Satisfying the
changing needs
of our customers
Annual Report and Accounts 2017
Group Highlights
Group Financial Summary
(Year ended 31 December 2017)
Group revenue
£28.0bn
2016: £27.1bn
▲3%
£1,252m
2016: £1,515m
▼17%
Adjusted earnings
£698m
2016: £895m
▼22%
Group Key Operational
Performance Indicators
Return on average capital employed
(ROACE)
Total customer account holdings –
Consumer (‘000)(1)(2)
14%
2016: 16%
▼2ppt
£486m
2016: £2,486m
▼80%
▼5%
25,316
2017
26,668
2016
Total customer account holdings –
Business (‘000)(2)
▼6%
1,273
2017
1,352
2016
Statutory profit for the year
attributable to shareholders
Total customer gas consumption
(mmth)
£333m
2016: £1,672m
▼80%
▼3%
11,630
2017
12,022
2016
Adjusted operating profit
Statutory operating profit
Adjusted basic earnings per share
(EPS)
Statutory basic earnings per share
Total customer electricity
consumption (GWh)
12.6p
2016: 16.8p
▼25%
6.0p
2016: 31.4p
81%
▼8%
133,869
2017
144,810
2016
Adjusted operating cash flow
Statutory net cash flow from
operating activities
Direct Group headcount(3)
£2,069m
2016: £2,686m
▼23%
Group net debt
£2,596m
2016: £3,473m
25%
£1,840m
2016: £2,396m
▼23%
▼9%
33,138
2017
36,494
2016
Net exceptional charge after taxation
included in statutory profit
Lost time injury frequency rate per
200,000 hours worked
£476m
2016: £27m (credit)
▼20%
0.36†
2017
0.30
2016
(1) 2016 account holdings have been reduced by 55,000 following data assurance activity of our analytical system.
(2) Consumer customer account holdings now include Connected Home cumulative hubs installed.
Business customer account holdings now include Distributed Energy & Power (DE&P) active customer sites.
2016 figures restated to be consistent.
(3) Direct Group headcount excludes contractors, agency and outsourced staff.
Read more about our Key Performance Indicators
Pages 30 to 31
Assurance We engaged
PricewaterhouseCoopers LLP (PwC)
to undertake a limited assurance
engagement over 22 metrics highlighted
with the symbol ‘†’ throughout our
Annual Report and Accounts 2017.
We are an energy
and services company.
Everything we do is focused
on satisfying the changing
needs of our customers.
Contents
Strategic Report
Centrica at a Glance
Chairman’s Statement
Group Chief Executive’s Statement
2
4
6
10 Our Strategy
12 Our Business Model
14
The Strategic Repositioning
of Centrica
16
Customer Focus
18 Centrica Consumer
24 Centrica Business
30 Key Performance Indicators
32 Responsible Business
39
40 Business Review
48 Group Financial Review
Our Principal Risks and
52
Uncertainties
Our View on Taxation
Centrica
Consumer
Centrica
Business
Read more about Centrica Consumer
Pages 18 to 23
Read more about Centrica Business
Pages 24 to 29
Governance
64 Board of Directors
66 Senior Executives
67
Directors’ and Corporate
Governance Report
78 Remuneration Report
90 Remuneration Policy
98 Other Statutory Information
Financial Statements
Independent Auditors’ Report
102
110 Group Income Statement
Group Statement of
111
Comprehensive Income
112 Group Statement of Changes
in Equity
113 Group Balance Sheet
114 Group Cash Flow Statement
115 Notes to the Financial Statements
190 Company Financial Statements
192
Notes to the Company Financial
Statements
Gas and Liquids Reserves
(Unaudited)
201
202 Five Year Summary (Unaudited)
203 Ofgem Consolidated Segmental
Statement
Other Information
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centrica.com/ar17
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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 48 to 51. See also notes 2, 4 and 10 to the Financial Statements on pages 117 and 118, 121 to 126 and 134 and 135,
for further details of these adjusted performance measures. In addition see pages 216 and 217 for an explanation and
reconciliation of other adjusted performance measures used within this document.
215 Shareholder Information
216
Additional Information
– Explanatory Notes (Unaudited)
Responsible Business
– Performance Measures
218
IBC Glossary
Centrica plc Annual Report and Accounts 2017 | 1
Centrica at a Glance
Our purpose
To provide energy and services to satisfy the changing
needs of our customers.
Our Group structure
Centrica Consumer
UK Home
Supplying competitive and reliable energy to residential
customers in the UK, and providing innovative services and
solutions that help to keep their homes warm and working.
Ireland
Supplying energy and energy services to residential and
business customers across Ireland.
Read more about Centrica Consumer
Pages 18 to 23 and 41 to 42
North America Home
Supplying competitive and reliable energy and providing home
services to customers in North America.
Connected Home
Helping customers get more from their homes, providing
automation, energy management and peace of mind through
our award-winning range of Hive connected home devices,
software and services.
Centrica Business
UK Business
Supplying energy and services to a diverse range of business
customers in the UK, using a variety of products tailored to meet
their differing needs and help them more effectively manage
their energy consumption and costs.
Distributed Energy & Power
Providing industrial and commercial customers with the ability
to use energy more intelligently, giving them the tools to generate
and manage their energy usage under the Centrica Business
Solutions brand.
North America Business
Supplying competitive and reliable electricity and natural
gas commodity and energy services to retail and wholesale
customers across North America.
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.
Central Power Generation
Generating power from our larger gas fired power stations and
our 20% interest in eight nuclear power stations in the UK.
Read more about Centrica Business
Pages 24 to 29 and 43 to 45
Exploration & Production
Through Spirit Energy we are targeting a sustainable, self-
financing Exploration & Production (E&P) business, producing
around 50 million barrels of oil equivalent a year, focused on
the North Sea (the UK, the Netherlands, Norway and Denmark).
Centrica Storage
The Group operates the Rough gas field in the UK North Sea,
which is being converted from a strategic storage asset to
a producing asset before decommissioning.
Read more about E&P and Centrica Storage
Pages 46 to 47
2 | Centrica plc Annual Report and Accounts 2017
Strategic Report | Centrica at a Glance Group snapshot
The world of energy is changing and,
with our chosen businesses, distinctive
propositions and current capabilities,
Centrica is well placed to deliver for its
customers, shareholders and for society.
We aim to be a good corporate citizen
and an employer of choice.
Our areas of focus for growth are Energy
Supply, Services, Connected Home,
Distributed Energy & Power, Energy
Marketing & Trading. We also have a
material Exploration & Production division.
We supply energy and services to over 25
million customer accounts mainly in the UK,
Ireland and North America through strong
brands such as British Gas, Direct Energy
and Bord Gáis Energy, all supported by
around 15,000 engineers and technicians.
We are focused on delivering high levels of
customer service, engagement and loyalty.
Our performance
UK Home
Ireland
Breakdown of
gross revenue
£827m
£781m
investment towards those businesses and
focus on performance delivery, specifically
growing gross margin and driving a further
£500 million per annum of cost efficiencies,
while maintaining financial discipline.
Read more about Our Strategy
Pages 10 to 11
Read more about Our Business Model
Pages 12 to 13
Technology is increasingly important in
the delivery of energy and services to our
customers. We are developing innovative
products, offers and solutions, underpinned
by investment in technology. In 2017 we
announced the creation of a new venture
‘Centrica Innovations’ to identify, incubate
and accelerate new technologies and
innovations.
At the end of 2017, phase one of Centrica’s
repositioning was complete. We have
simplified our business and portfolio.
We now have just three divisions –
Centrica Consumer, Centrica Business
and Exploration & Production. Our asset
portfolio has been materially repositioned.
We delivered our £750 million per annum
cost efficiency programme three years early
and met our net debt targets. We are seeing
encouraging signs of progress in our
customer-facing businesses. In our next
phase to 2020, we will further shift
Breakdown of adjusted
operating profit/(loss)
£8,536m
£9,252m
£819m
£810m
North America Home
£2,722m
£2,702m
Connected Home
£42m
£33m
UK Business
North America
Business
Distributed
Energy & Power
£1,830m
£2,031m
£171m
£161m
Energy Marketing &
Trading
£4,766m
£3,282m
Central Power
Generation
Exploration &
Production
£622m
£667m
£1,600m
£1,642m
£(95)m
£(50)m
£(53)m
£(26)m
£8,158m
£7,664m
£47m
£46m
£119m
£93m
£4m
£50m
£71m
£221m
£104m
£161m
£35m
£75m
£184m
£187m
Centrica Storage
£148m
£93m
£17m
£(52)m
2017
2016
Read more in the Business Review
Pages 40 to 47
Read more in the Group Financial Review
Pages 48 to 51
Centrica plc Annual Report and Accounts 2017 | 3
Chairman’s Statement
2017 was a difficult year for Centrica and,
to my deep regret, for our shareholders.
We are in the midst of a necessarily
ambitious transition: from a diversified
company, back to its core; to a customer-
focused provider of value-added services
and solutions; to a digital partner, providing
data-led insights into the whole energy
experience of our customers; to an offering
that provides products, expertise and
guidance, not simply molecules and
electrons; to a business model in which we
can control our own destiny to a far greater
degree than in the past.
This would be a tough undertaking even in a
benign and supportive political environment.
As it is, the pressures we have faced from
this quarter in our important home market
have raised the degree of competitive
difficulty and created an air of uncertainty
that weighed heavily on our share price
in 2017. I am disappointed that the many
actions we have taken to help vulnerable
customers, bring old tariff models to an
end and reward loyalty have received little
recognition from politicians.
Our response has been to strive to make
Centrica more resilient to our external
environment. This requires a fundamental
repositioning of our organisation, processes
and systems, integrating a hitherto
fragmented structure, always in the service
of our customers. This must all necessarily
be executed at pace, because to stand
still in our fast-moving sector is to invite
obsolescence, and because our employees
understandably want to get to the other side
as quickly as possible. There is a palpable
desire within Centrica to find new ways of
accelerating cultural change, building
innovative capabilities and better meeting
our customers’ expectations at a lower cost.
Accordingly, the business is being rebuilt
on a firm foundation. Underlying everything,
and essential to long-term value creation,
has been the considerable work done by
Iain Conn and his senior leadership team in
focusing on our core businesses of energy
supply and services, and the propositions
which our customers expect today and
desire tomorrow.
4 | Centrica plc Annual Report and Accounts 2017
All the while ensuring that the fundamentals
of change – our purpose, our new values and
new ethical standards – are fresh, relevant
and deep rooted, with safety, compliance
and conduct at the top of our agenda.
The strategic transition is being delivered well
and all of our declared financial targets have
been met. But there have also been areas of
weakness, particularly in our North American
power book during the second half of the
year. The impact of competitive and pricing
pressures here was exacerbated by a
seasonally weak performance from our
North American gas business and the
discovery of an historical accounting issue.
Our control systems are being enhanced
and improved and the accounting issue
was verified as having been a one-off.
But not before deep damage had been
done to confidence in the Company and
its prospects, with commensurate harm to
our share price layered on top of the impacts
of the current political uncertainty. There
was an understandably strong reaction
from investors and doubts emerged
about the detail and deliverability of the
Centrica strategy.
I hope that our Executive team went a long
way to addressing these concerns at the
Preliminary Results in February. They
reminded our stakeholders that the first
phase of our strategic repositioning has been
successfully completed. They reinforced the
point that our Consumer division remains
stable and profitable, with the prospect of
real growth, and that there is further scope
for cost efficiency gains.
They offered explanations, not excuses,
for the performance issues in our Business
division. Above all, they sought to reassure
investors that, through our changing
portfolio, cost efficiency and divestment
options, Centrica has a strengthening
resilience to uncertainty.
As ever, we recognise that the good
governance of the Company is essential to
the delivery of our strategy. So, in that spirit,
let me offer a window into the business of
your Board in 2017: the issues which will
dominate our agendas in the coming year
and our plans to build further on the new
governance approaches to risk mapping,
stakeholder engagement and board
development that we have implemented
in recent years.
The first and key question we revisit at each
meeting, and in the round each October, is
whether we are pursuing the right strategy.
It can be tempting to alter course in the face
of strong headwinds. And this has been the
subject of renewed challenge by your Board
since our trading update in November.
Our strong and shared contention is that
strategy is not about short-term adjustments;
it is about staying true to our purpose and
aligning ourselves with the fundamental
forces – consumer power and choice,
decentralisation and digitisation in particular
– that are changing the energy world,
affecting both our customers and the planet.
So, we believe the answer to be clear.
Nothing has happened to invalidate the
strategy which we set out in 2015.
Our vision is clear,
our determination is
unshakeable, our
governance is robust
and we are confident
that we will return
Centrica to real and
sustainable growth.
Rick Haythornthwaite
Chairman
Strategic Report | Chairman’s Statement In 2018, our focus is very much on strategy
delivery and performance management.
We are concentrating on those things which
we can control and we are prioritising the
performance of our existing businesses over
expansion. We are confident that the shape
of the business we now have is the right one
to deliver growth over time and achieve our
strategic goals.
Meanwhile, we have continued to revise and
refresh our approach to risk management to
ensure that we have a stronger framework in
place as we pursue our strategic objectives.
In 2017, we focused on embedding our
redesigned process. The risk management
framework makes a positive contribution to
good decision-making and business growth
and will be even stronger for the lessons
learnt last year. Your Board discussed all
aspects of our perceived risk exposure,
with particular emphasis on process safety,
political pressures, strategic delivery, cyber-
security, capability development and
leadership succession.
Inextricably linked to leadership succession
is our approach to the attraction and
retention of key people, a component of
which relates to their remuneration. This year
we are putting a new Remuneration Policy to
the vote at our Annual General Meeting and
have sought, through extensive dialogue,
to understand and reflect the evolving
consensus of the body of our investor base.
We recognise in our recommended Policy
an increasing investor discomfort with
reward for input if and when performance
outcomes are lagging.
So, we are proposing that annual bonuses
should be more closely tied to shareholder
experience, regardless of the quality and
intensity of the Executive team efforts. Longer-
term reward remains very much aligned to the
fortunes of shareholders, with deferred stock-
based schemes ensuring that only sustained
performance and growth is rewarded. But to
strengthen this link further, we are proposing
to add a Total Shareholder Return measure
to the Long Term Incentive Plan. More details
are set out in the revised Remuneration Policy
on pages 90 to 97 of this report.
Throughout 2017, our Executive team
worked tirelessly to deliver the first phase of
the strategic transformation and, in the eyes
of your Board, exceeded our expectations
in their ability to close difficult divestments,
navigate complex changes in the
organisation in a very sensitive manner and
bring home promised efficiency gains three
years ahead of schedule. But that good
strategic work was overshadowed by the
disappointed expectations of short-term
performance and the impact of UK
government pressure, with the net result of
a significant fall in the value of your Company.
Our current Remuneration Policy would
have resulted in significant annual bonuses,
though considerably less than last year, even
after adjustment for the effects of weather
and commodity prices. The impact of the
painful shareholder experience of 2017
would have had little impact on the
calculated outcome. The newly proposed
Remuneration Policy goes some way to
redressing this mismatch. But, pending its
adoption, your Board decided that discretion
should be exercised under the current policy
to reflect recent events, even though a
significant portion of the impact was beyond
the control of the Executive team.
Accordingly, no annual bonuses or pay
rises were awarded to the Executive
Directors for 2017 and, provided the new
Remuneration Policy is adopted, stock awards
under the forthcoming Long Term Incentive
Plan will be reduced. This reinforces the
broad and collective accountability of the
Executive leadership.
In other matters, your Board spent much
time over the past year ensuring that the
business has the right teams in place with
the right leadership style to achieve our
strategic objectives. The future of our
Company depends on having the best
talent and on the motivation of that talent.
Once again, our people have surpassed
my expectations and I would like to thank
them for all their hard work.
But we, as the leaders of this business,
must do more to support our own people.
Employee engagement levels fell again in
2017 as the transition process continued.
Our Gender Pay Statement showed that
women at Centrica are paid on average 12%
less than men, although we have a strong
track record of equal pay for equal work.
This gap can be explained in part by the
legacy of traditionally male-dominated field
engineering roles in our business. But it must
be closed and we are committed to doing so.
So, I have asked our Non-Executive Director,
Joan Gillman, to undertake a review of key
employee matters and how we might assure
ourselves that the voice of our people is
being heard loud and clear in the boardroom.
Joan has wide-ranging experience in the
media and communications sector, with
a very evident empathy towards the
importance of engagement, teamwork and
diversity. Her review will allow her to bring
more Centrica-specific content to her
boardroom contributions and challenge.
We bade farewell to Lesley Knox who
stepped down after six years of much
appreciated service as a Non-Executive
Director, for which she has our sincere
gratitude. We are in the process of seeking
a successor who will bring, not only digital
insights into customer segmentation and
journeys, but also the voice of the customer
into the boardroom, ensuring that we avoid
circularity and insularity of thinking.
To that end, we in particular need to focus
more on our weakest performance if we are
truly to improve customer experience levels
and open up the powerful possibility of our
customers becoming our advocates. This
is the most reliable route to dealing with the
trust gap that confronts business as a whole
and the energy supply sector in particular.
As Board members, we all have personal
experience of handling complaints from
customers who contact us directly. We
cannot help but be affected by what we
sometimes hear. But the flow is still too
anecdotal to be helpful in holding the
Executive team to account on its drive to
improve service. So, once recruited, I will be
asking our new Non-Executive Director to
consider how best to keep our boardroom
dialogues deeply connected to our
customers, their needs and our responses.
In summary, what we are trying to achieve
at Centrica is not easy. In fact, it is one of the
most ambitious changes attempted by any
company in one of the most competitive and
challenging sectors of the economy. But we
are not doing this out of ambition. We are
doing this because it is absolutely necessary
for the future of this business that we adapt
to the changes in the energy landscape and
that we find new ways to meet the changing
needs of our customers.
We believed this in 2015 when we set out our
new strategic direction. We believe it now.
Our future is in the hands of our customers
and, by extension, our own hands. We may
occasionally stumble on the road and be
jostled by powerful external forces. But
our vision is clear, our determination is
unshakeable, our governance is robust
and we are confident that we will return
Centrica to real and sustainable growth.
Rick Haythornthwaite
Chairman
21 February 2018
Read more about Corporate Governance
Pages 67 to 77
Centrica plc Annual Report and Accounts 2017 | 5
Group Chief
Executive’s Statement
2017 was a challenging year for Centrica.
Our performance in the second half was weak,
particularly in Business energy supply.
This, combined with uncertainty around
our future prospects in UK energy supply,
significantly amplified by the Prime Minister’s
announcement in October that the UK
Government would pursue a market-wide
price cap of the Standard Variable Tariff (SVT)
and other default tariffs, resulted in a
significant fall in our share price in 2017,
particularly over the fourth quarter.
Some of the drivers were clearly beyond our
control. But clearly we regret the outcome
and the impact it has had on our shareholders
and on our employees. I am determined to
restore shareholder value and confidence.
The underlying trends driving our strategy
are clear, as are the distinctive capabilities
we have to benefit from them. We are
committed to delivering attractive returns
and growth over the medium term. Our focus
today is on performance delivery and financial
discipline – on demonstrating top line growth
as we deliver improved service and new
propositions for our customers, and driving
efficiency as hard as possible to underpin
our competitiveness.
Although we delivered our 2017 published
targets in terms of operating cash flow, cost
efficiency and headcount reduction, capital
discipline and net debt, our financial results
were disappointing. Adjusted operating profit
at £1.25 billion was down 17%, earnings
were down 22%, at £698 million, equivalent
to 12.6 pence per share. Adjusted operating
cash flow was £2.07 billion. EBITDA of
£2.14 billion was down 9%.
We delivered a disappointing result in our
North America Business operation. This
was both in terms of the performance of
our power supply book and from a charge
relating to historical revenue recognition
in one of our billing systems going back to
2013. Performance in UK Business energy
supply was also poor. Adjusted operating
profit for Centrica Business as a whole was
down 67%.
6 | Centrica plc Annual Report and Accounts 2017
However, Centrica Consumer delivered
robust performance with adjusted operating
profit down only 1% despite the impacts of
warm weather, the UK Government pre-
payment tariff cap, competitive intensity
and investing for growth.
Despite the setbacks, the foundations of our
businesses remain strong. We believe our
business model is – and will continue to be –
resilient, even under the pressures we face.
Our strategy is clear. It is founded on an
analysis of market trends and sources of
growth, on our own capabilities and the
efficiency necessary to pursue them profitably.
Centrica is an energy and services company.
Our purpose is ‘to provide energy and
services to satisfy the changing needs of our
customers’. This is the core of the Company
and we have been supplying energy and
services to customers since 1812. We are
re-emphasising and returning to that core.
However, it is not 1812, the needs of
customers are indeed changing, and as
we deliver for them the propositions we
offer must change too.
Globally, the energy system is becoming
more decentralised, customers are
becoming more powerful because of
increased choice, and technology is
accelerating the pace of change. These
trends, which we identified when we
launched our new strategy in 2015, are even
clearer today and are playing out in line with
our views at the time. We are in step with
where the energy world is going and the
services which our customers desire. We
do not believe that anything has happened
since 2015 to invalidate our strategy or the
core strengths of the Company.
As a result, Centrica is focusing more
investment on the customer-facing
businesses. We are also becoming simpler
as an organisation. We now have only three
divisions, Centrica Consumer, Centrica
Business and Exploration & Production
(E&P). Each has a clear participation strategy
and strategic framework. The reason we have
established Group-wide Consumer and
Business divisions is that we have found
that customer needs are very similar globally,
and they are seeking more than simply
energy supply.
Our focus today is on
performance delivery
and financial discipline
– on demonstrating top
line growth as we deliver
improved service and
new propositions for our
customers and driving
efficiency as hard as
possible to underpin
our competitiveness.
Iain Conn
Group Chief Executive
Strategic Report | Group Chief Executive’s Statement What we are doing is not a radical departure
from our roots; it is a natural extension
of who we are and what we are good at.
Through installing boilers, heating systems
and their controllers we have always been
in the ‘home energy management’ business.
Our development of Hive, starting with the
digital thermostat and the intelligent boiler,
is the next phase in the evolution of home
energy management and a direct extension
of our in-home services business.
We are finding that consumers want these
propositions and are willing to pay for them.
