
Trading Update
AGM
QEII Centre
Broad Sanctuary
Westminster
London
SW1P 3EE
8 June 2017
4.30 pm
Deadline for the receipt
of scrip election forms
from shareholders
29 June 2017
Payment date for
2016 final dividend
12 October 2017
Ex-dividend date for
2017 interim dividend
13 October 2017
Record date for
2017 interim dividend
May 2017
Jun 2017
Jul 2017
Aug 2017
Sep 2017
Oct 2017
Nov 2017
Dec 2017
11 May 2017
Ex-dividend date for
2016 final dividend
12 May 2017
Record date for
2016 final dividend
17 May 2017
Scrip reference
share price set
1 August 2017
Half-year results
announcement
9 November 2017
4.30 pm
Deadline for the receipt of scrip
election forms from shareholders
23 November 2017
Trading Update
30 November 2017
Payment date for 2017
interim dividend
Centrica plc Annual Report and Accounts 2016
217
Shareholder Information
continued
Shareholder fraud warning
Shareholders are advised to be very wary of any suspicious
or unsolicited mail or telephone calls in relation to their Centrica
shares. These may offer to buy shares at a discount, sell your
shares at a premium or offer a free company report. These
communications imply a connection with Centrica and are often
from overseas based ‘brokers’ who are very persuasive and
extremely persistent, with professional websites to support their
activities. Such communications are not endorsed by Centrica
as the Company does not participate in such unsolicited
communication programmes. The calls should be treated as
scams and should be reported to the Financial Conduct Authority
(FCA) so that they can investigate. You are able to do this either
online at fca.org.uk/consumers/report-scam-unauthorised-firm
or by calling them on 0300 500 8082* or +44 (0)207 066 1000*
from outside the UK.
If you do receive telephone calls, emails or letters from Centrica
or from companies endorsed by Centrica and you are unsure
if they are legitimate, please contact our shareholder helpline
for clarification on 0371 384 2985**.
More information can be found on the FCA’s website
fca.org.uk/consumers/scams and scamsmart.fca.org.uk.
*
FCA lines open 8.00 am to 6.00 pm, Monday to Friday (UK time), excluding
public holidays in England and Wales, and 9.00 am to 1.00 pm, Saturday (UK time).
Calls to an 03 number cost no more than a national rate call to an 01 or 02 number.
** Shareholder helpline open 8.30 am to 5.30 pm, Monday to Friday (UK time),
excluding public holidays in England and Wales. Calls to an 03 number cost
no more than a national rate call to an 01 or 02 number.
RANGE ANALYSIS OF REGISTER
Breakdown of shareholdings overall
Range
1–500
501–1,000
1,001–5,000
Over 5,001
Total*
Number
of holdings
423,568
88,559
57,614
6,340
576,081
Percentage
of issued
share capital*
1.7%
1.1%
1.9%
95.2%
100%
*
Excludes shares held in Treasury.
RANGE ANALYSIS OF REGISTER
Breakdown of shareholdings with over 5,001 shares
Range
5,001–10,000
10,001–50,000
50,001–100,000
100,001–1,000,000
1,000,001–maximum
Total*
*
Excludes shares held in Treasury.
Number
of holdings
Percentage
of issued
share capital*
3,875
1,494
157
457
357
6,340
0.5%
0.5%
0.2%
3.1%
90.9%
Share distribution
Shareholder communication
preferences as at 31 December 2016
Shareholder dividend preferences
for the 2016 interim dividend
Number of shares
Number of holdings
Number of shares
Institutions
Individuals
Centrica FlexiShare
Treasury
5,063,443,175
Hardcopy Annual Report
295,871,106
129,215,631
50,833,460
Hardcopy Annual Review
Notice of Availability
Electronic communication
8,664
11,801
531,054
56,073
Scrip dividend reinvestment
1,148,656,041
Bank mandate
Cheque
4,064,969,244
251,963,002
When including Centrica FlexiShare
holders, individual shareholders equate
to 99% of the Company’s registered
shareholders with institutions making up
the remaining 1%. The 99% of individual
shareholders hold 7.7% of the Company’s
issued share capital with institutional
investors holding 92.3%. These figures
exclude shares held in Treasury which
represent 0.9% of the Company’s
issued share capital.
The Company spends over £189,000
on postage of its Annual Report and
Accounts and related documents.
Help us to reduce our costs and to
reduce our environmental impact by
signing up now for electronic shareholder
communications. Register now at
shareview.co.uk and you will be notified
as soon as new shareholder documents
are available online.
If you elect to receive cash dividends
you are encouraged to have your
dividends paid directly to your bank
or building society account. This means
that you will receive the money on the
day it is paid which avoids the risk of
your dividend cheque being delayed
or lost in the post.
218
FINANCIAL STATEMENTSSTRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATION
Additional Information – Explanatory Notes (Unaudited)
DEFINITIONS AND RECONCILIATION OF ADJUSTED PERFORMANCE MEASURES
Centrica’s 2016 consolidated Group Financial Statements include a number of non-GAAP measures. These measures are chosen as
they provide additional useful information on business performance and underlying trends. They are also used to measure the Group’s
performance against its strategic financial framework. They are not however, defined terms under IFRS and may not be comparable
with similarly titled measures reported by other companies. Where possible they have been reconciled to the statutory equivalents from
the primary statements (Group Income Statement (‘I/S’), Group Balance Sheet (‘B/S’), Group Cash Flow Statement (‘C/F’)) or the notes
to the consolidated Group Financial Statements.