We are also finding that many customers
value receiving these services from the same
provider as their energy supply. The same
principles apply to our business customers.
The new propositions and services we have
developed are not a distraction or somehow
unrelated to our legacy businesses. They are
at the heart of what our legacy offerings have
to incorporate and what the most valuable
customer segments are demanding.
In our Consumer division, revenues have
been stable and unit gross margins are
attractive. We did see a fall of 1.35 million
customer accounts during 2017. We have
made active choices on which channels
and customer segments we are seeking
to engage, retain and serve. We do not like
losing any customers but most of these
customer accounts generated very low
gross margin and were loss-making at the
operating profit level.
In contrast, while we have seen some losses
in higher value accounts, in 2017 we were
successful in encouraging a net approximately
700,000 UK energy accounts from the
SVT to our fixed-term tariffs. We have seen
material growth in new services and
relationships. We saw 18% growth in
protection plans in the US. In Connected
Home we saw cumulative installed hubs
grow by 71% to 900,000 over 2017. We
exceeded our target of 1.5 million products
sold. Connected Home continues to grow
in all of our energy supply geographies, and
our first international partnership with Eni
gas e luce in Italy will see its full commercial
launch in April.
Our Local Heroes scheme has grown rapidly
from its launch at the beginning of last year.
We now have 7,000 tradespeople signed
up, backed by our guarantee, and we have
now completed over 25,000 jobs. This on-
demand offer continues to accelerate and it
complements our own contract relationships
through British Gas.
We have also seen the number of British Gas
services accounts deliver the first year of
stability since 2010. Accounts grew by
77,000 in the second half, reversing the fall
we saw in the first half. In addition, 700,000
customers have so far signed up for British
Gas Rewards, enabling us to enhance
the relationship and proposition for our
loyal customers in combination with our
other offers.
In our customer businesses, our goal is to
focus on value, not volume, retaining and
engaging our customers while continuing
to drive costs down to maintain margins.
This is what we will concentrate on across
the Centrica Consumer portfolio as we
extend the propositions we can offer our
customers with the goal also to stabilise and
grow the total number of relationships we
have. We believe we can continue to make
progress, even in the face of further price
regulation in the UK.
As we have made clear, we do not support
price controls in competitive retail energy
markets and we believe they will not
ultimately benefit customers. We believe
price caps will reduce competition and
choice, and prices tend to ultimately
converge around the cap level. Instead,
to improve the market our focus is on
increasing customer engagement, driving
cost efficiency, improving service levels,
on rewarding loyalty and on delivering
propositions that customers want.
Last year, we announced a package of
actions and proposed measures to reform
the UK energy market for the long term and
really benefit customers, without the need for
price controls. At its heart are our decision to
withdraw the British Gas SVT and our call for
the UK Government and the regulator to ban
this sort of rolling tariff across the industry.
We will introduce new, attractive fixed-term
propositions including fixed-price, online only
and bundled tariffs. We will introduce a new
default tariff and increase choice to try to
avoid people going onto a default tariff in the
first place. Allied to a greater range of choice
for customers and simpler bills, we think
these measures will be far more effective
in improving the market for customers than
any price caps.
However, given the prospect of default tariff
cap legislation we are taking a number of
steps to reduce our relative exposure to price
caps and their impact on Centrica. We will
reduce our exposure to a cap, using our
recent efficiency to continue to price
competitively and to drive further cost
reductions. We had 4.3 million customers
on SVTs at the end of 2017 and we expect
to reduce this to 3 million by the end of this
year as the measures described above take
effect. Secondly, as a result of our own cost
efficiencies and other actions to date,
our current SVT is cheaper than 85% of
the market and is £41 a year below the
average SVT of the large suppliers. Thirdly,
our efficiency programme will deliver an
additional estimated saving of £20 per dual
fuel customer by 2020.
Taking all of this together, and recognising
that the formula for any potential cap is not
yet known, we believe that we can deliver
a sustainable energy supply business in
the UK with healthy returns under most
conceivable scenarios.
Turning to Centrica Business, we have
continued to develop our business across
the five pillars of our divisional strategic
framework. We find that in addition to the
commodity offerings of energy supply and
energy wholesale, business customers
want access to more distributed energy
generation solutions, and we are moving
from building large central power generation
plants to many smaller distributed units.
Our customers want combined heat and
power units, solar arrays and the grid
operators want distributed power systems
and technology to assist with the optimisation
of local energy markets and micro-grids.
Along with this, customers want to be able
to gain insight from their energy use to save
money and improve their operations,
including in preventative maintenance.
Customers who have distributed energy
assets want to be able to optimise them
and are willing to pay for optimisation
services rather than do it themselves.
We have responded to these needs by
developing capabilities in all of these areas,
both organically and through targeted
acquisitions of Panoramic Power, ENER-G
Cogen, Neas Energy and REstore. We have
also expanded our distribution and sales
capability and built a new marketing platform
for business customers under the brand
Centrica Business Solutions.
Centrica plc Annual Report and Accounts 2017 | 7
Energy stronger and more sustainable and
we will now target further consolidation. We
would be open to having a lower ownership
percentage in a larger entity, provided our net
E&P exposure remains broadly unchanged
and we retain sufficient influence to shape
the strategic direction of the business. We
would therefore also be prepared to own less
than 50% of Spirit Energy if the right
opportunity came along.
We also concluded that our Rough storage
asset was no longer capable of safe injection
operations due to its age and condition and
that, because of the economics of seasonal
storage and the cost of refurbishing or
rebuilding the facility, neither pathway would
be economic. We therefore decided that we
can no longer operate Rough as a storage
facility and have now received all relevant
consents and approvals to extract the
recoverable gas from the reservoir. In the
past, Rough has made a vital contribution
to the nation’s security of supply. But today,
the UK is fortunate in benefiting from a
diverse range of energy sources.
Centrica is halfway through a six-year strategic
repositioning of the Company and I would
now like to summarise what has been
delivered during the first phase since 2015.
We have continued our reallocation of
resources away from the asset businesses
towards our customer-facing activities. We
have made divestments of over £900 million
and reduced capital allocation to E&P by
£300 million per annum while investing an
Key events in 2017
additional £700 million across 2016 and 2017
in the customer-facing businesses. This has
enhanced our capabilities and technologies,
leaving us well positioned to capitalise on
consumer trends.
We have been successful in reducing costs.
We have delivered our £750 million cost
efficiency programme three years early.
We have also set out plans for further
significant cost reductions, totalling an
additional £500 million a year by 2020, which
will release more savings to support our aim
of becoming the most efficient price setter
for our chosen propositions and brands.
We have reduced our net debt to less than
£2.6 billion, in the lower half of our target end
2017 band, and our credit metrics are at levels
currently required for the strong investment-
grade credit ratings that we aim for.
As we look forward to 2018/20, although
we have still got some portfolio development
to complete, the focus is on performance
delivery and financial discipline. In
performance terms, it is about growing
gross margin through our customer
relationships, and driving the next phase
of cost efficiency. We will also be focusing
on improving organisational effectiveness
and securing the capabilities we need in
2020 and beyond. We must do all of this
while continuing to deliver improvements
in safety, compliance and conduct and in
operational excellence across the Company,
starting with customer service.
13 January
Centrica announces
sale of its remaining
wind farm joint venture
20 February
Centrica launches new
innovations venture,
Centrica Innovations
April
Hive thermostat
introduced in US, and
subscription model
launched in UK
Read more on
Page 45
Read more on
Page 15
Read more on
Page 20
08 February
Centrica announces
global Consumer and
Business divisions
22 February
British Gas unveils
Rewards, its major new
loyalty programme
09 June
Centrica agrees the
sale of its Canadian
E&P business
Read more on
Pages 19 and 41
We have also disposed of our large gas fired
generation plants and our two large wind
farms and continued to shift our portfolio to
more distributed assets. We have converted
some sites to peaking plant and have several
projects underway to build new gas fired
rapid response generation sites, as well as
constructing a battery storage facility which
is one of the largest in Europe. We also aim
to divest our shareholding in UK nuclear
power. Subject to ensuring alignment with
our partner, and being very mindful of UK
Government interests in this area, we would
hope to achieve this by the end of 2020.
The business customer is also on the
move and we are responding to their needs.
They want more than just commodity
energy supply, and the new capabilities
and propositions we have developed once
again reinforce the core of the relationship.
The returns in value-added services tend
to be higher than in pure commodity
energy supply.
The big message, therefore, whether in
Centrica Consumer or Centrica Business,
is that the new propositions and services
we have developed are at the heart of what
Centrica’s core offerings in energy and
services now have to incorporate. They are
at the heart of what important and valuable
customer segments are demanding.
Centrica has now developed the capabilities
to offer them in a high-quality way. We are
seeing improvements in the customer
experience and the growth in demand
is feeding through to revenues and at
attractive margins.
Since we embarked on our new strategic
direction we have made a number of
acquisitions to provide the key capabilities
we did not already have in-house. These
acquisitions have all met, and in some
cases exceeded, our expectations. We have
widened the footprint of the Group beyond
the UK and North America to serve
customers in 40 countries. However, in the
last three months of 2017 the risk envelope
for Centrica changed, and as a result, we will
not be pursuing growth through major M&A
activities. This is because the uncertainty
over the UK price cap is too great and we
wish to maintain our hard-fought balance
sheet strength. We will, however, continue
to pursue smaller bolt-on acquisitions to
build capability in key areas.
In our asset businesses we have made
divestments of over £900 million – towards
the top of our target range – and reduced
capital investment into them. Last year,
we combined our E&P operations with
Bayerngas Norge AS, and the new business,
Spirit Energy – in which we hold a 69% stake
– began trading as an independent oil and
gas operator. Our goal is to make Spirit
8 | Centrica plc Annual Report and Accounts 2017
Strategic Report | Group Chief Executive’s Statement2017 We will be targeting delivery, on average,
of £2.1–£2.3 billion of adjusted operating
cash flow per annum. We believe this is
deliverable, even taking into account a
potential price cap, for the reasons outlined
earlier. But there remains a risk that a
particularly severe cap impact in the first
year may put this target at risk for 2019.
As we continue to focus on financial
discipline we will be limiting capex to no
more than £1.2 billion per annum and
targeting to maintain net debt within a
£2.25–£3.25 billion range. Despite current
pressures, we expect to continue to be able
to balance sources and uses of cash in 2018,
without materially affecting our ability to
invest in the business and deliver on all
aspects of our financial framework.
In terms of the dividend, we have indicated
since 2015 that it would be linked to operating
cash flow and we expect to maintain the
current level of the dividend over the period
2018/20, subject to meeting our adjusted
operating cash flow and net debt targets.
We believe we can manage within both these
constraints under most scenarios based on
our current projections, but clearly, there are
always risks associated with extremes of
commodity price movements and regulatory
interventions. We would intend to restore a
progressive dividend only when, in addition
to the criteria already mentioned, underlying
cash flow growth capability is demonstrated.
The transformation of Centrica is also about
the values which guide us as we go about
our daily business. In 2017 we launched a
new set of Group-wide values – ‘our Values’
of Care, Collaboration, Courage, Delivery
and Agility – and in January this year we
launched ‘Our Code’, which replaces the
Business Principles and other codes of
conduct within the Group. We wanted
a clear, unified statement of the most
important principles and expectations which
apply to all of us. In essence, ‘our Values’
and ‘Our Code’ embody what we stand for.
We hope that they will help all of us at
Centrica make the right decisions.
The transition we are making has not been
easy for our team. Our people have faced,
and will continue to face, a number of new
challenges. But they have shown extraordinary
resilience, passion, commitment and talent,
and I would like to thank each of them for all
their contributions over the past year.
The first phase of our strategic repositioning
is complete. We have strengthened the
balance sheet, paid down debt, matched
our sources and uses of cash, and refocused
resources and capability towards the
customer. But we are only halfway through
a six-year repositioning and we must stay
the course.
The next phase to 2020 is all about
performance delivery and financial discipline,
as we marry customer-led gross margin
growth with continuing to drive material
levels of cost efficiency while maintaining
capital discipline and a strong balance sheet.
It is this combination, our track record to
date and an excellent and committed team
which give us confidence to pursue our
medium-term goals of delivering growth
and returns through satisfying the changing
needs of our customers, deal with the
uncertainties posed by any default tariff
cap in the UK and indicate a stable dividend
outlook within defined boundary conditions.
It is undeniable that at present Centrica
faces a higher level of external uncertainty.
It is therefore imperative that we focus
on the things we can control to underpin
our performance.
This is how we will rebuild shareholder
value and confidence, and I am determined
to demonstrate this through our actions,
one step at a time.
Iain Conn
Group Chief Executive
21 February 2018
12 June
Centrica announces
national roll-out of
industry-first Local
Heroes
Read more on
Pages 21 and 41
21 June
Centrica announces sale
of Langage and South
Humber Bank gas fired
power stations
01 August
British Gas extended price freeze ends;
increases electricity prices on the
standard tariff by 12.5% but protects its
most vulnerable customers from the rise
14 November
Centrica announces
expansion of
Connected Home
business into Italy
11 December
Spirit Energy launched,
following completion of
Centrica and Bayerngas
Norge E&P joint venture
Read more on
Pages 20 and 42
Read more on
Pages 15 and 46
spirit-energy.com
2018
03 November
Centrica acquires Europe’s
leading demand response
aggregator REstore
20 November
Centrica sets out
proposals for UK
Energy Market reform
12 December
CMA terminates
Rough undertakings
at Centrica Storage
Read more on
Pages 28 and 44
Read more on
Page 18
Read more on
Page 47
centrica.com/energy
marketproposal
Centrica plc Annual Report and Accounts 2017 | 9
2017 Our Strategy
Strategic context
In 2015 our Strategic Review was founded on an analysis of market trends
and sources of growth, and the capabilities and efficiency necessary to
pursue them profitably.
The three fundamental trends we identified and which are changing the energy
landscape – decentralisation, shifting of power to the customer and digitisation
– are even clearer today and are playing out in line with our views at the time.
Three macro-trends are driving
the energy transition
Consumers and business customers show
similar trends across all global markets:
Decentralisation
Globally, as we pursue lower carbon and more efficient
solutions, the energy system is becoming decentralised
with more technologies available and viable, close to
the customer.
Power to the customer
As a result of increased choice and alternatives, the
customer is becoming more powerful. Owning the
relationship with customers and satisfying their needs
is fundamental.
Digitisation
Technological developments, both physical and digital,
are accelerating the pace of change. Capability in these
areas is key to keeping up with customers and their
changing needs.
These trends demand more decentralised technologies and
propositions, more customer intimacy and better service, more
agility and stronger technology capability.
The result of all these changes is that the customer is increasingly
powerful. That is why, at Centrica, we have put ‘satisfying the
changing needs of our customers’ at the heart of our strategy.
Market trends
• Global demographic
changes
• Adoption of technology
• Mobile first
• Self-service
• Traditional competitive
boundaries blurring
• Growth of data and
analytics
Customers need
• Value for money
• Solutions not just
products
• Frictionless service
• Trusted brands
• Responsible use
of data
Read more about Centrica Consumer
Pages 18 to 23 and 41 to 42
Market trends
Customers need
•
•
•
•
•
Volumes per
customer reducing
Margins under
pressure
Gas becoming global
Mega-trends
impacting energy
sector
Electricity system
becoming more
local
Read more about Centrica Business
Pages 24 to 29 and 43 to 45
•
•
•
•
•
Reduced cost and
increased productivity
Supply security and
resilience
An expert partner to
guide them through
complexity
A trusted and credible
counterpart
Not to be distracted
from their main activity
10 | Centrica plc Annual Report and Accounts 2017
ConsumerBusinessStrategic Report | Our Strategy Strategic approach
To deliver the strategy we announced in July 2015, we set ourselves
a number of medium-term objectives to 2020. We have organised the
Group to deliver customer-led growth through two global customer-facing
divisions and refocused our Exploration & Production business.
Our Strategy:
• To deliver for the changing needs of our customers
• To deliver long-term shareholder value through returns
and growth
• To be a trusted corporate citizen
• To be an employer of choice
• To be a 21st century energy and services company
Our strategic objectives:
• Customer-led growth
• Smaller and more focused E&P business
• £1.5 billion resource reallocation from E&P and Central
Power Generation to customer-facing businesses 2015/20
• £750 million per annum efficiency programme delivery
by 2020
• Strong financial discipline within a clear framework
• Adjusted operating cash flow growth of 3-5% per annum
Our focus areas for long-term growth:
• Energy Supply
• Services
• Connected Home
• Distributed Energy & Power
• Energy Marketing & Trading
We already have some or all of the characteristics of material market share,
ability to manage large customer books and risk, strong product brands, leading
capabilities and emerging products and offerings in these focus areas.
Identifying and managing risk is essential to delivering our strategy
Read more about how we manage risk
Pages 52 to 62
Customer-facing
divisions
In 2017, we reorganised the Group around
the customer, creating two new, customer-
facing divisions: Centrica Consumer and
Centrica Business. The customer needs
addressed by each division are global.
We have built strategic frameworks around
those needs that go beyond energy supply
and target those areas where we believe we
have real competitive advantage.
Strategic pillars
1. Energy supply
2. In-home servicing
3. Peace of mind
4. Home energy management
5. Home automation
1. Energy supply
2. Wholesale energy
3. Energy insight
4. Energy optimisation
5. Energy solutions
Exploration & Production
Exploration & Production (E&P) will continue
to play an important role for Centrica, but
a more focused one. E&P provides diversity
of cash flows and is a source of balance
sheet strength. Following our divestment
programme, the formation of Spirit Energy,
and conversion of the Rough field to a
producing asset, our E&P business will
now be focused on Europe.
Centrica plc Annual Report and Accounts 2017 | 11
ConsumerBusiness 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 interact with the customer and are
fundamental to our success.
Our remaining two business units, 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.
Our customer-facing strategic framework
1. Energy supply
• Gas supply
• Electricity supply
2. In-home
servicing
• Cover products
(protection plans,
warranties)
• On demand repair
and maintenance
Installation (heating
and air con)
•
Read more about Centrica Consumer
Pages 18 to 23 and 41 to 42
3. Peace of mind
• Home insurance
• Home security and
monitoring
• Remote diagnostics
4. Home energy
management
• Energy insight
• Energy efficiency
• Energy optimisation
• Energy solutions
5. Home
automation
• Home control
• Appliance control
1. Energy supply
• Gas supply
• Electricity supply
2. Wholesale
energy
• Trading partner
• Energy
commodities
and risk products
• Central power
generation
•
3. Energy
insight
Energy resource
management
and monitoring
• Operational insights
from energy data
• Preventative
maintenance
4. Energy
optimisation
• Asset optimisation
• Aggregation and
optimisation of
distributed energy
resources
• Access to energy,
capacity and
flexible markets
5. Energy
solutions
• Multi-technology
solutions
• Design, install,
maintain and
service
• Business services
Read more about Centrica Business
Pages 24 to 29 and 43 to 45
12 | Centrica plc Annual Report and Accounts 2017
Centrica ConsumerCentrica BusinessStrategic Report | Our Business Model Our Group Priorities
We are focused on five key priorities to deliver
our strategy and we align performance and
risk management processes around these,
including our Key Performance Indicators.
Safety, compliance
and conduct
Customer satisfaction and
operational excellence
Cash flow growth and
strategic momentum
Cost efficiency and
simplification
People and building
capability
Read more about Key Performance Indicators
Pages 30 to 31
Read more about Risk
Pages 52 to 62
Read more about Remuneration
Pages 78 to 97
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 52 to 62.
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.
Our stakeholder commitments
Customers
Help customers save time and money by delivering excellent
customer service alongside innovative products and services.
Employees
Create a great place to work with a diverse and inclusive
culture where our people feel motivated and able to achieve
their full potential.
Investors
Deliver long-term shareholder value through financial returns
and growth.
Society
Provide competitive energy prices and support for those who
struggle to pay for their energy.
Regulators and government
Secure a more affordable and clean energy future through
engagement while contributing positively to economic growth
and tax receipts.
Suppliers
Treat our suppliers fairly and maintain high social, ethical and
environmental standards in the products and services we buy.
Read more about Responsible Business
Pages 32 to 38
Adjusted operating cash flow
(AOCF)
3-5%
Dividend
Progressive in line
with AOCF
Controllable costs(1)
Cost growth < inflation
Return on average capital
employed (post-tax)
10-12%
Capital reinvestment
Investment < 70%
of AOCF
Limited to
£1.2bn
per annum from 2018/20
Credit rating
Strong investment grade
(Baa1/BBB+ or above)
(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, the impact of
portfolio changes and foreign exchange movements). Like-for-like controllable costs
are controllable cost of sales, excluding the impact of portfolio changes, foreign
exchange movements and growth investment in Connected Home and Distributed
Energy & Power, and adjusted operating costs, excluding growth investment in
Connected Home and Distributed Energy & Power.
Centrica plc Annual Report and Accounts 2017 | 13
The Strategic Repositioning
of Centrica
1. Stronger and
more resilient
We have
fundamentally
repositioned
Centrica
2. Capable of
delivering
customer-led
growth
3. Focused on
delivering returns
and growth
Shifting resources to customer-facing businesses
Acquisitions
As part of our customer-led strategy, we
announced that we would commit about
AlertMe (Connected Home)
£1.5 billion of additional operating and capital
Mar-2015
resources by 2020 to drive growth in our
focus areas, broken down as follows:
Panoramic Power (DE&P)
Nov-2015
£37m Provides the technology that underpins Connected Home activity
£39m Leading provider of device-level energy management solutions
£138m Established supplier and operator of combined heat and power
solutions
£18m An early stage UK-based business developing unique and innovative
technology to remotely detect water leaks
£184m One of Europe’s leading providers of energy management
and revenue optimisation services for decentralised third-party
owned assets
£59m Europe’s leading demand response aggregator
ENER-G Cogen (DE&P)
May-2016
FlowGem (Connected Home)
Aug-2016
Neas Energy (EM&T)
Oct-2016
REstore (DE&P)
Nov-2017
Organic investments
Over £300 million of incremental investment across 2016 and 2017.
•
Connected Home: introduced Hive in North America, increased marketing spend
and launched the subscription model.
• UK Home: invested in building Local Heroes and launched British Gas Rewards.
• DE&P: supported global mobilisation of technology, propositions and development teams.
Launched in North America and funded further geographic expansion.