Adjusted operating profit, adjusted earnings and adjusted operating cash flow have been defined and reconciled separately in notes 2,
4 and 10 to the consolidated Group Financial Statements where further explanation of the measures is given. Additional performance
measures are used to help explain the performance of the Group and these are defined and reconciled below.
Underlying adjusted operating cash flow
Adjusted operating cash flow is the key metric used to assess the cash generating performance of the Group. Underlying adjusted
operating cash flow makes further adjustments for foreign exchange and the commodity price movements that most impact the Group,
which are outside its control, along with other material one-off items, to provide a comparable year on year measure of cash generation
that more closely reflects business performance.
Year ended 31 December
Adjusted operating cash flow
Commodity price – E&P and Nuclear(i)
Foreign exchange movements(ii)
UK Business working capital recovery
Underlying adjusted operating cash flow
4(f)
2016
£m
2,686
–
–
(357)
2,329
2015
£m
2,253
(397)
77
102
2,035
Change
14%
The commodity price adjustment has been calculated by applying the average achieved price in 2016 to production and generation volumes for 2015 net of taxation.
(i)
(ii) The foreign exchange movement has been calculated by applying the average 2016 rate to the 2015 adjusted operating cash flow net of taxation of entities with functional
currencies other than GBP.
Underlying adjusted operating cash flow is adjusted operating cash flow as defined in note 2 and reconciled in note 4(f). It has been
adjusted for the impacts of commodity price movements on E&P and nuclear assets and foreign exchange movements. It has also been
adjusted for one-off working capital movements in UK Business. This follows billing performance issues after the implementation of
a new system in 2014, impacting the Group’s ability to collect cash from customers and therefore its adjusted operating cash flow.
As a consequence, the working capital movement for UK Business has been removed from underlying adjusted operating cash flow.
E&P free cash flow
Free cash flow is used as an additional cash flow metric for the E&P business due to its asset intensive nature. This metric provides
a measure of the cash generating performance of the E&P business, taking account of its investment activity.
Year ended 31 December
E&P adjusted operating cash flow
Capital expenditure (including small acquisitions)
Net disposals(i)
Free cash flow
4(f)
2016
£m
655
(518)
29
166
2015
£m
787
(715)
14
86
Change
93%
(i)
2016 net disposals include Skene and Buckland (see note 12(d)), Trinidad and Tobago Blocks 1a and 1b and some other small E&P asset disposals.
E&P free cash flow is E&P’s adjusted operating cash flow, as defined in note 2 and reconciled in note 4(f), less the business’s capital
expenditure and net disposals as defined above. Capital expenditure is the net cash flow on capital expenditure and purchases of
businesses (less than £100 million). Net disposals is the net cash flow from sales of businesses, property, plant and equipment and
intangible assets, repayments of loans to, and disposals of investments in, joint ventures and associates, net of investments in joint
ventures and associates.
Centrica plc Annual Report and Accounts 2016
219
Additional Information – Explanatory Notes (Unaudited)
continued
Return on average capital employed (ROACE)
Post-tax ROACE is one of the key performance metrics in the financial framework of the Group and represents the return the Group
makes from capital employed in its wholly owned assets and its investments in joint ventures and associates.
Year ended 31 December
Adjusted operating profit
Share of joint ventures’/associates’ interest and taxation
Taxation on profit – business performance
Exclude taxation on interest
Return attributable to non-controlling interests
Return
Net assets
Less: non-controlling interests
Less: net retirement benefit obligations
Less: net cash and cash equivalents, bank overdrafts, loans and other borrowings,
securities and cash posted/(received) as collateral
Less: derivative financial instruments
Less: deferred tax (assets)/liabilities associated with retirement benefit obligations
and derivative financial instruments
Effect of averaging and other adjustments
Average capital employed
ROACE
4(c)
6(a)
I/S
4(c)
B/S
B/S
22(d)
24(c)
19
16
2016
£m
1,515
(48)
(282)
(120)
5
1,070
2,844
(178)
1,137
3,764
(280)
23
(582)
6,728
16%
2015
£m
1,459
(61)
(286)
(93)
27
1,046
1,342
(164)
119
4,829
592
(417)
2,476
8,777
12%
Change
4ppt
Average capital employed takes the Group’s net assets excluding net debt and deducts the net retirement benefit obligation and other derivative
financial instruments (together with their associated deferred tax balances) because these represent unrealised positions and therefore do not
reflect true capital employed. They are also subject to market driven volatility which could materially distort the ROACE calculation.