• EM&T: focused on business development within existing markets.
• North America Home: growing services, primarily annuities/protection plan products
and new home heating, ventilation and air conditioning installations.
• Centrica Innovations: first investments to identify, incubate and accelerate new
technologies and innovations.
~£1.5 billion
over 5 years
Energy Marketing
& Trading (EM&T)
Services
Connected Home
Distributed Energy
& Power (DE&P)
We have invested over £700 million in these
activities since the end of 2015 and expect
further growth investment of around
£250–£300 million per year out to 2020.
We are reducing resource allocation to
our asset portfolio by about £1.5 billion
over this period.
Asset portfolio materially repositioned
In 2015, we announced a £500 million to
£1 billion disposal programme which has
delivered proceeds of over £900 million by
the end of 2017, including the disposals of:
Exploration & Production (E&P)
In 2017 we created a new E&P business,
Spirit Energy. Centrica owns 69%, with
Bayerngas Norge’s former shareholders,
led by Stadtwerke München Group,
owning 31%.
Canada E&P
Trinidad & Tobago E&P
Combined cycle gas turbines
Wind assets
£255m
£26m
£314m
£308m
14 | Centrica plc Annual Report and Accounts 2017
Centrica Storage
Following extensive well testing, we
concluded that the Rough facility was no
longer capable of safe injection operations.
We have been granted the necessary
approvals to produce the indigenous
gas and liquids from Rough before
decommissioning.
Central Power Generation
We have shifted our portfolio to more
distributed assets. We have converted some
sites to peaking plants, are redeveloping
Kings Lynn A, building new flexible gas fired
generation, and installing one of Europe’s
largest rapid response batteries. We consider
our nuclear position as a financial investment.
Strategic Report | The Strategic Repositioning of Centrica E&P smaller and more focused
The formation of Spirit Energy creates
a strong and sustainable European E&P
business, combining Centrica’s cash-
generative and relatively near-term
production profile with Bayerngas Norge’s
more recently on-stream producing assets
and development portfolio.
The new company is a robust, self-financing
entity, and will invest in the range £400–£600
million per annum to deliver sustainable
medium-term production of 45–55 mmboe.
It has operations across the UK, Norway,
Denmark and the Netherlands, with
interests in 28 producing fields and over
70 exploration licences.
Spirit Energy’s focus in 2018 will be to
maximise efficiency from its producing
assets, as well as progressing several key
projects including the development of the
Oda field, submitting a plan for Skarfjell
field development, appraisal drilling at
the Fogelberg discovery and drilling on
a number of exploration prospects.
Read more about E&P in the Business Review
Pages 46 to 47
Technology and innovation
Building capability in technology and
innovation is a key enabler in supporting our
customer-facing businesses to improve our
offerings, deliver new products, propositions
and service delivery to meet our customers’
changing needs.
Our Technology & Engineering function
is maturing. We are investing in a portfolio
of innovative projects covering areas
such as energy storage, electric vehicles,
artificial intelligence and blockchain.
We filed 24 patents in 2017.
We strengthened our Quality Assurance
capability to drive improvements in the
manufacturing value chain. This will support
greater reliability of our products in customer
installations, reduce cost and improve
our operational efficiency.
Read some examples of how we are using
technology to benefit consumers and businesses
Pages 16 to 29
Investing in innovation for
competitive advantage
Centrica Innovations (CI) is a strategic
investor, helping accelerate Centrica’s
transformation. Since its inception
in February 2017, CI has invested in
companies with pioneering technologies.
EtaGen
A California-based start-up developing
a linear generator that offers businesses
affordable, flexible, reliable and clean
on-site power.
Io-Tahoe
An Artificial Intelligence driven data
management company was created by
combining internal innovation and acquired
intellectual property.
Rokitt Astra
In May 2017, the assets of Rokitt Astra
were acquired and combined into Io-Tahoe
to add machine learning to in-house data
discovery solutions.
LO3 Energy
An innovative start-up specialising in
blockchain-based solutions for energy
transactions.
With technology hubs around the world,
our teams in New York, Houston, San
Francisco, Seattle, London and Tel Aviv
actively scan for companies with the latest
innovations for integration within the Group.
From the Internet of
Things to the Internet
of Energy, our customers
are empowered to
take more control
over their energy use.
In the connected world,
Centrica has a solid
position and strong
capability.
Charles Cameron
Director of Technology & Engineering
and Centrica Innovations
Centrica plc Annual Report and Accounts 2017 | 15
A strategy shaped by
our cust omers’
Centrica
Consumer
We want to make householders’ lives
easier, by providing seamless, time-saving
services that are easy to use and help
save them money.
Understanding and satisfying customer
needs is critical to our success. We have
around 27 million customer accounts.
Every year we receive 36 million phone calls
and support more than 31 million online
transactions. Through these interactions,
we gain an unrivalled understanding of our
customers’ needs in and around the home.
Residential customers are seeking value
for money and solutions, not just products,
especially in the home. They desire great
service, when and how they need it, and the
reassurance of trusted brands. Customers
also increasingly understand the value of
their own personal data. They expect it to
be used responsibly and held securely.
We believe these trends present us with
numerous opportunities.
16 | Centrica plc Annual Report and Accounts 2017
Centrica Consumer
Bringing our Consumer strategy to life
centrica.com/video/consumeroverview
Customer commitments
We want to create a fairer, more
competitive and sustainable
energy market
See page 18
Getting the most out of your energy
Home comparison helps Direct Energy
customers save money at their fingertips
centrica.com/video/dehomecomparison
Responding to Harvey
Our Direct Energy colleagues talk about
their experiences after Hurricane Harvey
centrica.com/video/hurricaneharvey
Strategic Report | Centrica Consumer our cust omers’
changing needs
Battery storage
Unlocking alternative energy sources
with battery storage
centricabusinesssolutions.com/
batterysolution
Helping businesses reach their potential
Entering a pioneering contract with Europe’s single
biggest onshore wind installation
See page 29
Centrica
Business
At Centrica Business, we aim to be the
partner that our business customers will
turn to for advice on how best to manage
their energy needs.
Our business customers, like our residential
customers, are cost conscious. They want
their bills to be as low as possible and they
want to increase their efficiency wherever
they can. Energy is essential, so they need
to know that their supply is resilient.
Energy processes are complex. Our
customers want an expert adviser to help
them understand their energy use; a trusted
and credible partner, who can deliver energy
solutions as promised.
We can and do help to meet all these needs.
Power in Your Hands
Powering our business customers’ ambitions
with intelligent, end-to-end energy solutions
centricabusinesssolutions.com/
powerinyourhands
Centrica Business
Managing the revolution in energy
systems for our business customers
centrica.com/video/
businessoverview
Centrica plc Annual Report and Accounts 2017 | 17
Centrica Consumer
Creating a fairer,
lasting deal for
energy customers
We want to create a fairer, more competitive and
sustainable energy market for our customers.
Our commitments to customers
We have been listening to our customers and stakeholders. We froze our prices in the
UK through the entire winter of 2016/17 until last August, longer than any other supplier,
and introduced a loyalty reward scheme. But we recognise that we need to go further.
On 20 November 2017, we announced
seven commitments to customers,
which we are working to deliver.
We will:
1. End Standard Variable Tariffs (SVTs)
for new customers
2. Engage customers already on SVTs
and offer them better deals
3. Offer a choice of competitive fixed-term
tariffs at the end of their contract
4. Introduce a new fixed-term default tariff
5. Provide new offers to respond to
customers’ changing needs
6. Bring in simple, no-nonsense bills
for all our customers
Our actions alone won’t improve
the market. So, we have asked
the UK Government and Ofgem to:
1. Phase out SVTs altogether
2. Level the playing field on social and
environmental policy costs which are
included in energy bills
3. Move the funding of all government policy
costs away from energy bills
4. Make the smart meter roll-out more
efficient and effective
5. Be more consistent in the way vulnerable
customers are treated
6. Remove strict rules making energy
bills complicated
7. Continue improving our customer service
and our own efficiency
7. Refresh the calculation of the price cap
for customers on pre-payment meters
We feel these changes will be more effective than further government intervention
in the shape of temporary price controls.
18 | Centrica plc Annual Report and Accounts 2017
Strategic Report | Centrica Consumer Rewards
Inspired by the success of the Bord Gáis
Energy Rewards Club in Ireland, the Centrica
UK Consumer business launched British
Gas Rewards. This programme gives
customers highly personalised offers,
giveaways and monthly prize draws as our
way of saying thank you. So far, the benefits
range from a free boiler service and a Hive
Active Light Pack, to 10% off at Waitrose
and Sky Store movies. Loyalty days provide
customers with a number of days of free
energy each year, linked to how long they
have been with us.
+8
Increase in net promoter score (NPS) for
British Gas Rewards members compared
to non-Rewards customers
5.5m
Number of offers shown to our British Gas
Rewards members by the end of 2017
Digital engagement
We want to create better digital experiences,
because our customers want and expect us to.
Webchat means we can respond to customers’
online queries more quickly and at a time convenient
to them. Our British Gas Chatbot allows customers
to seek help or book smart meter appointments
without needing to call us up. They can also now
interact with British Gas by using voice commands
through Amazon Alexa. Our energy insight
platforms – My Energy Live in the UK and Direct
Your Energy in the US – help customers who have
smart meters to gain greater insights into their
energy use with just a few taps on their smartphone.
We are currently trialling our next generation app,
for roll-out later this year, which will include a range
of enhanced functions, including tailored insights
and alerts to help give customers more control over
their spending.
70%
More than 70% of visits to britishgas.co.uk
are now from mobile devices
Link to
Consumer strategic framework
Energy supply
Centrica plc Annual Report and Accounts 2017 | 19
Strategic Report | Centrica Consumer
Link to
Consumer strategic framework
Peace of mind
Home energy management
Home automation
20 | Centrica plc Annual Report and Accounts 2017
Putting our customers
at the heart of
everything we do
Through our customer knowledge, insight and
experience, we are putting customers in control
of how they run their homes, helping to make
their lives simpler and smarter.
Having full control of your
central heating and hot
water in the palm of your
hand, it’s so simple to use
and the money it saves
you over the 12 months
is awesome.
UK Hive Active Heating customer
1.6m
Connected Home cumulative products sold
+39
NPS for UK Hive customers
Bringing Connected
Home to customers
in new markets
We have grown the Hive ecosystem,
expanding the range of products and
services that make our customers
lives easier.
In 2017, Connected Home launched
new subscriptions plans across the UK,
Ireland and North America, to enable our
customers to choose the package that
works for their home. This includes smart
bulbs and plugs, door and window sensors
and a new smart home security camera.
In the UK, we launched the Hive Leak Plan,
a subscription service featuring the new
Hive Leak Sensor. This monitors water flow
around the home, notifying the customer
of potential leaks through the Hive app and
connecting the customer with a British Gas
engineer, who can repair the problem.
We are bringing the benefit of our Hive
products to customers across the world
including Ireland, North America and Italy.
In Italy, this is through our five-year
partnership with energy supplier, Eni gas
e luce. This has the potential to enable
Eni’s eight million customers to access
and use our products. Partnerships like
this will increasingly be the focus for growing
our Connected Home business.
Local Heroes
goes nationwide
We know it’s important for customers to
get quick and easy access to reputable
tradespeople if they need help with
household breakdowns and other problems.
Following a successful pilot, in June 2017
we launched a digital platform service in the
UK that helps people to find trusted local
tradespeople to complete jobs in the home
and also helps tradespeople to source local
work. It is quick and easy to use and has a
12-month guarantee backed by British Gas.
By the end of 2017, more than 7,000 Local
Heroes had signed up to the platform and
completed nearly 25,000 jobs. The service
provides us with access to the large and
growing on demand market and has high
customer satisfaction ratings.
Came out in less than
an hour, called me 20
minutes before arrival
and fixed the job in
double quick time.
Local Heroes customer
25,000
Jobs completed for Local Heroes customers
by the end of 2017
+81
Average NPS for Local Heroes customers
Link to
Consumer strategic framework
In-home servicing
Peace of mind
£8.6m
Invested in engineer and apprentice training
11,000
Engineers and apprentices in the UK
Link to
Consumer strategic framework
In-home servicing
Building workplace
capabilities fit for
the future
We are making long-term investments in our
engineers’ capabilities and tools so they are
better equipped to serve our customers.
In 2017, we invested £8.6 million in training
and developing the skills of our 11,000 strong
UK network of engineers and apprentices.
Together, they completed over 385,000
hours of training last year. This equates to
nearly one week per year for each engineer
and will help them deliver a better customer
experience across our full range of products
and services – from boiler repairs to
Connected Home devices.
We are also investing in technology so our
engineers and technicians have the right
tools at their fingertips. We have provided
our engineers with smartphones so they
can work more easily on the go. Our labs
continue to develop new technologies and
in 2017, we enhanced our diagnostic tool,
XSOL, improving its ability to identify
problems. It now provides our engineers
with full diagnostic information across
nearly 1,000 different types of boilers
enabling us to reduce the time taken to
fix our customers’ boilers by 8%.
Centrica plc Annual Report and Accounts 2017 | 21
Strategic Report | Centrica Consumer
Supporting our
Texan colleagues
and customers
through Hurricane
Harvey
In August 2017, Texas was hit by Hurricane
Harvey. We worked hard to support our
people, customers and communities
through this difficult time and help them
rebuild their lives.
We delivered hurricane preparedness
checklists and evacuation information before
the hurricane struck, via bill inserts and direct
mail. Our aim was to help customers to be
as prepared as possible. To cushion the
financial impact of the event, we suspended
late payment fees and disconnections for
customers in affected areas and offered
them flexible or deferred payment plans.
Our own people wanted to help too. So, we
launched a Direct Energy donation page for
them to pledge money to the American Red
Cross who were co-ordinating the support
effort in the hardest hit areas of Houston and
Corpus Christi. This raised over US$50,000
(£38,860) and Direct Energy made a
matching donation.
The Direct Energy Back
Office team was on the
ground helping customers
who really needed our
personal attention after
the devastation from
Hurricane Harvey. The
best part was seeing the
relief on their faces.
Tara Norris
Direct Energy
Assistance Program Coordinator
>US$100,000
(£77,720)
Total donation to help those affected by
Hurricane Harvey
Watch our video about how our people
responded to Hurricane Harvey
centrica.com/video/hurricaneharvey
Link to
Consumer strategic framework
Energy supply
In-home servicing
22 | Centrica plc Annual Report and Accounts 2017
I’m very proud of Adam’s
actions which reinforce
just how brilliant
our people can be.
Andrew Reaney
Installations Director,
UK Field Operations
11m
Number of engineer visits to customers’
homes each year
Link to
Consumer strategic framework
In-home servicing
Peace of mind
Adam Downend
Installations Engineer
Going above and
beyond to help
our customers
Our engineers and technicians make
thousands of visits to our customers’ homes
every week. In 2017, across our business,
our engineers made nearly 11 million visits
to customers’ homes.
On one of those visits, British Gas installations
engineer, Adam Downend, rang the bell and
didn’t get an answer. He called the phone
number and could hear the phone ringing
upstairs. Adam walked around the house
and looked through the window to find the
elderly customer lying on the sofa. After
trying to get a response by banging on the
window and shouting through the letter box,
Adam then decided to gain access through
an open bedroom window upstairs. Putting
his ladder up to the window, he secured it
safely and climbed in. When he got
downstairs he found that the customer was
barely conscious, so he put her in the
recovery position and called for
an ambulance. Adam then followed the
instructions of the operator to keep her
conscious while waiting for the paramedics
to arrive and take her to hospital for treatment.
When she got home, the customer thanked
Adam for his help and quick thinking.
We are in a real position to help our
customers through the millions of visits
we make to their homes each year.
Centrica plc Annual Report and Accounts 2017 | 23
Centrica Business
Turning energy
into an opportunity
With advances in technology, the energy market
has evolved. Power increasingly lies in the hands
of our customers, turning energy from a simple
commodity into a critical source of business
advantage. Customers are starting to use energy
to gain a competitive edge, increase their resilience,
improve operational efficiency and to help to
futureproof their businesses.
Helping St George’s Hospital to deliver
operational efficiency
St George’s Hospital in Tooting is the
largest healthcare provider in South West
London. It serves 1.3 million people and
800,000 patients, as well as being a
teaching hospital and advanced medical
research centre. It employs over 8,500
people. During 2017, we continued
working to deliver the hospital with end-
to-end solutions that improve their energy
efficiency and operational performance,
while reducing carbon emissions.
An energy centre is being installed to
replace the existing 40-year-old system.
This comprises a new combined heat
and power plant, efficient boilers and
lighting alongside heating, ventilation
and air conditioning systems. Meanwhile,
energy use is optimised through
a building management system.
24 | Centrica plc Annual Report and Accounts 2017
Strategic Report | Centrica Business Powering Britain
There has never been a more important time
for us to work with businesses and other large
energy users to develop solutions for them
which can unlock new revenue streams, become
a source of competitive advantage and drive
growth. Our report, ‘Powering Britain’s Economic
Future’, set out to measure those impacts and
demonstrate the benefits of distributed energy
solutions. It assessed the potential economic
benefits to the UK if three major sectors –
Industrial, Health, and Hospitality & Leisure,
which together represent over a quarter of the
UK economy – were to adopt a range of solutions
including battery storage, on-site power
generation and energy saving devices.
It found these solutions could generate
in the UK(1):
£980m
Saving on annual energy bills
£18.5bn
Gross value added to economy
(1) Centrica Business Solutions research supported
by FTI Consulting, Modelling 2017.
Read more in Responsible Business
Pages 32 to 38
Read the full report at
centricabusinesssolutions.com/poweringbritain
Each year the St George’s Hospital project is
projected to save:
£1m
Cost savings
6,000tCO2e
Carbon emissions
The energy centre will
deliver recurring savings in
energy costs year-on-year
which can be redirected into
patient care. It also helps
St George’s Hospital meet
their goal of reducing their
carbon footprint.
Alan Barlow
Director UK & Ireland
Distributed Energy
Link to
Business strategic framework
Energy optimisation
Energy solutions
Explore how distributed energy and power works
centricabusinesssolutions.com/powerinyourhands
Link to
Business strategic framework
Energy supply
Centrica plc Annual Report and Accounts 2017 | 25
By capturing a variety of
usage data, we are able
to obtain a keen sense
of consumption patterns
and behaviour trends
that will allow us to make
more strategic decisions
related to energy
efficiency and capital
upgrades.
Grant Ervin
Chief Resilience Officer for the
City of Pittsburgh
Find out more about how
Panoramic Power works
centricabusinesssolutions.com/energyinsight
Link to
Business strategic framework
Energy insight
Strategic Report | Centrica Business
Increasing energy
efficiency for
Pittsburgh City-
County building
The historic City-County building has
stood in downtown Pittsburgh since 1917.
Direct Energy is helping to bring it into the
21st century by optimising its energy use
and improving its resilience.
In January 2017, we installed our energy
insight solution, Panoramic Power, on the
sixth floor of the building which houses part
of the city’s government offices and data
centre. The system uses sensors and cloud-
based analytics to transmit real-time data
on energy use to the customer’s dashboard.
This can be viewed on a desktop or mobile
device and provides actionable insights to
improve operational efficiency.
26 | Centrica plc Annual Report and Accounts 2017
This is a bold, imaginative
scheme that means
we can also store and
release energy when
we choose, as well as
supporting the National
Grid, which helps raise
more income to support
Council services.
Councillor John McElroy
Cabinet Member for Environment and
Transport, Gateshead Council
24/7
Battery available to the grid 24 hours a day,
seven days a week
3MW
Battery capacity
Link to
Business strategic framework
Energy solutions
Empowering
Gateshead Council
to cope with local
energy spikes
Centrica has installed one of the country’s
largest commercial battery storage schemes
for Gateshead Council, giving it greater
flexibility in managing its energy. The 3MW
battery facility is equivalent to one million
AA batteries and forms the final part of the
Gateshead District Energy Centre, which
also includes a pair of 2MW combined heat
and power units.
Centrica will manage the battery project
under a 10-year contract. This scheme will
help keep the national electricity network
in balance by responding to any fluctuations
on the system in less than a second.
In time, it will also be used to strengthen
Gateshead’s energy resilience by providing
electricity to council-owned buildings
through a private wire.
Centrica plc Annual Report and Accounts 2017 | 27
Acquiring REstore,
Europe’s leading
demand-response
aggregator
Whether it’s reducing energy usage at
certain times, supplying energy back into
the grid or increasing consumption when
the grid is over-supplied, demand response
is helping energy markets to become more
flexible. Last year, we strengthened our
ambitions in this area by acquiring REstore
NV. It delivers cloud-based demand-side
management software and demand
response services to over 150 of Europe’s
largest energy users, such as ArcelorMittal
and Total. With these capabilities, we are
now playing a leading role in reducing
pressure on the electricity grid.
850MW
Flexible power capacity to grid operators
Link to
Business strategic framework
Energy optimisation
One example of how these efforts are
helping our customers is Lineage Logistics
Europe (formerly known as Partner Logistics),
a frozen food warehousing company in the
UK. REstore works with the team to reduce
the use of the cold store compressors and
fans for short periods during peak demand
without affecting overall operations. In return,
Lineage Logistics Europe receives a reward
from the electricity transmission system
operator for being flexible, and the
arrangement also helps the business to
meet its own sustainability objectives.
This will be a significant growth area for us as
global markets for demand response evolve.
28 | Centrica plc Annual Report and Accounts 2017
Strategic Report | Centrica Business Entering a pioneering
contract with Europe’s
single biggest onshore
wind installation
Providing a route-to-market for renewable power
generators is one of the distinctive capabilities of Neas
Energy, part of our Energy Marketing & Trading business.
Neas has signed a landmark, long-term balancing and
hedging contract with Europe’s biggest onshore wind
farm, Markbygden ETT in Sweden. The agreement
includes the management of price risks in the Nordic
electricity and certificate market, as well as the physical
sale and balancing of power production in the Nordic
wholesale market. Underpinning this contract is a
19-year fixed volume corporate Power Purchase
Agreement (PPA) with Norsk Hydro, a leading global
aluminium producer, where Centrica is offtaking power
for the first year and subsequently 77% of the power
will be bought by Norsk Hydro as a corporate PPA
and the remainder will be sold on the power markets.