220
FINANCIAL STATEMENTSSTRATEGIC REPORTGOVERNANCESHAREHOLDER INFORMATION Glossary
$
Refers to US dollars unless specified otherwise
2P reserves
Proven and probable reserves
AGR
AIP
Algorithm
AOCF
App vending
bbl
bcf
Advanced gas-cooled reactor
Annual Incentive Plan
A procedure or formula for problem solving, based on a
sequence of specified actions or a series of steps
Adjusted operating cash flow
Allows Smart Pay-as-you-go customers to vend
(top-up their meters) via the BG App
Barrels of oil
Billion cubic feet
BSUOS
Balancing services use of system
B2B
B2C
C&I
CCGT
CGU
CHP
CMA
CO2
CO2e
CPI
CRM
CSS
Business-to-business
Business-to-consumer
Commercial and industrial
Combined cycle gas turbine
Cash generating unit
Combined heat and power
Competition and Markets Authority
Carbon dioxide
Universal unit of measurement of the global warming potential
(GWP) of greenhouse gases (GHG) expressed in terms of the
GWP of one unit of CO2e (carbon dioxide equivalent)
Consumer Price Index
Customer relationship management
Consolidated Segmental Statement
Data analytics
Data lake
Data science
DECC
DEEPAC
DRD
DSA
EBT
ECO
EUA
The process of examining data sets to draw conclusions
and insights about the information they contain
Storage repository that holds a vast amount of raw data
Collective processes that enable the review, analysis and
extraction of valuable knowledge and information from raw data
Department of Energy and Climate Change
Direct Energy Employee Political Action Committee
Decommissioning Relief Deed
Decommissioning Security Agreement
Employee Benefit Trust
Energy Company Obligation
European Union allowance (carbon emissions certificate)
EU ETS
European Union Emission Trading Scheme
FCA
FFS
FIT
FVLCD
gCO2/kWh
GDP
GFRMC
HSES
HVAC
IoT
IPIECA
ISA
Financial Conduct Authority
Fixed-fee service
Feed-in tariff
Fair value less costs of disposal
Grammes of carbon dioxide per kilowatt hour
Gross domestic product
Group Financial Risk Management Committee
Health, safety, environment & security
Heating, ventilation and air conditioning
Internet of Things
International Petroleum Industry Environmental
Conservation Association
International Standards in Auditing
This report is printed on recycled silk papers made from 100%
pre and post-consumer waste. The paper mills are based in the
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and certified by the Forest Stewardship Council® (FSC®) and
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Designed and produced by
KPI
kW
kWe
kWh
LEC
LNG
LTIFR
Key performance indicators
Kilowatt
Kilowatt-electric
Kilowatt hour
Levy Exemption Certificate
Liquefied natural gas
Lost time injury frequency rate
Machine learning
Artificial intelligence (AI) that provides computers with the ability
to learn, without being programmed
mmboe
mmth
MPAN
MPRN
mtCO2e
MW
MWe
MWh
MWp
NBV
NGO
NLF
nm
NPS
OECD
OTC
PAC
PIE
PPA
PP&E
ppt
PRA
Million barrels of oil equivalent
Million therms
Meter point administration number
Meter point reference number
Million tonnes of carbon dioxide equivalent
Megawatt
Megawatt-electric
Megawatt hour
Megawatt peak
Net book value
Non-governmental organisation
Nuclear Liabilities Fund
Not measured
Net promoter score
Organisation for Economic Cooperation and Development
Over the counter
Political Action Committee
Pensions increase exchange
Power purchase agreement
Property, plant and equipment
Percentage point
Prudential Regulation Authority
Process safety
Process safety is concerned with the prevention of harm to people
and the environment, or asset damage from major incidents such as
fires, explosions and accidental releases of hazardous substances
PRT
PWR
QPI
RBD
ROC
RPI
SBR
SBU
Petroleum Revenue Tax
Pressurised water reactor
Qatar Petroleum International
Reconciliation by difference
Renewable Obligation Certificate
Retail Price Index
Supplementary Balancing Reserve
Standard bundled unit
SHESEC
The Safety, Health, Environment, Security and Ethics Committee
SPA
STOR
tCO2e
The Code
T&E
TSR
TWh
VAT
VIU
VPP
WBCSD
WRI
Sale and Purchase Agreement
Short Term Operating Reserve
Tonnes of carbon dioxide equivalent
The UK Corporate Governance Code set of principles and
provisions issued by the Financial Reporting Council
Technology & Engineering
Total shareholder return
Terawatt hour
Value added tax
Value in use
Virtual Power Plant
World Business Council for Sustainable Development
World Resources Institute
Disclaimer
This Annual Report and Accounts does not constitute an invitation to underwrite,
subscribe for, or otherwise acquire or dispose of any Centrica shares or other securities.
This Annual Report and Accounts contains certain forward-looking statements with respect
to the financial condition, results, operations and businesses of Centrica plc. These statements
and forecasts involve risk and uncertainty because they relate to events and depend on
circumstances that will occur in the future. There are a number of factors that could cause
actual results or developments to differ materially from those expressed or implied by these
forward-looking statements and forecasts.
Past performance is no guide to future performance and persons needing advice should
consult an independent financial adviser.
CENTRICA PLC
Company registered
in England and
Wales No. 3033654
Registered office:
Millstream
Maidenhead Road
Windsor
Berkshire
SL4 5GD
centrica.com
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