650MW
Wind farm supported
497,000tCO2e
Carbon emissions avoided
Link to
Business strategic framework
Wholesale energy
Energy optimisation
Helping the Government
of Canada to achieve
its energy ambitions
We are helping the Government of Canada to realise
its energy ambitions through a new 10-year contract.
Under this, we will supply up to 10 billion cubic feet
of gas annually and secure access to new sources of
renewable biomethane gas. We will also provide strategic
counsel, including a detailed procurement strategy,
budget preparation, billing and data management.
Our comprehensive data amalgamation capabilities
will allow detailed tracking and analysis of energy use.
This will help to identify efficiency improvements, which
the Government of Canada can make to reduce its
energy costs and carbon footprint.
We are pleased to be a part
of this collaboration effort to
reduce natural gas consumption
and cost while supporting
green energy to lower our
carbon footprint.
Honourable Ralph Goodale
Minister of Public Safety and
Emergency Preparedness
C$8m
(£4.7m)
Value of contract
Link to
Business strategic framework
Energy supply
Energy optimisation
Centrica plc Annual Report and Accounts 2017 | 29
Key
Performance
Indicators
Our Key Performance Indicators (KPIs) help
the Board and executive management assess
performance against our Group Priorities.
Our Group
Priorities
Safety,
compliance
and conduct
Customer satisfaction
and operational
excellence
Cash flow growth
and strategic
momentum
Cost
efficiency and
simplification
People and
building
capability
Financial KPIs
Adjusted operating profit
Read more about
Our Strategy
Pages 10 to 11
Read more about
Remuneration
Pages 78 to 97
Read more about
Adjusted performance
measures
Pages 216 to 217
Operating profit is one of our fundamental financial
measures. It is adjusted to a post-tax basis and a
charge on capital is then applied to set the economic
profit performance targets.
Adjusted operating profit was down 17%, reflecting
reduced profit in our Centrica Business energy supply
business units.
Link to
Remuneration:
Long-term incentive
Link to Group
Priorities:
2017
2016
2015
Adjusted operating profit
-17%
£1,252m
Adjusted basic earnings per share (EPS)
EPS is a standard measure of corporate profitability.
EPS is adjusted to better reflect the underlying
performance of the business.
Link to
Remuneration:
Long-term incentive
Adjusted basic EPS was down 25%, which includes the
impact of lower operating profit, a higher interest charge
and a lower tax rate.
Link to Group
Priorities:
Adjusted basic EPS
-25%
2017
2016
2015
£1,515m
£1,459m
12.6p
16.8p
17.2p
Adjusted operating cash flow
Adjusted operating cash flow is our key measure of
financial performance and is the financial metric for the
short-term incentive plan for our Executive Directors.
Link to
Remuneration:
Short-term incentive
Adjusted operating cash flow was down 23%, reflecting
lower operating profit and the impact of £357 million of
one-off working capital inflow in 2016 in UK Business.
Link to Group
Priorities:
Adjusted operating cash flow
2017
2016
2015
-23%
£2,069m
£2,686m
£2,253m
Total shareholder return (TSR)
The Board believes that TSR is a valuable KPI to
assess the Company’s performance in the delivery
of shareholder value.
Centrica underperformed the FTSE 100 return index
over the three-year period ending in 2017 by 73%.
Link to
Remuneration:
Short and long-term
incentive
Link to Group
Priorities:
TSR indices (unaudited)
160
140
120
100
80
60
40
2014
2015
2016
2017
FTSE 100
Total return
index
Centrica
Total return
index
Source:
Bloomberg
30 | Centrica plc Annual Report and Accounts 2017
Strategic Report | Key Performance Indicators 0.30
0.34
0†
2
1
Non-financial KPIs
Lost time injury frequency rate (LTIFR)
We prioritise safety and aspire to have an incident-
free workplace.
Our LTIFR worsened to 0.36 in 2017. We are growing
our safety culture by targeting interventions in
key performance areas and introducing improved
management systems.
Link to
Remuneration:
Long-term incentive
Link to Group
Priorities:
2017
2016
2015
LTIFR per 200,000 hours worked
-20%
0.36†
Process safety
We focus on process safety where we source,
generate and store energy to prevent potential
incidents, such as fires and releases of gas.
In 2017, we experienced zero significant process
safety events. We remain committed to strengthening
our understanding, monitoring and controls related
to process safety.
Link to
Remuneration:
Long-term incentive
Link to Group
Priorities:
Significant events (Tier 1)
2017 -2pts
2017
2016
2016
2015
2015
Employee engagement
Having an engaged workforce is key to our success.
We seek feedback on what we are doing well and
where we can improve through our annual employee
engagement survey.
In 2017, employee engagement was 52% favourable
which is below the external employee engagement
benchmark of 72%. While our score indicates a slight
improvement from 2016 on like-for-like questions
(see page 85), morale remains affected by the
continued restructuring of our business. We are
taking meaningful action to improve engagement.
Net promoter score (NPS)
We strive to satisfy the changing needs of our
customers. To measure customer satisfaction,
we use NPS(2).
NPS performance across the business was mixed
in 2017 (see pages 41 to 43). We are working to
improve satisfaction by enhancing our customer
service capabilities and delivering the new products
and services our customers want.
The KPIs associated with our 2018/20
Remuneration Policy can be found on page 89.
We will disclose our performance against these
KPIs in our Annual Report and Accounts 2018.
Link to
Remuneration:
Long-term incentive(1)
Employee engagement
(% favourable)
Link to Group
Priorities:
2017
2017
52%†
Measurement in 2017 moved to a new provider to enable best
practice external benchmarking. Due to changes in methodology,
direct prior year comparisons are not available.
Link to
Remuneration:
Long-term incentive(1)
UK Home
2017
2016
-2pts
Link to Group
Priorities:
North America Home
2017
2016
+1pt
UK Business
2017
-3pts
2016
North America Business
2017
2016
+2pts
+1†
+3
+33†
+32
-11†
-8
+33†
+31
(1) NPS and employee engagement linked to Executive remuneration arrangements
are calculated using historical methodology and business areas which were
approved by shareholders as part of the current Remuneration Policy. See page 85
for more information.
(2) NPS methodology was implemented consistently across the UK, Ireland and
North America from 2017. Prior year figures have been restated where applicable.
Read about our wider performance in Responsible
Business – Performance Measures Pages 218 to 220
Assurance We engaged PricewaterhouseCoopers LLP (PwC)
to undertake a limited assurance engagement over 22 metrics
highlighted with the symbol ‘†’ throughout our Annual Report
and Accounts 2017.
Further details are set out on page 218 in Responsible Business –
Performance Measures or online at centrica.com/assurance
Centrica plc Annual Report and Accounts 2017 | 31
Strategic Report | Responsible Business
Strategic Report | Responsible Business
Being a
responsible
business
We provide energy and services that are at the heart
of our customers’ lives. To continue doing that and
generate greater value in society over the long term,
we focus on being a responsible business.
This helps us realise our strategy to deliver for the changing needs of our customers
and be a trusted corporate citizen, an employer of choice and a 21st century
energy and services company, driving long term shareholder value through
returns and growth.
Contents
Caring for our customers
Pages 33 to 34
Being an employer of choice
Page 35
Enabling the low carbon
transition
Page 36
Building strong communities
Pages 37 to 38
Want to find out more?
Explore how we do business responsibly and how we engage
stakeholders on material issues at centrica.com/responsibility
32 | Centrica plc Annual Report and Accounts 2017
>1m
Vulnerable customer households helped
1.6m
Connected Home cumulative products sold
>£10m
Investment in training engineers, technicians and apprentices
57,300
Volunteering hours
Customer carbon savings from measures installed since 2008
31mtCO2e
19%
Total carbon emissions reduction
£156m
Total community contributions
£10m
Investment committed to start-ups with innovative energy
ideas that benefit society
Read more about our non-financial KPIs
Pages 218 to 220
Caring for our customers
We care about our customers and challenge
ourselves to provide market leading products,
services and solutions that not only satisfy them,
but enhance their lives and business success.
1.7m
Customers who choose to contact us via our
digital platforms
Making lives simpler and smarter
We are focused on saving our customers
time and money, while making it easier for
them to understand energy.
Smart meters improve bill accuracy and
empower customers to reduce their use
by providing insight into how much energy
they are using and its cost in real-time.
Since 2009, we have led the smart meter
roll-out in the UK, installing around five million
in homes and businesses. Building on this,
a simpler, no-nonsense British Gas bill will
be introduced during 2018.
We are making it easier for customers to
control and optimise their energy. In 2017,
we established Centrica Innovations
with a £100 million investment to build,
collaborate and invest in purposeful start-
ups that will make energy work better
for customers by focusing on control,
convenience and affordability. Cumulatively,
we have also sold over 1.6 million
Connected Home products that can be
controlled conveniently with just a tap on
the app – from smart thermostats, plugs,
lights and cameras, to window, door and
motion sensors.
We are investing in our customer service
capabilities so that we can provide an
excellent service.
In 2017:
• UK Home invested in training and
intelligent call-routing;
• North America Home improved training
•
and self-serve capability;
Ireland increased training, process
automation and enhanced customer-
facing IT platforms;
• UK Business strengthened bill accuracy
and timeliness; and
• North America Business improved its
online customer platform as well as digital
journeys for acquisitions.
Over time, these efforts will help reduce
customer complaints and improve
satisfaction.
Read more in Centrica Consumer and
Centrica Business
Pages 16 to 29
Read more in the Business Review
Pages 41 to 43
A growing number of customers are able
to interact with us when and how they want.
Meet our social media customer service team
to see how we are responding to customer
needs in real-time.
Watch our video
centrica.com/customerservice
Cherry Healey
@cherryhealey Does anyone have
a Hive heating control system?
Are they any good?
Sarah Willingham
@sarahwillers Yes and yes. V good!
Gets a bit obsessive
26 Jan 2018
89%
Customers with smart thermostats who feel
more in control over their heating
Centrica plc Annual Report and Accounts 2017 | 33
Caring for our customers (continued)
Powering competitive advantage
Through our Distributed Energy & Power
(DE&P) business, we are giving large-scale
energy users the power to operate and
optimise their energy so that they can use
it more efficiently. This increases their
operational resilience and unlocks new
sources of revenue for growth. In 2017,
we made it easier to harness these benefits
by launching our offer to businesses under
a new Centrica Business Solutions banner,
providing end-to-end customer solutions –
from flexible and local generation, battery
storage and energy efficiency measures,
to smart building management systems
and energy trading technologies.
Key sectors in the UK could save millions
of pounds a year if they adopted distributed
energy solutions(1):
£540m
Industry
£130m
Healthcare
£310m
Hospitality & Leisure
(1) Centrica Business Solutions research supported
by FTI Consulting, Modelling 2017.
Read the full report at
centrica.com/economicfuture
34 | Centrica plc Annual Report and Accounts 2017
Our award-winning customer service training
ensures we identify and support those who
need a helping hand. By the end of 2017,
over 21,000 employees had become
Dementia Friends, improving our ability to
help those living with the condition. We also
supported the development of industry
guidance that will enable the utility sector
to become dementia-friendly.
Innovative products and services are
creating a better world for people with
disabilities and those in later life. In 2017
for example, we launched a video relay
service for customers who use British Sign
Language, allowing them to interact with us
much more effectively.
Helping those in need
We have worked hard to deliver a fairer, more
competitive energy market for everyone,
especially those in need. Having cut prices
in 2016, however, we made the difficult
decision to increase them in 2017. British
Gas’ electricity prices rose by 12.5% due to
an increase in costs relating to energy policy
and the delivery to customers’ homes.
Similarly, Bord Gáis Energy put up prices
by 5.9% for electricity and 3.4% for gas,
following a rise in wholesale energy costs
and distributing energy to the network.
In the UK, we have set out a range of initiatives
to help drive engagement with the energy
market and ensure customers get a better
deal. This includes closing our standard
variable tariff to all new customers and
introducing fixed-term competitive tariffs
(see page 18).
In 2017, we helped over one million vulnerable
customer households through mandatory
and voluntary schemes.
This included:
•
667,900 customers accessing bill
assistance via the UK’s Warm Home
Discount scheme and North America’s
Neighbor-to-Neighbor programme;
297,000 customers supported with bill
assistance following Hurricane Harvey
in North America;
26,900 customers and non-customers
helped with debt advice and grants
through the British Gas Energy Trust; and
•
•
• 53,200 households receiving energy
efficiency improvements via the UK’s
Energy Company Obligation, while five
communities benefited from Ireland’s
Better Energy Communities scheme.
See how our support can
benefit those in need
centrica.com/BGET
This programme has
given us a level of
awareness I never could
have imagined. We’ll not
only improve our profit
margins, but become
better corporate
citizens and better
professionals.
Rafael Ruíz Muñoz
Corporate Brand Director,
CMR Chili’s
A restaurant chain in Mexico who use
Panoramic Power sensors, part of our
distributed energy solutions
Strategic Report | Responsible Business Being an employer of choice
We want to be the best at attracting and retaining
a talented and diverse workforce who are motivated
and able to deliver for our customers.
Building skills for the future
We are creating a workforce fit for the future
by investing in our people’s development and
providing opportunities that attract a diverse
array of talent.
In 2017:
•
•
15,000 engineers, technicians and
apprentices enhanced their skills,
supported with an investment of more
than £10 million in training;
5,800 employees seized the opportunity
to learn new skills through volunteering,
generating 57,300 volunteering hours; and
• 180 young people developed workplace
skills on our graduate programmes.
We are known for our world-class engineering
apprenticeships. We are building on this
success by expanding our customer service
apprenticeships and providing new ones in
leadership, management and digital amongst
other areas during 2018.
We are using our expertise to nurture the
skills that our society needs. Since 2010,
we have reached nearly 562,000 young
people with our curriculum-based lesson
plans, helping to improve skills in the key
areas of science, technology, engineering
and maths (STEM). Over the past four years,
we have also helped 1,160 young,
unemployed people to secure workplace
skills through the Movement to Work
scheme. Around 60% of scheme
participants went on to secure permanent
employment or further training. We will
provide a further 300 places in 2018.
My main highlight is not
only the professional
development you get but
the personal growth that
happens day-to-day.
Mal Prasad
HR Graduate
Embracing workforce diversity
Reflecting the diversity of our customers
and communities in our workforce is vital
if we are to attract and retain the talent to
satisfy our customers. We are working hard
to become a more diverse and inclusive
workplace and in 2017, we launched a new
Disability and Wellbeing Employee Network
to complement our other employee
networks. Business in the Community (BITC)
have recognised our efforts in this area,
awarding us a Bronze award for our
commitment to gender and race inclusion.
Read more about diversity and inclusion
Pages 70 to 71
Respecting our people
Our success depends on our people.
That is why we want our people to stay safe
and why we respect and respond to their
needs. We have robust processes in place
to uphold equal pay and reward our people
fairly, which includes paying at least the
Living Wage in the UK and taking action
to close the gender pay gap. We also
conduct an employee engagement survey
to understand how our people feel, so that
we can improve our result.
Read more about our safety performance
Page 218
Read more about employee engagement
Page 31
0.98†
Total recordable injury frequency rate
per 200,000 hours worked (2016: 0.98)
View our Gender Pay Statement
centrica.com/genderpay
Hear from our people about what
diversity and inclusion means to them
centrica.com/ourdiversity
Centrica plc Annual Report and Accounts 2017 | 35
Enabling the low carbon transition
We are tackling climate change by reducing
emissions across our business and providing
products and services that lead to a lower
carbon future.
Reducing operational impact
We have shifted away from being a large-
scale energy producer and now emit over
70% less carbon for every pound of revenue
than we did in 2010.
In 2017, our total carbon emissions
decreased by 19%. This was mainly due
to the sale of our Exploration & Production
business in Canada and two power plants
in the UK. The average carbon intensity
of our Central Power Generation remained
relatively stable at 125gCO2/kWh. Instead
of generating power for our customers,
we will now predominantly buy it for re-sale
from third parties.
Meanwhile, the internal carbon footprint
of our property, fleet and travel reduced
11% in 2017. The decline was achieved
through planned carbon reduction activities
alongside headcount reductions arising from
the reorganisation of our business. Following
these changes, we are reassessing our
targets for both carbon intensity of Central
Power Generation and internal carbon
footprint (see page 220).
Total carbon emissions
2017†
2016(1)
Scope 1
2017†
2016(1)
Scope 2
2017†
2016(1)
4,103,348tCO2e
5,073,320tCO2e
4,044,754tCO2e
4,986,299tCO2e
58,594tCO2e
87,022tCO2e
Total carbon intensity by revenue
2017
2016(1)
146tCO2e/£m
187tCO2e/£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 – see the Basis of Reporting
at centrica.com/assurance for full details.
(1) Restated due to availability of improved data.
We are a world leader for
disclosure and action on
tackling climate change
and water scarcity
Helping customers cut
their carbon emissions
More than 90% of our carbon emissions are
associated with the energy consumed by
our customers. So the biggest contribution
we can make in tackling climate change is
to help them cut their carbon by using our
energy efficiency and Connected Home
products, alongside the solutions offered
by our DE&P business. We calculate this has
saved our customers nearly 31mtCO2e since
2008 – equivalent to the annual emissions
of around nine million UK homes.
Decarbonising the energy system
Centrica is revolutionising the way energy
is generated, managed and consumed,
by leading the transition to a decentralised
energy system that enhances grid flexibility,
supports renewables and reduces reliance
on fossil fuels.
During 2017, we:
•
•
•
•
created Centrica Business Solutions,
a one-stop-shop for large-scale
energy users to harness distributed
energy products and services;
completed a 3MW battery storage
scheme for Gateshead Council, to help
keep the national electricity network
in balance;
invested £62 million to acquire REstore,
Europe’s leading demand-response
aggregator, enabling us to counter grid
imbalance by managing demand from
commercial and industrial customers; and
launched a £180 million investment
programme to build three new flexible
power generation facilities and one of
the world’s largest battery storage
facilities, to meet peaks in local demand
and back-up intermittent renewables.
We are additionally playing an important role
in growing the infrastructure needed to lower
emissions from transport, having installed
around 13,000 electric vehicle charge points
since 2013.
Read more about Centrica Business
Pages 24 to 29
36 | Centrica plc Annual Report and Accounts 2017
Strategic Report | Responsible Business Building strong communities
We are increasing the positive impact our presence
has in society by working with communities to address
key issues, while contributing to the local economy.
Developing local energy markets
Through our DE&P business, we are
exploring the potential for local energy
markets to put communities in control of
their energy, drive down bills and unlock
further renewable generation.
Towards this in 2017, Centrica Innovations
acquired a stake in LO3, a start-up with
a focus on developing peer-to-peer power
market trading and were involved in the
Brooklyn local energy market in New York.
Cornwall’s energy ambitions
At the end of 2016, we announced a £19 million local energy market trial in Cornwall, UK. The
three-year trial will test how flexible demand, generation and storage can reduce pressure on
the electricity grid, enable the growth of renewables and avoid expensive network upgrades.
Since then, over 300 homes and businesses registered to get involved and in 2017, we
welcomed our first business to the trial – a working farm and holiday retreat. Pioneering
battery storage technology was installed to help them better manage the energy generated
by their solar panels. In 2018, we expect to roll-out storage and solar panels in 100 homes
and commence larger installations of storage, renewables and distributed generation across
15 businesses.
We believe our trial will not only help Cornwall realise its energy ambitions, but lead the way for
the UK and other countries to do the same.
Collaborating to help communities
Our strategic partnerships are building
a better future – whether it’s helping
vulnerable households with their energy
(see page 34), or tackling bad housing and
homelessness. To support these issues in
2017, we invested £156 million in mandatory,
voluntary and charitable contributions.
A further £10 million has been committed
to start-ups developing innovative energy
ideas that benefit society, helping 38,000
people since 2013.
Making a difference through our
flagship partnerships
(2012/17)
4m
people are expected to benefit from campaigning
that led to changes in law relating to the UK’s
private rented sector, including improvements in
gas and electrical safety alongside protection from
retaliatory evictions
(2015–Ongoing)
1,000
families in Ireland have been prevented from
homelessness as a result of our €1.2 million
(£1 million) partnership
(2014–Ongoing)
3.3m
lives of children and their families have been
improved across North America through our
support of local hospitals
Centrica plc Annual Report and Accounts 2017 | 37
Building strong communities (continued)
Boosting the economy
Our business depends on and creates
value in the communities where we operate.
During 2017, we generated £1,591 million
in wages for our 33,140-strong workforce
and we contributed £307 million in taxes.
We also spent nearly £4 billion on goods
and services, supporting 36,000 suppliers
and thousands of jobs.
Distributed energy solutions have the
potential to generate widespread economic
benefits. It is estimated that these solutions
could help the UK meet decarbonisation
targets more effectively, saving £8 billion
a year by 2030(1). Likewise, key sectors could
save millions of pounds each year while
boosting the economy (see page 34).
If just 50% of the UK’s Industry, Healthcare,
and Hospitality & Leisure sectors utilised
distributed energy solutions, the potential
economic benefits to the UK would be(2):
£18.5bn
Gross value added to the economy
260,000
Jobs
1.5% boost
Economic output
(1) National infrastructure commission,
September 2016.
(2) Centrica Business Solutions research supported
by FTI Consulting, Modelling 2017.
Read the full report at
centrica.com/economicfuture
Being a good corporate citizen
We are committed to working with integrity
so that we can maximise the positive
impact we have in society. To support this,
we launched a new Company-wide set of
values and a code of conduct in 2017/18.
Taken together, our Values and Our Code,
demonstrate our commitment to being
a responsible business and bind us
together in common pursuit of our strategy
and purpose.
Through Our Code, we reaffirmed that we
will ensure our business partners and third
parties share our dedication to eliminate
bribery and corruption. We do not condone
any payments we feel to be improper and
take particular care when offering or
receiving gifts and hospitality. We prohibit all
forms of fraudulent conduct or dishonest
behaviour and will report any serious matters
to the relevant authorities. We also set out
that we respect and uphold the fundamental
human rights and freedoms of everyone
who works for us, with us or lives in our local
communities. As part of our response to the
Modern Slavery Act in the UK, we have taken
action to reduce risk relating to forced or
compulsory labour in our business and
supply chain.
In 2017, we assessed 138 suppliers on
their social, ethical and environmental
standards to guard against risks such as
human rights and bribery and corruption.
This resulted in an average supplier
sustainability score of 56 (low risk), which
is better than the multi-industry average
of 44 (medium risk). If suppliers receive a
medium or high-risk rating, we will consider
appropriate next steps which may include
collaborating to raise standards or ending
our relationship and reporting the abuse.
Read more about our Values and Our Code
centrica.com/ourcode
Read more about our Modern Slavery
Statement centrica.com/modernslavery
38 | Centrica plc Annual Report and Accounts 2017
Strategic Report | Responsible Business Strategic Report | 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, overseen by the Board and
the Audit Committee.
22%
Adjusted effective tax rate (see page 50)
£102m
Corporate income tax paid
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 are committed to providing disclosures
and information necessary to assist
understanding beyond that required by
law and regulation.
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.
In the UK we maintain a transparent and
constructive relationship with Her Majesty’s
Revenue & Customs (HMRC). 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
governments on tax policy where we believe
we are in a position as a Group to provide
valuable commercial insight.
The Group’s tax charge, taxes
paid and the UK tax charge
The Group’s businesses are subject to
corporate income tax rates as set out
in the statutory tax rates on profits table.
The overall tax charge is therefore
dependent on the mix of profits and the
tax rate to which those profits are subject.
Statutory tax rates on profits
Group activities
UK supply of energy and services
UK oil and gas production
Norway oil and gas production
Netherlands oil and gas production
United States supply of energy
and services(1)
Canada supply of energy and services
and oil and gas production
Denmark energy services
Republic of Ireland supply of energy
and services
As at 31 December 2017.
(1) US tax rate is 21% from 1 January 2018.
%
19
40
78
50
35
26
22
12.5
Tax charge compared to cash
tax paid
Current tax
charge/(credit)
£m
Cash tax paid/
(recovered)
£m
9
53
(13)
49
(88)
169
21
102
UK
Europe
North America
Total
During the year, the UK received a cash refund
of tax overpaid in periods prior to 2015; in Europe,
Spirit Energy made a payment of tax in respect
of 2016 Norwegian profits. These items contributed
to differences between the current tax charge and
taxes paid during 2017.
For details on the Group’s effective tax rate and
a breakdown between relevant jurisdictions and
segments, see the Group Financial Review on
pages 48 to 51.
Further information on the tax charge
is set out in note 9
Pages 132 to 134
Read more in the Group Financial Review
Pages 48 to 51
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
Centrica plc Annual Report and Accounts 2017 | 39
Strategic Report | Business Review
Business
Review
Contents
41 UK Home
41
Ireland
42 North America Home
42 Connected Home
43 UK Business
43 North America Business
44 Distributed Energy & Power
45 Energy Marketing & Trading
45 Central Power Generation
46 Exploration & Production
47 Centrica Storage
40 | Centrica plc Annual Report and Accounts 2017
UK Home
Our leading position in UK energy supply
and services remains core to our business
and we are making good progress on our
transformational journey to improve
customer service levels, reduce costs
and develop propositions to expand and
deepen relationships with households.
Delivering high levels of customer service
is fundamental and total energy supply
complaints fell by 224,000, or 20% per
100,000 customers, as we continued to
invest in transforming customer journeys
and agent training. However, the number
of services complaints increased by around
31,000, or 30% per 100,000 customers,
reflecting operational disruption following
the centralisation of planning and dispatch
activities. Our engineer customer visit net
promoter score (NPS) remained high at 67
and we remain highly focused on improving
customer service levels in 2018. UK Home
Brand NPS reduced by 2pts to +1†, reflecting
the impact of our standard tariff electricity
price increase in September and a broader
negative sentiment surrounding UK
energy suppliers.
Cost efficiency is also fundamental in
allowing us to maintain a competitive pricing
position. Annualised cost per home account
fell by 8% compared to 2016, with efficiencies
realised through our new operating model
including the combination of multiple
customer operations teams into one
organisation, lower incoming call volumes
resulting from investment in our digital
platform which has made it easier to
complete transactions online, consolidation
of our planning and dispatch activities, and
the integration of seven separate field forces
into one. Our leaner, more efficient operating
model has also enabled us to improve our
speed to take new offers to market, for
example digital, rewards and bundling.
Total energy customer account holdings fell
by 1,376,000, or 10%, during 2017, including
the roll-off of 967,000 low-margin collective
switch and white-label fixed price tariffs. The
remaining 409,000 account losses include
195,000 prepayment customers, with the
remaining 214,000 reflecting market
switching trends. Within this, in line with our
strategy to reduce the number of customers
on the Standard Variable Tariff (SVT), we saw
a 14% drop in SVT account holdings and
an increase in the number of customers on
British Gas fixed-term tariffs. The number of
services accounts was flat, with growth of
77,000 in the second half of the year
reflecting an increased focus on offers
targeted at higher value energy customers
and the deployment of digital offers to
partner channels.
Our UK services business completed
nine million customer visits in 2017 and
remains a source of competitive advantage
in the UK given our nationwide scale which
is very difficult to replicate. In 2017, we further
strengthened our services offer with the UK
nationwide launch of our technology-led
Local Heroes on demand services platform,
which plays towards the market trend of
more customers seeking on demand and
home emergency offers. Local Heroes
provides customers with access to local
tradespeople backed by a British Gas
guarantee, and growth accelerated
throughout 2017, with over 7,000
tradespeople signed up and 25,000 jobs
now completed.
In the fourth quarter we developed new
customer offers targeted at increasing
customer value, including the launch of
our online-only tariff, bundling energy with
services or connected home products and
more sophisticated risk-based services
pricing. We will continue to develop these
offers further in 2018. We launched British
Gas Rewards in April, which uses our data to
gain a deeper understanding of customer
preferences and allows customers to select
personalised offers, like loyalty energy days.
Over 700,000 customers have signed up to
date and we are already seeing greater
customer engagement, with retention rates
1.5ppt higher for customers signed up to
British Gas Rewards.
We continue to lead the industry in the smart
meter roll-out and have now installed around
five million smart meters in UK homes,
providing customers with additional insight
on their energy usage and bringing an end
to estimated bills for customers, reducing the
number of calls we receive relating to billing
and meter reading queries.
Overall UK Home adjusted operating profit
was up 1% to £819 million, within which
energy supply profit was up 3% to
£572 million. Energy gross margin reduced
by 4%, reflecting the impact of warmer
weather, lower customer account holdings
and the implementation of the prepayment
cap which came into effect in April 2017 as
a result of the Competition and Markets
Authority remedies. However, these negative
impacts were more than offset by strong
cost efficiency progress. Services gross
margin was down 10%, which includes the
impact of an increase in pension costs and
lower average customer account holdings
through the year. However, cost efficiency
progress was strong and as a result,
operating profit was down by less, by 4%
to £247 million.
Ireland
Our Irish business, Bord Gáis Energy,
performed well in 2017, and, as in the UK
and North America, we are offering a wider
choice of products to our customers.
We continue to focus on customer service,
with increased training, robotics process
automation and enhancements to our
customer-facing IT platforms all contributing
to an 18% reduction in complaints. We also
successfully upgraded our enterprise billing
platform in the year, which will support
increased digitisation over the coming years.
NPS fell by 3 points to +17†, reflecting a
more negative customer perception of
energy suppliers following the fourth quarter
price increases.
Total customer account holdings fell by
13,000, or 2%, reflecting increased market
competition, including from new entrants into
the market. However, electricity customer
account holdings increased by 7,000, or 2%,
as we successfully converted more of our
customers to a dual fuel offering. As in the UK
and North America, we are offering a wider
choice of products to our customers and
having launched our range of Hive automation
products in Ireland in the first half of the year,
we are focused on building brand awareness
around our Connected Home propositions.
Whitegate, our flexible gas fired power
station, recorded another good performance,
with a load factor of 85% and total generation
volumes of 3,228GWh, up 3% compared
to 2016.
Adjusted operating profit was up 2%
compared to 2016, although down 4%
in local currency. This reflects the impact
of a competitive environment, which was
broadly offset by cost efficiencies and good
performance from our trading and power
generation business. Adjusted operating cash
flow was down 26% compared to 2016, which
benefited from a one-off payment related to
the cessation of a gas storage contract.
Centrica plc Annual Report and Accounts 2017 | 41
North America Home
As in the UK, energy supply and services
remains core to our customer offer in
North America and we are well positioned
to expand and deepen relationships
with households.
We remain focused on improving the
sustainability of our business in our chosen
markets by improving customer service
levels, reducing costs and developing
innovative and differentiated offers.
We delivered further improvements in
customer service in 2017, with additional
training provided for our customer service
agents to improve customer interactions,
and enhancements to our digital platform
enabling improved self-serve capability.
These actions contributed to a 22%
reduction in complaints compared to 2016,
while our online reputation improved
significantly. Brand NPS also increased in the
second half of the year and ended 1pt higher
than at the end of 2016.
Cost efficiency remains a core priority.
The integration of our energy and services
business combined with the disposal of non-
core businesses in 2016 has allowed us to
simplify our processes further, reduce
headcount and consolidate office locations.
We have now closed or sold a number of
loss-making services businesses in non-
core markets and have completed our exit
from the residential solar market, which we
announced in July. Centrica’s participation
in commercial solar in North America will
continue as a part of the Distributed Energy
& Power (DE&P) customer offering. Overall,
annualised cost per home account fell by 2%.
The total number of energy supply accounts
fell by 327,000, or 11%, during 2017. In the
US North East, customer account holdings
fell by 18%, driven by a competitive pricing
environment and the loss of 108,000 low-
margin aggregated auction customers.
In Texas, customer account holdings were
down 7% due to competitive pressure and
a pause of door-to-door sales due to
regulatory concerns. However, in the second
half of the year customer retention improved
in Texas, compared to the second half of
2016, reflecting higher levels of customer
service and proactive renewal of customers
on fixed contracts. In Canada, regulatory
changes required us to cease our door-to-
door sales channel which contributed to a
customer account decline of 6%. However,
we have now entered into a number of retail
partnerships that will expand our number of
sales channels. Services customer account
holdings were broadly flat compared to
2016, although within this paid Direct Energy
protection plans rose 18%.
42 | Centrica plc Annual Report and Accounts 2017
We are focused on differentiating our
customer offer and developing bundled
propositions. Direct Energy is currently a key
channel for Hive products in North America
with 80,000 Hive hubs having been sold with
an energy supply tariff. In 2017, 21% of
energy sales were bundled with one or more
product or offer, such as a protection plan or
a Hive product, compared to 17% in 2016.
We sold 373,000 connected hubs in 2017,
taking the total number installed to 900,000.
Hive products are now being sold through
around 50 retailers in the UK and we have
sold over 1.6 million Connected Home
products in total, with the number of
products per hub increasing to 1.8 by the
end of 2017 compared to 1.4 at the start
of the year.
North America Home adjusted operating
profit increased by 28% and adjusted
operating cash flow was up 5%. Within this,
energy supply gross margin was up 2%
despite the fall in customer account holdings,
reflecting our focus on more valuable
customer segments, while adjusted
operating profit was up 6% which includes
the benefit of cost efficiencies. Services
gross margin was down by 7% reflecting the
closure of the solar business, which when
combined with other actions taken to
improve efficiency resulted in a reduced
adjusted operating loss.
Connected Home
Our Connected Home business is utilising
technology to provide offers that meet
customer needs across the strategic pillars
of peace of mind, home energy management
and home automation.
We now have 94,000 customers on
subscription offers or payment plans.
This includes 51,000 ‘Boiler IQ’, which uses
sensors to remotely diagnose boiler faults,
and 43,000 on Hive propositions including
‘Welcome Home’, ‘Close to Home’ and our
heating and cooling plans in the UK, Ireland
and North America. These propositions
enable customers to personalise, control
and interact with their home through the Hive
product range.
Gross revenue increased by 27% to
£42 million, reflecting increased sales of
hubs and products from our more diverse
product range, with gross margins remaining
attractive at around 20%. Connected Home
reported an increased adjusted operating
loss and adjusted operating cash outflow,
reflecting higher investment in product and
platform development, app user experience
and customer acquisition costs.
It is also an important source of
differentiation for our energy and services
businesses and the NPS for British Gas
customers who have a Hive product is
10 points higher than those who do not.
In 2017, we launched three new products,
the Hive Camera, Hive Leak and, in North
America, the Hive Active Thermostat with
air-conditioning; while in January 2018 we
launched our new camera, Hive View. These
new products take Connected Home more
deeply into the peace of mind pillar, as we
deepen our diagnostics capability to provide
additional comfort to home owners.
Additional planned product, proposition
and feature launches in 2018 will strengthen
our customer offer further.
The full range of Hive automation products
was launched in North America and Ireland
during the year, while we also signed our
first strategic partnership deal outside of
our core energy and services markets. Our
partnership with Italian energy company
Eni gas e luce will provide their 8 million
customers in Italy with access to the full
range of Hive home automation products.
We continue to integrate with other
connected home eco-systems, including
through our successful partnership with
Amazon Echo, where 23% of our customers
have used Alexa, Amazon’s voice assistant,
in combination with Hive.
Business Review (continued)Strategic Report | Business Review North America Business
North America Business delivered a poor
financial result in the second half of the year,
with adjusted gross margin down 26% and
adjusted operating profit down 68%.
The drivers of lower gross margin were
primarily in the power retail business. Total
power adjusted gross margin was down
51%, reflecting increased competitive
intensity, changes to the market structure
and related input costs, including higher unit
capacity charges, and the impact of warmer
weather on consumption and a subsequent
under recovery of unitised non-commodity
costs. The financial result also includes a one-
off non-cash charge of £76 million (£46 million
post-tax) relating to a reassessment of
the historic recognition of unbilled power
revenues. In addition, warmer weather
reduced opportunities for gas optimisation,
however, our gas retail business performed
well and overall gas gross margin was
slightly up.
In response to the challenges we faced
in 2017, we have taken actions to drive
improvements in profitability and reduce
volatility in the retail power book. These
include introducing a new standard product
offering that more closely matches input
cost recovery, completion of system
enhancements to provide greater granularity
of gross margin drivers, and improvements
to the processes and controls around our
load forecasting and risk management
reporting. We also implemented several
enhancements to our online customer
platform during 2017, with improved
response times on issue resolution and an
enhanced digital journey for acquisitions
helping improve the customer experience.
Our digital Energy Portfolio platform,
launched in the second half of 2016, has also
given customers direct access to our energy
expertise while providing dynamic energy
procurement options. In addition, we made
improvements to our billing processes and,
reflecting all of this, complaints fell 38%
compared to 2016 and NPS increased by
2 points to +33†.
We continue to expand our offering into
new geographies and delivered higher sales
in our key growth areas of the US Mid-
Continent, California and Canada. Overall,
total customer account holdings reduced by
20,000 during 2017, which reflects a focus
on higher value accounts and a reduction in
our small business accounts. However, the
competitive environment impacted our sold
unit margins, down 20% in power and 22%
in gas for new contracts.
An increased focus on energy efficiency has
lowered power usage per customer across
the industry and we are well positioned to
benefit from this market trend, with North
America Business working closely with the
DE&P business to develop joint propositions
to deepen the customer relationship. North
America Business continues to be an
important sales channel for distributed
energy products, including Panoramic
Power’s wireless energy insight management
solutions. Over 11,000 sensors were
deployed to Direct Energy customers in
2017. We are also planning to expand our
combined heat and power offering in North
America following the acquisition of ENER-G
Cogen in 2016, while the DE&P acquisition
of demand response company REstore
provides additional capability.
North America Business reported a 68%
fall in adjusted operating profit and a 69%
reduction in adjusted operating cash flow.
Around half of the reduction in adjusted
operating profit reflects the impact of the
competitive environment, warmer weather,
fewer optimisation opportunities and the
impact of higher capacity costs, with the
other half reflecting the one-off non-cash
charge. In 2018, we are focused on
continuing to deliver a high-quality customer
experience, targeted offers for higher value
customer segments and offering an
increasing range of DE&P products and
propositions. However, we expect to see
continued competitive pressure on electricity
supply margins and, therefore, growth in
adjusted operating profit will be limited, after
adjusting for the impact of the one-off non-
cash charge.
UK Business
UK Business adjusted operating profit fell
significantly in 2017.
This reflects the negative impacts of
additional costs resulting from commodity
volatility and energy volume settlements in
the first quarter of 2017, relating to 2016,
warmer weather and the impact of increased
competition on customer account holdings.
The combination of these factors resulted
in a 30% fall in gross margin in 2017,
which was only partially offset by further
cost efficiencies and reductions in bad
debt, the latter enabled by improved
operational performance.
Operationally, UK Business delivered
improved customer outcomes in 2017,
with better timeliness and accuracy of
customer bills. This helped drive an 8%
reduction in call volumes and a 24%
reduction in complaints compared to 2016.
However, customer account holdings fell
64,000 or 9%, with around half the losses
in Industrial and Commercial, reflecting our
decision not to pursue renewal of some
low value multi-site contracts, but also
increasing competitive intensity. The
remaining losses were of small and medium
(SME) customers, reflecting competitive
intensity with 67 active competitors and
high levels of switching activity.
Against this competitive backdrop, we are
focusing our retention and acquisition
activities on the higher value SME segments,
continuing to build relationships with energy
brokers and improving our customer portal
facilities to allow them to manage their whole
portfolio online. This has led to an increase
in broker-led acquisitions, which should aid
our commercial performance. In 2018,
we expect some recovery in gross margin
given a more normal weather and
commodity environment, and, combined
with further cost efficiency, expect adjusted
operating profit to improve towards the levels
seen in 2016.
Adjusted operating profit of £4 million was
down 92% in 2017, reflecting the additional
costs in the first quarter, warmer weather
and lower customer account holdings, partly
offset by cost efficiencies and bad debt
reductions. Working capital management
has remained a key area of focus, and
reflecting this, adjusted operating cash flow
was £131 million despite the material
reduction in operating profit.
Centrica plc Annual Report and Accounts 2017 | 43
DE&P gross revenue increased by 6%
compared to 2016, and by 34% on an
underlying basis when reflecting the impacts
of the disposal of the non-core building
energy management systems business and
the scaling back of our UK solar business
following the removal of the feed-in-tariff.
This growth reflects the organic increase
in customer sites and a full year impact from
ENER-G Cogen, which was acquired in May
2016. DE&P reported an increased adjusted
operating loss of £53 million and an
increased adjusted operating cash outflow
of £30 million, reflecting increased
headcount to build new capability and higher
investment in the development of new
customer propositions, sales channels and
technology to drive growth. We expect DE&P
to deliver continued revenue and gross
margin growth in 2018, although we will
continue to make further investment to drive
this growth and therefore expect the current
year operating loss to be similar to 2017.
Distributed Energy & Power
Distributed Energy & Power (DE&P) is
focused on the three Centrica Business
strategic pillars of energy insight, energy
optimisation and energy solutions.
Since the formation of the DE&P business
unit in the second half of 2015, we have
grown our capability both organically and
inorganically. The targeted acquisitions of
Panoramic Power, REstore and ENER-G
Cogen provide us with strong positions in
each of the three strategic pillars and enable
us to capitalise on the global trend towards
distributed energy and to develop a range
of products and services to meet the needs
of customers.
Our subscription-based Panoramic Power
energy insight product provides customers
with real-time visibility of their energy usage
plus actionable insights. We now have
53,000 sensors deployed across more than
1,800 sites in 30 countries and are collecting
around 14 billion data points per month.
It has proved successful in changing the
dynamic of the conversation with customers
and provides opportunities to cross-sell
energy optimisation and solutions services.
We acquired REstore, Europe’s leading
demand response aggregator, in November.
REstore provides key capabilities in energy
optimisation and provides over 850MW of
flexible power capacity to grid operators.
The power is aggregated from a 2.2GW
flexible portfolio of industrial and commercial
customers across Belgium, the UK, France
and Germany and generates value for
businesses through ancillary services
including frequency response and capacity
markets. Through this acquisition, demand
response aggregation will become a core
part of our offer to customers, and DE&P’s
optimisation capacity has now increased
to 1.9GW.
In energy solutions, DE&P now has over
1,400 long-term contracted sites and active
solutions, mostly CHP-based, in 13 countries,
having sold both off-the-shelf and bespoke
end-to-end solutions. We have also
expanded our distributed solutions offering
in North America, which will be a major focus
area for growth.
In total, the number of DE&P active customer
sites has increased by 22% over the past
12 months, with growth particularly strong in
the fourth quarter. Total secured revenue, our
forward order book, increased 24% in 2017.
DE&P also includes our fleet of smaller gas
fired peaking plants at Brigg, Peterborough
and Barry. Construction is progressing well
on our three new flexible generation projects,
a 49MW battery storage facility at Roosecote
and two 50MW fast response gas fired
plants at Brigg and Peterborough. All three
have 15-year capacity contracts starting in
October 2020 and were successful in the
2018/19 T-1 capacity auction.
We continue to innovate in Local Energy
Markets and now have over 300 homes and
businesses registered to take part in our
three-year trial in Cornwall. In 2017 we
installed the largest flow battery in the UK
and in 2018 we expect to install storage
and solar PV in 100 homes and commence
larger installations of storage, renewables
and distributed generation across up to
15 businesses as part of the trial.
44 | Centrica plc Annual Report and Accounts 2017
Business Review (continued)Strategic Report | Business Review transact multiple free on board and delivered
ex-ship cargoes from a range of locations
globally. In November, we traded our
hundredth cargo outside the UK, just three
years after trading our first cargo.
EM&T has major flexible legacy gas contracts
and associated hedges with take or pay
arrangements, where the payments are
made for gas even if delivery is deferred to
future periods. These were inherited by
Centrica on demerger and are part of an
overall profitable Centrica portfolio. The profit
and cash flow from these contracts and
hedges will vary between periods based on
the commodity price environment and
decisions we take to optimise them. In 2017,
the three remaining contracts and
associated hedging generated £36 million
of gross margin, having made £118 million
of gross margin in 2016, reflecting our take
or pay strategy to maximise the contracts’
value over their lives. During 2018, the two
historically most profitable flexible legacy
gas contracts will end, leaving one contract
which expires in 2025 and is currently
expected to be loss-making based on the
current level of gas prices. As a result, we
currently expect 2018 EM&T adjusted
operating profit to be no more than half the
level of 2017. This contract will continue to be
managed for value and we will look to utilise
the contract optionality to capture favourable
market conditions as they arise.
Energy Marketing & Trading
Energy Marketing & Trading (EM&T) is focused
on the Centrica Business strategic pillars of
energy optimisation and wholesale energy.
In addition to expanding its route to market
offers, global LNG presence, and trading and
optimisation activities across Europe, EM&T
continues to serve its core purpose of
managing commodity profit risk and
providing wholesale market access for
the Group.
The acquisition of Neas Energy in October
2016 has enhanced EM&T’s capabilities and
geographical reach, as well as giving EM&T
access to Neas’ advanced optimisation
platform, Neas Direct, which provides
hedging and optimisation strategies and
route to market services to our customers.
EM&T now serves customers who own
decentralised assets with installed capacity
of around 10GW, predominantly in Denmark,
the UK, Germany and Sweden, enabling
them to access our expertise to capture
value and provide flexibility services to their
assets. Neas Energy has performed ahead
of expectations since its acquisition, and it
delivered a strong trading and optimisation
result in 2017, particularly in the first half of
the year during periods of power volatility
in Northern European markets.
In LNG, we continue to expand our global
business in advance of the first delivery
from our contract with Cheniere, which is
expected in September 2019 from the
Sabine Pass facility in Louisiana. We have
built a full range of LNG trading, optimisation
and operations capability and continue to
EM&T adjusted operating profit was
£104 million in 2017 compared to
£161 million in 2016, although, after
excluding the contribution from the flexible
legacy gas contracts, adjusted operating
profit associated with core EM&T activities
increased by 58% to £68 million. This
underlying increase reflects further strong
trading and optimisation and route-to-market
performance and a full year’s impact of the
Neas Energy acquisition. Adjusted operating
cash flow increased by 32% to £262 million,
predominantly reflecting the timing of cash
flows associated with the flexible gas
contracts between 2016 and 2017.
Central Power Generation
With our focus for growth on distributed
energy and flexible generation, we made
further significant progress in 2017 to reduce
the scale of our Central Power Generation
business in line with our strategy.
In February 2017, we completed our exit
from wind power generation with the
disposal of our 50% interest in the Lincs
Wind Farm for £214 million. The sale resulted
in an exceptional pre-tax profit on disposal of
£64 million (post-tax £58 million). In August,
we completed the sale of our large combined
cycle gas turbines (CCGTs) at Langage and
South Humber Bank and the Kings Lynn B
CCGT development project for £314 million
in total, which resulted in a total pre-tax
exceptional profit of £8 million (post-tax
£5 million), comprising an impairment write
back and a small loss on disposal.
Centrica retains a 20% equity interest in the
entity which owns and operates the eight
nuclear stations in the UK. Our share of
nuclear generation volumes remained high
at 12.8TWh, the second highest output
achieved since our investment in 2009.
However, this was 2% lower than in 2016,
reflecting slightly higher unplanned outages.
Central Power Generation adjusted
operating profit was £35 million, 53% lower
than 2016. This was primarily driven by
a lower achieved power price for Nuclear,
including the impact of historic hedging,
and the impact of our exit from wind power
generation. Adjusted operating cash flow
was £58 million compared to an outflow of
£1 million in 2016, with positive movements
in working capital in comparison to 2016,
more than offsetting a reduction in Nuclear
dividends received.
Centrica plc Annual Report and Accounts 2017 | 45
In 2018, we currently expect Spirit Energy to
deliver production in the range 50–55mmboe
while progressing several key projects.
Fabrication contracts have been awarded
and drilling commenced on the Oda project,
which remains on target to produce first oil in
2019, while appraisal drilling will commence
at the Fogelberg discovery. We also expect
that a Field Development Plan for the Nova
development, previously named Skarfjell,
will be finalised during 2018.
Reflecting the net impact of the Spirit Energy
transaction, and reserve additions on a
number of fields including Chiswick and
Maria not fully offsetting production during
the year, Centrica’s net share of 2P reserves
in Europe, excluding reserves at Rough, fell by
59mmboe to 251mmboe at the end of 2017.
European total lifting and other cash
production costs increased by 9%
compared to 2016, with the decline in
sterling and the impact of Cygnus coming
on-stream more than offsetting cost
efficiency benefits. Combined with lower
production volumes, this resulted in
European unit lifting and other cash
production costs increasing by 16%. For the
period in which the assets in Canada and
Trinidad and Tobago were owned, Americas
unit lifting and other cash production costs
were 47% higher, principally reflecting the
impact of the decline in sterling, higher
royalty and pipeline tariffs and the non-
repeat of some one-off savings in 2016.
Adjusted operating profit of £184 million was
broadly flat compared to 2016, with higher
achieved prices offsetting the impact
of lower production, higher cash costs
and higher depreciation including that
associated with Cygnus production.
Adjusted operating cash flow fell 32% to
£448 million despite the flat operating profit,
reflecting higher decommissioning spend
and higher cash taxes due to the phasing
of Norwegian payments between years.
The business was again free cash flow
positive in 2017, generating £298 million
when excluding £78 million of cash acquired
Exploration & Production
In line with our strategy, we now have
a stronger, more sustainable Exploration
& Production (E&P) business focused
on Europe.
Following the disposal of our assets in
Canada and Trinidad and Tobago during
the year, on 8 December Spirit Energy was
launched, a newly formed entity combining
Centrica’s E&P business with that of
Bayerngas Norge. The transaction creates
a leading independent European E&P
business with an attractive mix of producing
assets and development projects. Centrica
owns 69% of the new business, and will
consolidate 100% of the financial result.
The sale of our remaining portfolio of
gas assets in Trinidad and Tobago was
completed in May for $35 million (£26 million),
which resulted in a pre- and post-tax
exceptional loss on disposal of £9 million.
We announced the disposal of our interest
in the joint venture portfolio of assets in
Canada in June, and the sale was completed
in September for C$420 million (£255 million),
leading to total pre-tax exceptional loss on
disposal and impairment charges of
£125 million (post-tax £109 million).
Total gas and liquids production of
61.0mmboe was down 14% compared
to 2016 principally due to the sale of assets
in Canada and Trinidad and Tobago.
Production in Europe was down 5%,
or 6% when excluding Bayerngas Norge
production following the launch of Spirit
Energy. This principally reflects lower
production from Morecambe due to our
decision to undertake onshore and offshore
asset integrity works to improve safety,
operational efficiency and underpin the
residual life of the asset. Excluding
Morecambe, the natural decline from the rest
of the portfolio was fully offset by the positive
impact of a first full year of production from
the Cygnus gas field, which came onstream
in December 2016 and is performing ahead
of expectations.
We continue to focus our investment on the
most attractive development options in our
portfolio. Drilling operations at the Maria
development commenced in the first quarter
2017, with first oil achieved in December,
a year ahead of schedule and with total
project costs around 20% lower than the
business case. Further infill wells were drilled
at Statfjord and Kvitebjørn in Norway and
Chestnut in the UK. Overall, 2017 capital
expenditure was down 15% to £439 million,
which reflects the impact of reduced spend
on Cygnus.
46 | Centrica plc Annual Report and Accounts 2017
Business Review (continued)Strategic Report | Business Review of gas in order to reduce pressure on the
wells to ensure that risks associated with
operating the reservoir are as low as
reasonably practical. Consent was granted
in September, and 25bcf of gas was sold in
2017, with production continuing into 2018.
CSL will now operate Rough as a gas
production asset to maximise recovery of
the estimated 142bcf of reserves remaining
in the field as at the end of 2017. Production
in 2018 is currently forecast to be 56bcf.
CSL gross revenue increased by 59%
to £148 million, reflecting 2017 production
volumes from the Rough asset being
materially higher than the 9bcf of cushion
gas sold in 2016. This was partially offset
by minimal SBU revenue due to the reduced
available capacity of the reservoir for the
2016/17 storage year as a result of the well
integrity issues and no SBUs being sold for
the 2017/18 storage year. With total costs
down 9% due to lower fuel gas usage
reflecting the reduced operations at
Rough and reduced operating costs to
reflect the changing status of the asset, CSL
recognised an adjusted operating profit of
£17 million in 2017 compared to a loss of
£52 million in 2016. Adjusted operating cash
flow was £61 million, which included working
capital inflows resulting from the sale of
operational stock, compared to a build-up
of stock in 2016, and costs associated with
decommissioning the 8A platform, which
will continue into 2018.
A pre-tax exceptional charge of £270 million
(post-tax £224 million) was recorded in the
first half of 2017, following the June 2017
announcement to apply for a production
licence and permanently end Rough’s status
as a storage facility. From 2018, we expect
to report both Spirit Energy and CSL in one
E&P reporting segment.
through the Spirit Energy transaction. This
includes £289 million of disposal proceeds,
with adjusted operating cash flow broadly
offsetting capital expenditure during the year.
We also recognised pre-tax exceptional
impairments of £494 million (post-tax
£162 million) on certain fields, predominantly
due to reduction in price forecasts and
changes to expected decommissioning
costs following the conclusion of the triennial
review, partially offset by the recognition of
a PRT deferred tax asset reversing a prior
period impairment. In addition, there has
been a pre-tax reduction in decommissioning
provisions of £86 million (post-tax £51 million)
for assets previously impaired through
exceptional items.
Centrica Storage
In January 2018, Centrica Storage (CSL)
received consent from the Oil and Gas
Authority to produce all recoverable gas
reserves from the Rough asset which,
following the Competition and Markets
Authority’s final decision to remove CSL
from the Undertakings, finalises the change
in Rough’s status from a storage facility to
a producing asset.
In June, CSL announced it had completed
and analysed the results of the extensive well
testing programme at the Rough gas storage
asset, which had commenced in 2015
following the identification of an issue with
the integrity of the wells.
CSL also announced that it had completed
a review into the feasibility of returning
Rough to injection and storage operations.
It concluded that due to the high operating
pressures involved, and the fact that the
wells and facilities are at the end of their
design life and had suffered a number of
different failure modes while testing, it could
not safely return the assets and facilities to
injection and storage operations. In addition,
an assessment of both the current
economics of seasonal storage and the
costs involved suggested that it would not
be economic to continue to operate Rough
as a gas storage asset by refurbishing or
rebuilding the facility and replacing the wells.
As a result, CSL made all relevant
applications to permanently end Rough’s
status as a storage facility and to produce
all recoverable gas reserves. In December,
the Competition and Markets Authority
announced its final decision to grant CSL’s
request to be released from the Rough
Undertakings, while in January 2018 the
Oil and Gas Authority (OGA) granted its
consent for CSL to produce indigenous gas
and associated liquids from Rough. Separate
to this application, in June, CSL also applied
to the OGA to produce up to an initial 30.7bcf
Centrica plc Annual Report and Accounts 2017 | 47
Group revenue
Group revenue increased by £0.9 billion,
or 3%, to £28.0 billion (2016: £27.1 billion).
Gross revenue in Centrica Consumer fell
by £0.6 billion, or 5%, largely reflecting the
impact of lower average customer account
holdings and lower consumption due to
warmer weather over the year. Gross
revenue in Centrica Business increased by
£1.7 billion, or 13%, reflecting the full-year
impact of the Neas Energy acquisition which
completed in October 2016 and the impact
of foreign exchange movements on North
America Business revenue. Revenue from
the asset businesses, Exploration &
Production (E&P) and Centrica Storage
(CSL), was broadly flat overall.
Group Financial
Review
Group Revenue
£28.0bn
▲3%
2016: £27.1 billion
Adjusted operating profit
£1,252m
▼17%
2016: £1,515 million
Statutory operating profit
£486m
▼80%
2016: £2,486 million
Adjusted effective tax rate
22%
▼3ppt
2016: 25%
Statutory profit attributable
to shareholders
Statutory basic earnings
per share
£333m
▼80%
2016: £1,672 million
6.0p
▼81%
2016: 31.4p
Adjusted basic earnings per share (EPS)
12.6p
▼25%
2016: 16.8p
Final dividend per share
12.0p
0%
2016: 12.0p
Jeff Bell
Group Chief Financial Officer
48 | Centrica plc Annual Report and Accounts 2017
Strategic Report | Group Financial Review Adjusted operating cash flow
£2,069m
▼23%
2016: £2,686 million
Adjusted earnings
£698m
▼22%
2016: £895 million
Group net debt
£2,596m
25%
2016: £3,473 million
Operating profit
Throughout this report, reference is made
to a number of different profit measures,
as shown below.
Group finance charge and tax
Net finance costs increased to £344 million
(2016: £300 million), predominantly reflecting
a lower capitalised interest credit.
Business performance taxation on profit
was lower at £191 million (2016: £282 million)
and after taking account of tax on joint
ventures and associates, the adjusted tax
charge was £197 million (2016: £298 million).
An adjusted effective tax rate calculation is
shown on page 50.
The Group adjusted effective tax rate reduced
to 22% (2016: 25%) reflecting the mix of
profits between different activities and
jurisdictions and the impact of a net uncertain
tax provision release of £34 million, a net
petroleum revenue tax refund of £34 million
and a tax credit of £34 million resulting from
the restatement of deferred tax balances
following the reduction in the US federal
tax rate from 35% to 21%. Adjusting for these
impacts and other similar, but individually
immaterial items, the Group’s underlying
adjusted effective tax rate was 40%.
Total adjusted operating profit reduced
17% to £1,252 million (2016: £1,515 million).
Centrica Consumer profit fell 1% with the
impact of warmer weather on consumption
and lower account holdings in UK Home and
North America Home, and an increased
operating loss due to growth investment in
Connected Home, largely offset by cost
efficiencies. Centrica Business profit fell by
67%, largely reflecting the impact of warmer
weather and competitive market conditions
in our energy supply businesses in UK
Business and North America Business,
a one-off non-cash charge relating to a
reassessment of the historic recognition of
unbilled power revenues in North America
and lower profit from flexible gas contracts
in Energy Marketing and Trading (EM&T).
Profit from E&P was broadly flat, with higher
achieved prices offsetting lower volumes,
while CSL reported an operating profit of
£17 million compared to a loss of £52 million
in 2016, reflecting higher gas production
volumes with Rough having received
permission to produce up to 30.7bcf of
cushion gas to reduce pressure in the field
for safety reasons.
Operating profit
Year ended 31 December
Notes
Adjusted operating profit/(loss)
Business
performance
£m
Exceptional
items and certain
re-measurements
£m
Statutory
result
£m
Business
performance
£m
Exceptional
items and certain
re-measurements
£m
2017
2016
Statutory
result
£m
UK Home
Ireland
North America Home
Connected Home
Centrica Consumer
UK Business
North America Business
Distributed Energy & Power (DE&P)
Energy Marketing & Trading (EM&T)
Central Power Generation (CPG)
Centrica Business
Exploration & Production (E&P)
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 period
Less (profit)/loss attributable to non-controlling interests
Adjusted earnings
819
47
119
(95)
890
4
71
(53)
104
35
161
184
17
1,252
(7)
1,245
(344)
(191)
710
(12)
698
4(c)
4(c)
4(c)
8
9
810
46
93
(50)
899
50
221
(26)
161
75
481
187
(52)
1,515
(48)
1,467
(300)
(282)
885
10
895
(759)
–
352
(407)
486
(344)
161
303
1,019
–
(242)
777
2,486
(300)
(524)
1,662
Centrica plc Annual Report and Accounts 2017 | 49
Group tax charge
Year ended 31 December
Adjusted operating profit
Share of JV/associate interest
Net finance cost
Adjusted profit before taxation
Taxation on profit
Share of JV/associate taxation
Adjusted tax charge
Adjusted effective tax rate
UK
£m
798
(1)
(197)
600
62
6
68
Spirit
Energy
UK
£m
Spirit
Energy
Non-UK
£m
Spirit
Energy
Total
£m
Non-UK
£m
278
–
(90)
188
6
–
6
(103)
–
(37)
(140)
(111)
–
(111)
79%
279
–
(20)
259
234
–
234
90%
176
–
(57)
119
123
–
123
103%
11%
3%
2017
Group
Total
£m
1,252
(1)
(344)
907
191
6
197
22%
UK
£m
932
(32)
(235)
665
31
16
47
7%
Non-UK
£m
583
–
(65)
518
251
–
251
48%
2016
Total
£m
1,515
(32)
(300)
1,183
282
16
298
25%
A breakdown of factors that have affected the adjusted effective tax rate in 2017 is shown in the table below:
Year ended 31 December
Tax at relevant statutory rate
Adjusting items(1)
Underlying adjusted effective
tax charge/rate
Rate changes
Provision releases and other
Adjusted effective tax charge/rate
£m
116
21
UK
%
19%
–
137
23%
–
(69)
68
–
–
11%
£m
66
(7)
59
(34)
(19)
6
Non-UK
%
Spirit Energy
UK
%
£m
Spirit Energy
Non-UK
%
£m
Spirit Energy
Total
%
£m
35%
(56)
40%
–
3
–
202
21
78%
146
123%
–
24
–
£m
328
38
Total
%
36%
–
31%
(53)
38%
223
86%
170
143%
366
40%
–
–
3%
–
(58)
(111)
–
–
–
11
–
–
–
(47)
–
–
(34)
(135)
–
–
79%
234
90%
123
103%
197
22%
(1) Adjusting items includes non-qualifying depreciation and amortisation, upstream incentives, abandonment relief and any variance to statutory rates.
For the European E&P activities, now
included within Spirit Energy, profits were
made in Norway but losses were incurred in
the UK, where tax relief is given at a lower
effective rate than the rate applied in Norway.
As a result, the Spirit Energy underlying
adjusted effective tax rate was 143%.
The future underlying effective tax rate for
Spirit Energy will be dependent on the mix
of profits, while the underlying adjusted
effective tax rate for UK operations is
expected to reduce in future years as the UK
corporation tax rate reduces to 17% from
2020. The underlying adjusted effective tax
rate for US operations reported within non-
UK is also expected to reduce reflecting the
reduction in the US federal tax rate to 21%.
Group earnings and dividends
Profit for the year from business performance
decreased to £710 million (2016: £885 million)
and after adjusting for non-controlling
interests, adjusted earnings fell by 22% to
£698 million (2016: £895 million). This reflects
the lower adjusted operating profit and
higher net finance cost, partly offset by the
lower tax charge, all as described above.
Adjusted basic EPS was 12.6 pence
(2016: 16.8 pence) reflecting the lower
earnings and a higher number of shares
in issue due to the effects of a 7% equity
placing in May 2016 and the scrip dividend.
The statutory profit attributable to
shareholders for the year was £333 million
50 | Centrica plc Annual Report and Accounts 2017
(2016: £1,672 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 2016 is principally due to a post-tax
exceptional charge of £476 million (2016:
credit of £27 million) and a lower net gain from
certain re-measurements of £69 million (2016:
£750 million). The Group reported a statutory
basic EPS of 6.0 pence (2016: 31.4 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 (2016: 12.0 pence).
Group cash flow, net debt and
balance sheet
Net cash flow from operating activities
decreased to £1,840 million (2016: £2,396
million), which predominantly reflects lower
EBITDA and net working capital inflows.
Adjusted operating cash flow, which is
reconciled to net cash flow from operating
activities in the table on page 51, was down
23% to £2,069 million.
Net cash inflow from investing activities was
£32 million (2016: outflow of £803 million).
The change compared to 2016 is
predominantly due to proceeds from net
disposals in 2017 of £819 million, mainly
relating to the Lincs Wind Farm, UK gas fired
power stations and Canadian E&P assets.
The 2016 comparator included the
acquisitions of ENER-G Cogen and Neas
Energy and lower disposal proceeds.
Net cash outflow from financing activities
was £1,070 million (2016: £546 million). This
predominantly reflects 2016 including an
inflow from the issuance of ordinary share
capital following the £700 million equity
placing. Equity dividends paid were lower in
2017, reflecting a higher scrip take up of the
2016 final dividend payment, financing interest
was higher and repayment of borrowings
were lower reflecting a lower level of debt
maturing in 2017 compared to 2016.
Reflecting all of the above, the Group’s
net debt as at 31 December 2017 fell
to £2,596 million (31 December 2016:
£3,473 million), which includes cash collateral
posted or received in support of wholesale
energy procurement.
Net assets increased by £584 million to
£3,428 million (31 December 2016:
£2,844 million). Total assets decreased by
£1,226 million, with lower non-current assets
predominantly reflecting the pre-tax impact
of impairments and disposals. Total liabilities
decreased by £1,810 million, including the
impact of lower decommissioning provisions
resulting from the E&P disposals, lower
derivative financial instrument balances, and
a reduction in the net pension liability from
£1,137 million at the end of 2016 to
£886 million at the end of 2017. Further
details on pensions can be found in note 22.
Strategic Report | Group Financial ReviewGroup 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(1)
Payments relating to exceptional charges
Dividends received from joint ventures and associates
Defined benefit deficit pension payment
Adjusted operating cash flow
2017
£m
1,840
(136)
176
58
131
2016
£m
2,396
(177)
273
117
77
2,069
2,686
(1) Net margin and cash collateral inflow includes the reversal of collateral amounts posted when the related derivative contract settles.
2017 Acquisitions and disposals
In line with its strategy to reduce its scale
in E&P and Central Power Generation, in
February the Group completed the disposal
of the Lincs Wind Farm for £214 million and in
May completed the disposal of its remaining
Trinidad and Tobago gas assets for
£26 million. In August, the Group completed
the disposal of its UK gas fired power
stations at Langage, South Humber Bank
and Kings Lynn B, for £314 million and in
September, the Group completed the
disposal of its 60% interest in its portfolio
of Canadian E&P assets for £255 million.
In November, the Group acquired Europe’s
leading demand response aggregator,
REstore, for £62 million. The business brings
key capabilities in asset optimisation and
demand response aggregation is expected
to become a core part of our distributed
energy offer to customers. The business
will form part of the DE&P business unit.
In December, Spirit Energy was formed,
combining the Group’s remaining European
E&P business with that of Bayerngas Norge
AS. The Group owns 69% of the business.
Further details on acquisitions, assets
purchased and disposals are included in
notes 4(e) and 12.
Exceptional items
A net exceptional pre-tax charge of
£884 million was recognised in 2017
(2016: £11 million).
The Group recognised net impairments of
£408 million on E&P assets. It recognised
£494 million of impairments predominantly
due to a reduction in price forecasts and
changes to decommissioning costs following
the conclusion of the triennial review. It also
recognised an £86 million write-back of
decommissioning provisions for assets
previously impaired.
Following the announcement in June 2017
that the Rough facility could not be safely
returned to injection and storage operations
and CSL would instead apply for a
production licence for the remaining cushion
gas, a pre-tax impairment charge of
£270 million was recorded in the half
year results.
The Group recognised a £64 million gain on
disposal of the Lincs Wind Farm joint venture
and a net gain of £8 million relating to the
disposal of its CCGT power stations.
The Group recognised a £9 million loss on
disposal of its remaining portfolio of gas
assets in Trinidad and Tobago and a total
net charge of £125 million relating to the
disposal of its Canadian E&P assets.
As a result of the Group’s strategic review
announced in 2015, the Group incurred
a further £144 million of restructuring and
business change costs in 2017 in
implementing the new organisational model
relating principally to redundancy costs,
impairment of assets on closure of
businesses, transformation spend and
consultancy costs, as well as costs
associated with setting up the Spirit Energy
business and changing the operating model
for CSL.
These charges generated a taxation credit
of £408 million (2016: £38 million). Total net
exceptional charges after taxation were
£476 million (2016: credit of £27 million).
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 £125 million (2016: £1,030 million) relating
to these re-measurements, or £69 million
after tax (2016: £750 million). 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
On 15 January 2018, Centrica Storage
was granted consent from the Oil and Gas
Authority to produce indigenous gas and
associated liquids from Rough, confirming
transition from a storage operation to one
of production on 17 January 2018.
Further details of events after the balance
sheet date are described in note 26.
Risk and capital management
The Group’s principal risks and uncertainties
are set out on pages 52 to 62. 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).
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 (IFRSs) 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.
Centrica plc Annual Report and Accounts 2017 | 51
Our Enterprise Risk
Framework is established
to focus attention on
those risks that enable
us to deliver our strategy.
It’s critical we take an
appropriate level of risk
within the boundaries
we establish through
Delegations of Authority
and Policies and
Standards to manage the
downside impact, whilst
driving upside returns.
Carolyn Clarke
Group Head of Audit,
Risk and Control
Understanding those Risks that
impact our Strategy
The fundamental trends outlined in our
strategy on pages 10 and 11, including the
decentralisation of energy systems, shift
of power to consumers and increasing
digitisation, present both opportunities
and threats. Identifying and managing
these risks is critical to delivering our
strategy. The Group Priorities, as laid out
below, are the lens through which we
assess our risks and drive discussions
around the level of risk we need to take
and the requirements of our System of
Risk Management and Internal Control.
Our Group Priorities
Safety, compliance
and conduct
Customer satisfaction
and operational excellence
Cash flow growth and
strategic momentum
Cost efficiency
and simplification
People and building
capability
Read more about Our Strategy
Pages 10 to 11
Strengthening our System of Risk
Management and Internal Control
Following our Strategic Review in 2015,
we refreshed our approach to risk
management. In 2017 we focused on
embedding this improved process aligned
with the new operating model to ensure
it makes a positive contribution to effective
decision-making and business growth,
while ensuring we successfully manage
risks. In particular, as we have moved into
new geographies, we have sought to ensure
we are addressing risks associated with
operating in those jurisdictions.
Each business unit and Group function is
responsible for identifying and assessing
its significant risks within the context of
our Principal Risks. For each risk, they
consider both the potential impact to the
Group and the likelihood of occurrence on
an inherent and residual basis. The Executive
Committee then considers these perspectives
alongside broader external and internal factors
to create a Group-wide set of prioritised risks.
• We categorise our risks as:
– Risk Requiring Standards (RRS):
Risk with negative impacts that
we control through Standards and
Management Systems, for example
process safety or data security.
– Risk Requiring Judgement (RRJ):
Risk that we choose to take in order
to execute our business strategy,
for example new products or business
improvement opportunities.
– External Risk: Risk that requires
a focus on scenario and contingency
planning with little or no ability to
reduce likelihood, for example extreme
weather or geopolitical turbulence.
On an annual basis, we evaluate our System
of Risk Management and Internal Control,
learning from any control incidents that have
arisen, to ensure we are mitigating risks in
line with our risk appetite.
52 | Centrica plc Annual Report and Accounts 2017
Our Principal Risks and UncertaintiesStrategic Report | Our Principal Risks and Uncertainties
Determining the risk we would like
to take
The Board approves statements of risk
appetite associated with each Group Priority.
These statements provide a framework to
guide our risk mitigation activities and to
drive the appropriate level of risk taking:
• Safety, compliance and conduct: Our
appetite for taking risk in this area is as
low as reasonably practicable in relation
to: ensuring the safety of our people,
customers and communities; conducting
our business operations in compliance
with laws and regulations; and managing
our financial reporting risks.
• Customer satisfaction and
operational excellence: We have a
moderate risk appetite to allow us to
pursue innovative opportunities. We are
driven to satisfy the changing needs of
our customers.
• Cash flow growth and strategic
momentum: We have a moderate
to high risk appetite for seeking
opportunities to deliver cash flow growth
and our target return on capital.
• Cost efficiency and simplification:
We have a low risk appetite for
failing to implement and manage
improvements sustainably and
in a rigorous and systematic way.
• People and building capability:
We accept a moderate level of risk
in finding ways to attract, develop
and reward people with the diverse
capabilities needed to deliver our
ambitions. However, we have a low
risk appetite for rewarding and
retaining people who fail to demonstrate
our Values.
Evaluating Risks through our Enterprise Risk Framework
Our Enterprise Risk Framework is designed to enable us to identify, evaluate
and mitigate our risks appropriately. It comprises six steps:
1 Identify
•
Identify significant risks to achieving
business unit and/or function objectives
2 Assess & Analyse
• Assess inherent impact and likelihood using
•
•
Centrica risk assessment matrix
Identify risk type (RRS, RRJ or External Risk)
and determine target risk rating
Identify mitigating activity and key risk
indicators and assess current risk exposure
3 Design & Implement Controls
• Design and implement controls
and actions to mitigate the potential
impact and likelihood of risks
4 Manage & Monitor
• Management of risks and controls
to deliver target risk level
• Monitor through inspection,
performance reviews and
regular reporting
Identify and implement specific
remediation actions
•
5 Calibrate & Assure
• Group Functions calibrate submitted risks to ensure
consistency and prioritise their responses
• Functional assurance and internal audit activity
• Assess impact of assurance findings
6 Report, Evaluate & Improve
• Report consolidated risk, assurance and control position
to the Group Risk, Assurance and Control Committee,
Audit Committee and Safety, Health, Environment, Security
and Ethics Committee
• Evaluate priority risks within the Group risk profile to identify
any corrective actions
• Evaluate Group-wide severe, but plausible risks
and implications
• Drive continuous improvement through reviewing the
Risk Universe and Group risk appetite
Centrica plc Annual Report and Accounts 2017 | 53
Our System of Risk Management and Internal Control
Our Purpose
What we stand for
Our Values
Our strategic framework
Our Code
Strategy
Financial framework
Enterprise Risk Framework
Board and Committees
Legal entities
Delegations of Authority
Executive and Committees
Our governance
How we are organised and managed
Executive management
Business Units
Operating Functions
Group Functions
Corporate Functions
Management Systems
(policies, standards
and processes)
Functional assurance
Internal Audit
External assurance
How we provide assurance
The vision behind
our Enterprise Risk
Framework was to enable
us to operate within an
acceptable risk envelope
and make risk-informed
decisions in pursuit of our
strategy. Identification
and management of risk
is part of the day-to-day
responsibility of all our
staff and a feature of all
our business activities.
Alison Hill
Group Head of
Enterprise Risk
Mitigating risks through the
System of Risk Management and
Internal Control
Risk management is a key pillar of the overall
governance and management framework for
the Group. Our System of Risk Management
and Internal Control comprises the following
elements that are assessed annually for
effectiveness:
• What we stand for:
– Our Purpose: We are an energy and
services company. Everything we do
is focused on satisfying the changing
needs of our customers.
– Our Values: The new values were
rolled out globally in September 2017
to underpin our strategy and Priorities.
– Our Code: This was launched in early
2018 to replace our Business Principles
and provides the foundation for how
we operate.
• Our strategic framework:
– Strategy: Set out in July 2015 and
aligned throughout the organisation
by the five Group Priorities.
– Financial framework: Sets out
parameters and targets within which
we operate to guide our strategic
planning and financial decision-making.
– Enterprise Risk Framework:
Incorporates the Principal Risks within
the Group Risk Universe, as outlined
on pages 55 to 60.
• Our governance:
– Board and Committees: Structured
to effectively dispense with required
duties and through which our Principal
Risks are monitored.
54 | Centrica plc Annual Report and Accounts 2017
– Legal entities: Subsidiary company
legal entities with Boards of Directors
required to meet legal and regulatory
obligations.
– Delegations of Authority:
Accountability is delegated through
the organisation to individuals in
accordance with risk appetite.
– Executive and Committees:
Oversight to ensure appropriate
planning and performance
management.
• How we are organised and managed:
– Management Systems: The detailed
policies, standards and processes
establishing the mandatory
requirements and which are required
for the systematic management of
related risks.
• How we provide assurance:
– Functional assurance: Ensuring
policies and standards are complied
with through monitoring and testing
activities performed by individuals
who are not directly responsible for
the operation of the controls.
– Internal Audit: Providing confidence
to the Board, via the Audit Committee,
that Centrica has appropriate
risk management procedures and
effective controls in place.
– External assurance: Auditing of the
Group’s Annual Report and Accounts
prior to reporting, which includes
assessment of internal controls
relevant to financial reporting.
Our Principal Risks and Uncertainties (continued)Strategic Report | Our Principal Risks and Uncertainties Principal Risks
The Group Risk Universe is made up of a holistic framework of Principal Risks,
laid out below. The Board makes a robust assessment of these Principal Risks,
considering future performance and our ability to deliver the strategy, including
solvency and liquidity risks. For each Principal Risk, we discuss the nature of the
risk, the risk climate and the impact on our Group Priorities. Each Principal Risk is
overseen directly by the Board or one of its Committees, with the Board retaining
overall responsibility for risk across the Group.
Risk climate movement against prior year
Risk has
increased in
likelihood and/
or impact
Risk is at
similar level
Risk has
decreased in
likelihood and/
or impact
1
2
Description
Potential impacts
Mitigation
Political and Regulatory Intervention
Risk of political or regulatory intervention such
as the adoption of blanket price caps in the UK
energy supply market, changes to the political
or regulatory landscape, or failure to influence
that change.
External Risk
Governance oversight:
Board
Risk climate:
Priority:
Cash flow growth and strategic
momentum
Changes in government
and regulatory oversight,
specifically relating to the
Consumer Divisions markets
in the UK and North America,
such as the developments in
UK market regulation during
2017, could erode our profit
margins through price caps, or
through additional obligations
that increase operating costs.
The UK’s decision to exit the
European Union and wider
political changes in the markets
we operate in present risks
relating to changing policies in
relation to the energy market
change and carbon emissions.
• We are active in contributing our views on the development
of the markets in which we operate and in discussions with
political parties, regulatory authorities and other influencers.
• We are committed to an open, transparent and
competitive UK energy market that provides choice for
consumers. In November, we announced seven unilateral
steps we would take and recommended a series of
broader market reforms (as detailed on page 18).
• The UK is due to exit the European Union within two years
of Article 50 being triggered in March 2017. We have
a dedicated Brexit project group which is working to
understand and assess the many Brexit-related issues
which could impact the Group and our customers.
• We accept that we may be the subject of regulatory
scrutiny that could result in stakeholder concerns. We
co-operate fully with any enquiry or investigation and
take measures to react as quickly as possible.
Financial Market
Risk of financial loss due to our exposure to
market movements, including commodity
prices, inflation, interest rates and currency
fluctuations.
External Risk with elements that are Risks
Requiring Judgement
Governance oversight:
Board and Audit Committee
Risk climate:
Priority:
Cash flow growth and strategic
momentum
Our exposure to adverse price
movements in commodity
markets, due to our large
upstream and downstream
positions, could impact
profitability and cash flow
generation across the business.
Financial market risk is taken on
by Energy Marketing & Trading
(EM&T) as part of the
proprietary trading business.
Increased volatility in
commodity prices could
provide more opportunities but
also give rise to higher collateral
costs and/or additional credit
risk for both EM&T and North
America Business.
• We have hedging strategies in place to mitigate exposure
to commodity and financial market volatility.
• Financial risk is reviewed regularly by the Group Finance
Function and the Group Risk, Assurance and Control
Committee to assess financial exposures and compliance
with risk limits. Regular review is also undertaken by the
Audit Committee.
• As we move into new trading arrangements, including the
continued expansion of our LNG business, we are focused
on ensuring that our financial risk policies remain appropriate
to the risks we face.
• Our business units have risk measures, policies and
monitoring commensurate with the activities and risks that
they manage, and we invest in our systems to further
automate our control environment.
Centrica plc Annual Report and Accounts 2017 | 55
Description
Potential impacts
Mitigation
3
4
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.
Health, Safety, Environment
and Security (HSES)
Risk of failure to protect the health, safety and
security of customers, employees and third
parties or to take appropriate measures to
protect our environment and in response to
climate change.
Risk Requiring Standards
Governance oversight:
Board and Safety, Health, Environment,
Security and Ethics Committee
Risk climate:
Priority:
Safety, compliance and conduct
Strategy Delivery
Risk that we do not deliver our strategy due to
insufficient capability to execute it in line with
plan or failure to adapt quickly enough to
respond to changes in the external
environment. In our bottom-up process of risk
reporting, this is a key area of focus for our
business units and functions.
Risk Requiring Judgement
Governance oversight:
Board
Risk climate:
Priority:
Cash flow growth and strategic
momentum
Successful delivery of our
strategy requires delivering the
energy and services our
customers desire in a way that
satisfies their needs in a
competitive market place.
Failure to identify changing
trends in customers’ needs,
adapt to changing market and
competitive environments,
deliver major transformation
programmes to be an efficient
supplier, and build the
necessary capabilities to
compete, have the potential to
impact our cash flow growth
and value creation goals.
• We undertake regular reviews and have assurance
processes in place with reporting to the HSES Committee
on a quarterly basis and full discussion of all issues arising.
• The HSES management system is used to manage our
controls, focusing on areas of concern including process
safety, driving and working at heights.
• We continue to invest in training to ensure we maintain safe
operating practices. During 2017 all senior leaders took
part in an HSES leadership event.
• Security intelligence and operating procedures, as well as
crisis management and business continuity plans, are
regularly evaluated and tested.
• Significant Centrica representation on Board Committees
and establishment of a Shareholder Office to ensure that
mitigation of HSES risks remains a priority within the new
joint venture organisation, Spirit Energy.
• We actively engage with climate change bodies and
NGOs to offer our perspective, understand the direction
of potential future actions, and assess our readiness to
manage through change.
• A description of how we manage our environmental risk
is described on page 36.
• The Board sets and approves the Group’s strategy,
setting the strategic direction and confirming the
strategic choices made by the business. Regular reviews
are conducted on changes in market trends and the
competitive environment, and the business response.
• We have a clear financial framework to ensure capital
is allocated in line with the strategy and that balance
sheet strength and return on capital boundary conditions
are met.
• The Board and Executive Committee regularly review
the capabilities required to deliver on the strategy and
address gaps as they arise.
We operate in highly
competitive and changing
markets, where customer
behaviour, needs and
demands are evolving due to
digitisation, energy efficiency,
climate change, government
initiatives, and the general
economic outlook. In addition,
we are subject to global market
volatility in our upstream
businesses in commodity
markets.
• We focus on understanding customer segments and
their needs, aiming to design products and offerings that
are attractive and competitive.
• We are increasing our investment in areas like Connected
Home and Distributed Energy & Power that represent
emerging customer needs and reinforce our existing
energy supply and services offerings, putting customers
more in control of their energy use as described on
page 33.
• Regular analysis is undertaken of commodity price
fundamentals and their potential impact on our business
plans and forecasts.
5
External Market Environment
Risk that events in the external market or
environment could affect the delivery of
our strategy.
External Risk
Governance oversight:
Board
Risk climate:
Priority:
Cash flow growth and strategic
momentum
56 | Centrica plc Annual Report and Accounts 2017
Our Principal Risks and Uncertainties (continued)Strategic Report | Our Principal Risks and Uncertainties Description
Potential impacts
Mitigation
Failure to appropriately manage
brand perception, media
attention and campaign or
pressure groups could have a
negative impact on consumer
sentiment and contribute to a
fall in overall customer
numbers.
Failure to be fair and
transparent in all our operations
could cause reputational
damage and if standards are
particularly low, lead to legal
action.
• We regularly monitor and review our level of customer
service, aiming to deliver a fair, simplified and transparent
offering to all of our consumers. Operational processes
are in place to address failure in service and customer
complaints.
• We engage with NGOs, consumer and customer
groups, political parties, regulators, charities and other
stakeholders to identify solutions to help reduce bills
and improve trust in the industry.
• We review and monitor changes in our customer brand
position through net promoter score (NPS) and other
metrics as described on page 31.
• We consider our impact on society as part of being
a good corporate citizen. This is set out in the Building
strong communities section on pages 37 to 38.
If change projects are not
aligned to strategic objectives
or not implemented
appropriately, the expected
benefits may not be realised.
If acquisitions are not integrated
effectively the business
benefits may not be realised.
6
Brand, Trust and Reputation
Risk that our competitive position is
compromised by poor standards of fairness
and transparency and by failing to protect our
brands.
Risk Requiring Judgement
Governance oversight:
Board
Risk climate:
Priority:
Customer satisfaction and operational
excellence
7
Change Management
Risk of failure in the identification, alignment and
execution of change programmes and business
restructuring.
Risk Requiring Judgement
Governance oversight:
Board
Risk climate:
Priority:
Cost efficiency and simplification
8
Legal, Regulatory and Ethical
Standards Compliance
Risk of failure to comply with laws and
regulations and behave ethically in line with Our
Code, resulting in reputational or financial
damage. This includes market conduct,
customer conduct, data protection and financial
crime risk.
Risk Requiring Standards
Our operations are the subject
of intense regulatory focus and
we seek to deliver the highest
standards in compliance. We
recognise that any real or
perceived failure to follow Our
Code or comply with legal or
regulatory obligations would
undermine trust in our
business. Non-compliance
could also result in fines,
penalties or other interventions.
Governance oversight:
Board and Safety, Health, Environment,
Security and Ethics Committee
Risk climate:
Priority:
Safety, compliance and conduct
• Significant change management programmes are
reviewed as a regular aspect of Group and business unit
performance reviews, and are regular agenda items of
Executive Committee meetings.
• Change activity is managed through a network of
programme offices providing oversight and governance
at the appropriate level.
• We have dedicated change capability at Group and
business unit level to monitor the realisation of benefits,
the prioritisation of efforts and to share best practice.
• Our people capability is continually reviewed and
developed to ensure we have the right skills to deliver
our plans.
• We have post-merger integration guidelines in place to
integrate acquired businesses.
• Regulatory compliance monitoring activities are
performed by a single Group-wide function to drive
consistency and quality.
• Control frameworks are in place in the UK and in
development in other markets to ensure that the
customer experience is delivered in line with our
Customer Conduct guidelines. This is managed through
a Group-wide practice group.
• The Market Conduct practice group shares best practice
with standardised controls and processes and aligns
mitigation activities where possible.
• Data is a strategic asset and its protection is a priority
under a Steering Group led by the Executive Director,
Centrica Consumer.
• Our Code was launched globally in January 2018 to
underpin the new values introduced in 2017. This sets the
standard for behaviour across the Group.
• Where we enter new territories via acquisition or organic
growth we ensure country risks are identified and
managed appropriately, including anti-bribery and
corruption risk and compliance with local legislation.
Centrica plc Annual Report and Accounts 2017 | 57
Description
Potential impacts
Mitigation
9
Asset Development, Availability
and Performance
Risk that failures in the development or integrity
of our investments in operated and non-
operated assets could compromise
performance delivery.
Risk Requiring Judgement
Failure to invest in the
maintenance and development
of our assets could result in
significant safety issues or
asset underperformance.
Operational integrity is critical
to our ability to deliver
performance in line with the
strategic objectives.
• Capital allocation and investment decisions are governed
through the Investment Committee, the final decision
resting with the Group Chief Executive and/or Board
of Directors.
• Group-wide minimum standards are applied to all assets,
whether operated or non-operated to give confidence in
their integrity.
• Maintenance activity and improvement programmes are
conducted in all asset-based businesses to maximise
effectiveness and production levels.
Governance oversight:
Board
Risk climate:
Priority:
Customer satisfaction and operational
excellence
10
Information Systems and Security
Risk of reduced effectiveness, availability,
integrity or security of IT systems and data
essential for Centrica’s operations.
Risk Requiring Standards with elements that
are Risks Requiring Judgement
Governance oversight:
Board and Safety, Health, Environment,
Security and Ethics Committee
Risk climate:
Priority:
Safety, compliance and conduct
11
Financial Processing and Reporting
Risk of errors or losses arising from the
processing and reporting of financial
transactions for internal and external purposes.
This includes potential errors such as the
reassessment of unbilled power revenues in our
North America Business Unit of £46 million,
reported in our November 2017 trading update.
Risk Requiring Standards
Governance oversight:
Board
Risk climate:
Priority:
Safety, compliance and conduct
58 | Centrica plc Annual Report and Accounts 2017
Our substantial customer base
and strategic requirement to be
at the forefront of technology
development, means that it
is critical our technology is
robust, our systems are secure
and our data protected.
Sensitive data faces the threat
of misappropriation, leading
to potential financial loss
and/or reputational damage
to the Group.
Failure to deliver IT solutions
in support of the prioritised
objectives and change
programmes in the business
would have consequences
both for our organisational
transformation and in some
cases, our compliance
obligations.
The increasingly complex
financial accounting landscape,
including new financial
reporting standards, increases
the likelihood of errors being
made in the application of
accounting judgements.
The potential for failures in core
controls around critical
processes increases in a
period of significant change.
As Finance continues to
implement the functional
transformation programme,
the risk of control degradation
could increase and this is an
area of significant focus.
• Our information security strategy seeks to integrate
information systems, personnel and physical aspects
in order to prevent, detect and investigate threats
and incidents.
• We engage with key technology partners and suppliers,
to ensure potentially vulnerable systems are identified.
• Regular controls testing and security patching around
our core systems is undertaken and our controls are
further tested periodically by outside experts.
• Strengthening of the Chief Information Security Officer
(CISO) role to oversee the development of standards,
controls and assurance across the Centrica estate.
• We regularly evaluate the adequacy of our infrastructure
and IT security controls, undertake employee awareness
and training and test our contingency and recovery
processes, recognising the evolving nature and pace of
the threat landscape.
• Established governance bodies to oversee plans to
comply with new requirements including the European
General Data Protection Regulation (GDPR).
• Our financial control framework incorporates our financial
controls and management self-assessment compliance,
with progress being made to improve the use of systems
and reduce the reliance on manual controls.
• We have implemented a revised balance sheet review
and reconciliation procedure to target minimising control
gaps arising in our underlying systems and ensure that
issues are detected on a timely basis.
• We undertake detailed testing and evaluation of the
effectiveness of our controls in response to critical
financial risks and report to the Financial Risk, Assurance
and Control Committee quarterly.
• Controls improvement is a key objective of the Finance
transformation programme, with oversight of delivery of
this objective provided by the Audit Committee.
Our Principal Risks and Uncertainties (continued)Strategic Report | Our Principal Risks and Uncertainties Description
Potential impacts
Mitigation
12 Business Planning, Forecasting
and Performance Management
Risk that plans and forecasts may not be
deliverable or may fail to drive efficient and
effective performance and the risk of failures in
performance reporting. This includes the risk
that we do not quickly respond to and reflect
performance management issues in any of
the business units as and when they arise.
Risk Requiring Judgement with elements
that are Risks Requiring Standards
We prioritise how we use
our resources based on our
business plans and forecasts.
Failure to accurately plan and
forecast, taking into account
the changing business
environment, could result in
sub-optimal decisions and
failure to realise anticipated
benefits.
• Annual planning processes are subject to scrutiny and
challenge with respect to underlying market trends,
competitive threats and organisational capability and
delivery from the Executive Committee and the Board.
• Group Functions have adopted standardised planning
processes in support of the business priorities, driving
improved integration of plans.
• Quarterly performance review meetings involving the
Executive Committee enable the review of performance
against forecasts, ensuring that mitigating actions or
revisions are developed and implemented.
Governance oversight:
Board
Risk climate:
Priority:
Cash flow growth and strategic
momentum
13
People
Risk that we cannot attract or retain employees
to ensure we have the appropriate capabilities
to deliver our strategy. There is also the potential
risk of industrial action in our Consumer
businesses.
Risk Requiring Judgement with elements
that are Risks Requiring Standards
Governance oversight:
Board
Risk climate:
Priority:
People and building capability
14 Customer Service
Risk of failure to consistently meet the
expectations of our customers through the
customer lifecycle.
Risk Requiring Judgement
Governance oversight:
Board
Risk climate:
Priority:
Customer satisfaction and operational
excellence
In challenging conditions, it
is critical that we attract and
retain key capabilities across
the business. The consequence
of not being able to fulfil key
roles could have a detrimental
impact on our ability to meet
our strategic objectives.
The risk of industrial action in
our businesses would have a
potential impact on customer
service levels and retention.
We require the right behaviours
from our leaders and
employees to deliver our
business strategy in
accordance with our Values
and Our Code.
The delivery of high quality
customer service is central to
our business strategy. With
the entry of new competitors
to the market, customers are
increasingly likely to switch
if they face an unacceptable
customer experience.
Remaining at the forefront of
digital developments and
innovating to provide choice
and control for our customers
is critical. This risk faces
increased scrutiny as political
and regulatory attention
focuses on introducing
competition by applying
pressure over pricing
strategies.
• We continue to evolve a clearly defined people strategy
based on culture and engagement, equality and
wellbeing, talent development, training and reward
and recognition.
• We regularly review organisational capability in critical
business areas, reward strategies for key skills, talent
management and learning and development
programmes through external benchmarking.
• We conduct an annual survey of employee engagement
and take seriously the messages arising with a plan
of actions.
• The Executive Committee has clear oversight through
regular discussions of the people-related challenges
inherent in our transformation programme.
• We engage with trade unions on restructuring and issues
that could impact terms and conditions with clear and
open processes to promote an environment of trust
and honesty.
• Our Code was launched in early 2018. This sets the
expectations for all employees, replacing the
Business Principles.
• Customer and Field Operations teams monitor
customer service levels, ensuring enquiries are
answered in a timescale and manner acceptable to
the customer, complaint levels are minimised, and
that customer satisfaction is reviewed at all stages
of the customer journey.
• Leadership teams in our front-line businesses establish
accountability for specific aspects of the customer
journey and assess performance against agreed
metrics weekly.
• Performance parameters are monitored on a weekly
basis for all third-party service providers involved in the
front-line and back office customer service process.
• Customer service agents are quality assessed for
consistency with a rigorous training and performance
management programme, and a structured performance
management process is in place for field teams.
• We operate an environment of continuous improvement,
incorporating an accredited programme (STAR), and
use root cause analysis of complaint and NPS insight to
continuously improve our service delivery.
Centrica plc Annual Report and Accounts 2017 | 59
Description
Potential impacts
Mitigation
15 Balance Sheet Strength and
Credit Position
Risk that the balance sheet may not be resilient
with implications for our credit rating, liquidity
risk and long-term financial obligations.
Risk Requiring Judgement
Governance oversight:
Board and Audit Committee
Risk climate:
Priority:
Cash flow growth and strategic
momentum
Failure to operate within the
Group’s financial framework
resulting in risk to maintaining
our target credit rating,
impacting our access to cost
effective capital and trading
arrangements.
Long-term financial obligations
may increase in value due to
factors both inside and outside
of our control, for example
pension schemes, resulting
in additional funding required
to meet our obligations.
• We assess available resources on a regular basis and
this analysis underpins our going concern assumption
and viability analysis as described on pages 61 and 62.
• Significant committed facilities are maintained with
sufficient cash held on deposit to meet working capital
fluctuations as they arise.
• Counterparty exposures are restricted through a Group
Credit Limit policy which is regularly reviewed and
adjusted as necessary.
• Wholesale credit risks associated with commodity
trading and treasury positions are managed in
accordance with Group policy.
• We consider accounting assumptions impacting on our
balance sheet carefully, including decommissioning and
impairment, as described as part of the Group Financial
Review on pages 48 to 51 and in note 3(b) to the
Financial Statements.
16
Procurement and Supplier
Management
Risk of failure to source responsibly and to co-
ordinate and collaborate with supply chain
partners to ensure value delivery and continuity.
Risk Requiring Judgement with elements
that are Risks Requiring Standards
Governance oversight:
Board
Risk climate:
Priority:
Customer satisfaction and operational excellence
Our business operations rely on
products and services provided
through third parties, including
outsourced activities,
infrastructure and operating
responsibility for some assets.
We rely on these parties to
comply not only with contractual
terms, but also legal, regulatory
and ethical business
requirements.
• All suppliers are required to sign up to our ‘Ethical
Procurement’ policies and procedures.
• Financial health, risk and anti-bribery and corruption due
diligence and monitoring is implemented in supplier
selection and contract renewal processes.
• Audits are conducted in relation to third-party operation
of jointly operated Exploration & Production assets.
• We review the ethical conduct of our suppliers including
a programme of supplier visits to provide additional
assurance over practices employed, including respect
for human rights, as part of being a good corporate
citizen as laid out on page 38.
• Procurement practices have been reviewed across the
Group and a global Procurement Policy and Standard
was implemented from 1 January 2018.
60 | Centrica plc Annual Report and Accounts 2017
Our Principal Risks and Uncertainties (continued)Strategic Report | Our Principal Risks and Uncertainties In assessing the prospects of the business,
the Board must balance the short-term
planning horizons in the customer-facing
businesses, with the longer-term requirements
of our more asset-intensive businesses.
Given recent divestments of our largest
power generation assets and the divestment
of our wind portfolio, our core business is
increasingly focused on the energy supply
and services markets, which are more short
term in orientation and outlook. Whilst we
assess viability on a three-year basis, when
we consider our strategic risks (as described
on pages 55 to 60), we consider possibilities
that may occur outside of this time period
and any resultant mitigations.
Approach
The Board has outlined the Group strategy
in detail on pages 10 to 11. The Group has
a strong position in its chosen markets
with established brands, a highly skilled
customer-facing workforce and reliable
operations. The main risks to delivery of the
strategy, and our approach to managing
these risks, are described in our approach
to our Principal Risks on pages 55 to 60.
To understand the impact of these risks the
Directors perform a robust evaluation, which
in turn informs the assessment of viability.
In making this assessment, they consider
severe, but plausible, impacts where the
realisation of risks is more than remote in
likelihood. The potential impact is based on
known consequences, historical evidence
and similar events observed in the market.
The liquidity analysis contains assumptions
relating to the key drivers of financial
performance including customer numbers,
fundamental trends in energy and services,
commodity prices, efficiency programmes
and the shape of the future portfolio.
Viability statement disclosure
In accordance with provision C.2.2 of the
2016 UK Corporate Governance Code,
the Directors have assessed the prospects
for the Group over a significantly longer
time period than the 12 months required
in adopting the going concern basis
of accounting.
In making this assessment the Directors take
into account the liquidity analysis performed
in relation to the Group’s net debt and
available credit facilities, current business
performance, the Group annual plan for
2018 and strategic plan for the years beyond
this, potential risks and uncertainties in the
delivery of the strategic plan through a
number of modelled scenarios and available
mitigating actions. In conducting this
analysis, we model all potential significant
scenarios occurring simultaneously from the
first year, causing the maximum potential
impact on Group debt.
Timeframe
The Board has reviewed the timeframe over
which it makes this assessment and
continues to believe that three years is the
appropriate timeframe to assess viability.
This conclusion is reached as a result of:
• alignment with detailed planning
undertaken for a period of three years
within the strategic planning process,
which is used by the Group in assessing
business performance and taking
strategic decisions;
• the relatively short-term nature of some
of our more significant risks, such as the
potential for disruption in our customer-
facing markets, where we monitor the
risks and available mitigations frequently;
• the commodity markets in which the
Group operates where transparent and
executable pricing is generally only
available for a three-year period, allowing
market-based information to be used
within our forecasts for this period; and
increasing uncertainty inherent in
estimations beyond this period.
•
We also model the impact on liquidity
of events such as an inability to access
uncommitted financing facilities or a market
stress event, such as commodity price
volatility or a two-notch credit rating
downgrade. Identified risk impacts are
then incorporated within scenarios that are
modelled, individually and collectively, to
assess the impact they have on the available
headroom within our ongoing liquidity
analysis. The scenarios assessed as being of
most significance in making the assessment
of viability (and the related primary Principal
Risk categories) include:
• the potential for further regulatory or
political intervention resulting in a
significant impact on our customer
margins and our ability to retain
customers (Political and Regulatory
Intervention; Customer Service; Strategy
Delivery; and Brand, Trust and Reputation);
• a sustained significant adverse movement
in commodity prices (External Market
Environment and Financial Market);
• our inability to respond to disruption from
competition in the market and deliver
transformation through cost savings and
growth in new businesses (Strategy
Delivery and Change Management);
• risks associated with keeping our people
and our customers safe, incorporating
potential adverse consequences of
breaches in regulatory compliance
obligations and the impact of a loss of
containment in our upstream assets
(Health, Safety, Environment and
Security; and Legal, Regulatory and
Ethical Standards Compliance);
• challenges relating to the security of
our systems and keeping our data safe,
including cyber-security and, in future,
a breach of GDPR requirements
(Information Systems and Security; and
Legal, Regulatory and Ethical Standards
Compliance); and
• a significant increase in the obligations of
our pension schemes, requiring material,
repeated cash injections (Balance Sheet
Strength and Credit Position).
Centrica plc Annual Report and Accounts 2017 | 61
Conclusion
The Directors have considered all the above
factors in their assessment of viability over
the next three years, including the Group’s
strategic plan, levels of funding, scenario
analysis and the principal risks and
uncertainties facing the Group. The Directors
have also considered the availability of
mitigating actions within their control in the
event that a number of simultaneous severe
but plausible scenarios materialise. Based
on the conclusions of this assessment,
the Directors confirm that they have a
reasonable expectation that no individual
scenario identified or combination of
identified scenarios, will impact on the
Group’s ability to continue to operate and
meet its liabilities, as they fall due, over a
period of at least three years.
Each of the scenarios are considered
individually on a gross basis, with the
impact of Group-level mitigating actions
incorporated following the aggregation of
the individual impacts.
These risks are included as sensitivities to
our liquidity analysis, and are considered by
the Board as part of the approval process
for this statement.
Resilience
The sources of funding available to the
Group, including undrawn committed credit
facilities of £3.5 billion, are set out in note 24
to the consolidated Financial Statements.
The Board expects these sources, together
with cash flows generated by the Group from
its normal operations, to provide adequate
levels of funding to support the execution
of the Group’s plans. Cash flows generated
during 2017 are set out in the cash flow
statement and in note 24 (c) to these
Financial Statements.
We then consider the Group’s resilience to
risk and our ability to respond to changes
in market conditions to identify potential
mitigating actions, such as additional
restrictions and limits on capital investment,
further cost reduction opportunities and the
future sustainability of our dividend policy.
The Strategic Report, which has been
prepared in accordance with the
requirements of the Companies Act 2006,
has been approved by the Board and
signed on its behalf by:
Grant Dawson
Group General Counsel &
Company Secretary
21 February 2018
62 | Centrica plc Annual Report and Accounts 2017
Our Principal Risks and Uncertainties (continued)Strategic Report | Our Principal Risks and Uncertainties Governance
Contents
64 Board of Directors
66 Senior Executives
67 Directors’ and Corporate
Governance Report
78 Remuneration Report
90 Remuneration Policy
98 Other Statutory Information
Centrica plc Annual Report and Accounts 2017 | 63
Board of Directors
Full biographies can be found at
centrica.com/board
C
Chairman
of the Board
AC
Audit
Committee
DC
NC
Disclosure
Committee
Nominations
Committee
RC
SC
Remuneration
Committee
Denotes
Committee Chairman
Safety, Health, Environment,
Security & Ethics Committee
RICK
HAYTHORNTHWAITE
Chairman
IAIN CONN
Group Chief Executive
JEFF BELL
Group Chief
Financial Officer
STEPHEN HESTER
Senior Independent
Director
MARK HODGES
Chief Executive
Centrica Consumer
C NC
DC
DC
AC NC
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 board of MasterCard
International, QIO Technologies and Arc
International.
Iain was appointed Group Chief Executive
on 1 January 2015 and is Chairman of the
Disclosure Committee.
Jeff was appointed Group Chief
Financial Officer and joined the Board
on 1 August 2015.
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 the
organisation 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.
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 Centrica’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.
Stephen joined the Board on 1 June 2016
Mark joined the Board on 1 June 2015.
Carlos joined the Board on 1 January 2015.
and is the Senior Independent Director.
Skills and experience
Skills and experience
Skills and experience
Mark brings a strong understanding of the
Carlos has held a number of senior positions
Stephen has wide-ranging experience,
UK consumer market and a track record
in the energy industry as well as being a
particularly in customer-facing businesses,
in improving business performance. He is
prominent public figure in energy geopolitics
together with recognised expertise in
experienced in working in a regulated
and economic and commercial
transforming business performance. He has
environment, driving significant
development. Between 2011 and 2014
a deep knowledge of operating within highly
improvements in customer service and
Carlos established and directed the US State
regulated businesses and over 30 years’
managing efficiency, ‘offer innovation’, major
Department’s Energy Resource Bureau. Until
experience in financial services and FTSE
IT and change projects. Mark was group
August 2014 Carlos was special envoy and
100 companies. Stephen was previously
chief executive officer of Towergate
coordinator for international energy affairs,
chief executive officer of Royal Bank of
Scotland Group plc where he led their
Partnership. Prior to this he spent over 20
acting as senior adviser to the US Secretary
years with Norwich Union and Aviva plc in
of State on energy issues. He has also
largest ever corporate restructuring and
a variety of finance, planning and strategy
served as US ambassador in Mexico
recovery programme.
External appointments
Group plc.
Group chief executive of RSA Insurance
External appointments
Director of Energy UK
(representing Centrica).
roles. He was a member of Aviva’s board
and Ukraine.
and executive committee.
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.
CARLOS PASCUAL
Non-Executive
Director
NC RC SC
MARGHERITA
DELLA VALLE
Non-Executive
Director
AC NC RC SC
JOAN GILLMAN
Non-Executive
Director
NC SC
MARK HANAFIN
Chief Executive
Centrica Business
STEVE PUSEY
Non-Executive
Director
SCOTT WHEWAY
Non-Executive
Director
LESLEY KNOX
Lesley Knox stepped down from the
Board on 31 December 2017 having
served as a Non-Executive Director
since January 2012.
Joan joined the Board on 11 October 2016.
Mark joined the Board on 14 July 2008.
Skills and experience
Joan is a 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 the company’s
three operating divisions, doubling
revenues and overseeing the company’s
big data strategy.
External appointments
Director of Airgain, Inc.
Skills and experience
Mark has senior management experience
across the energy value chain from
exploration and production 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).
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 of 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 and held
various consumer marketing positions
in business analytics and customer base
management before moving into finance.
External appointments
Deputy group chief financial officer of
Vodafone Group Plc and a trustee of the
Vodafone Foundation.
64 | Centrica plc Annual Report and Accounts 2017
AC NC SC
NC RC SC
Steve joined the Board on 1 April 2015 and is
Scott joined the Board on 1 May 2016 and is
Chairman of the Safety, Health, Environment,
Chairman of the Remuneration Committee.
Security & Ethics Committee.
Skills and experience
Steve has a wealth of international
Skills and experience
Scott is a senior business leader with a
mix of deep retail and consumer expertise.
experience as a senior customer-facing
He has considerable knowledge gained
business technology leader. He has a long
in both the retail and insurance sectors,
track record in the telecommunications
together with a strong understanding
industry, in both the wireline and wireless
of operating within highly regulated
sectors, and in business applications and
businesses. Scott worked in retail for almost
solutions. Steve has worked for Vodafone,
30 years both in the UK and internationally
Nortel and British Telecom and is a graduate
and has over 10 years’ experience as a non-
of the Advanced Management Program
executive director within the financial
at Harvard University.
services industry.
External appointments
External appointments
Non-executive director of FireEye, Inc.
Chairman of AXA UK plc and senior
independent director of Santander UK plc.
Governance | Board of Directors RICK
HAYTHORNTHWAITE
Chairman
IAIN CONN
Group Chief Executive
JEFF BELL
Group Chief
Financial Officer
STEPHEN HESTER
Senior Independent
Director
MARK HODGES
Chief Executive
Centrica Consumer
CARLOS PASCUAL
Non-Executive
Director
NC RC SC
AC NC
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 and over 30 years’
experience in financial services and FTSE
100 companies. Stephen was previously
chief executive officer of Royal Bank of
Scotland Group plc where he led their
largest ever corporate restructuring and
recovery programme.
External appointments
Group chief executive of RSA Insurance
Group plc.
Mark joined the Board on 1 June 2015.
Carlos joined the Board on 1 January 2015.
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
managing efficiency, ‘offer innovation’, major
IT and change projects. Mark was group
chief executive officer of Towergate
Partnership. Prior to this he spent over 20
years with Norwich Union and Aviva plc in
a variety of finance, planning and strategy
roles. He was a member of Aviva’s board
and executive committee.
External appointments
Director of Energy UK
(representing Centrica).
Skills and experience
Carlos has held a number of senior positions
in the energy industry as well as being a
prominent public figure 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.
MARK HANAFIN
Chief Executive
Centrica Business
STEVE PUSEY
Non-Executive
Director
SCOTT WHEWAY
Non-Executive
Director
LESLEY KNOX
Lesley Knox stepped down from the
Board on 31 December 2017 having
served as a Non-Executive Director
since January 2012.
AC NC SC
NC RC SC
Steve joined the Board on 1 April 2015 and is
Chairman of the Safety, Health, Environment,
Security & Ethics Committee.
Skills and experience
Steve has a wealth of international
experience as a senior customer-facing
business technology leader. He has a long
track record 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.
Scott joined the Board on 1 May 2016 and is
Chairman of the Remuneration Committee.
Skills and experience
Scott is a senior business leader with a
mix of deep retail and consumer expertise.
He has considerable knowledge gained
in both the retail and insurance sectors,
together with a strong understanding
of operating within highly regulated
businesses. Scott worked in retail for almost
30 years both in the UK and internationally
and has over 10 years’ experience as a non-
executive director within the financial
services industry.
External appointments
Chairman of AXA UK plc and senior
independent director of Santander UK plc.
Centrica plc Annual Report and Accounts 2017 | 65
C NC
DC
DC
Rick joined the Board as a Non-Executive
Iain was appointed Group Chief Executive
Jeff was appointed Group Chief
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
on 1 January 2015 and is Chairman of the
Financial Officer and joined the Board
Disclosure Committee.
Skills and experience
on 1 August 2015.
Skills and experience
Iain possesses a deep understanding of the
Jeff has a broad range of finance experience.
energy sector built up over a lifetime in the
He joined the Group’s Direct Energy
Rick has a wealth of knowledge in the
industry and has demonstrated strong
business in Toronto in 2002 where he held
energy industry and has significant board
commitment to customers, safety and
various senior finance positions before
experience, both as an executive and non-
technology. Iain was previously BP’s chief
moving to Centrica’s head office in 2008 to
executive. He led the rescue of Invensys from
executive, downstream (BP’s refining and
support the Group Chief Executive and to
2001 to 2005 and the defence, turnaround
marketing division) a position he held for
lead the Group Strategy team. In 2011 he
and subsequent sale of Blue Circle Industries
seven years. Iain was a board member of BP
was appointed Director of Corporate
from 1997 to 2001. He has served on the
for 10 years from 2004 and had previously
Finance. Prior to Centrica, Jeff worked in
boards of Network Rail as chairman and
held a number of senior roles throughout the
Toronto for both KPMG, where he qualified
Cookson, Lafarge, ICI and Land Securities
organisation in trading, exploration and
as a chartered accountant, and the Boston
as a non-executive director.
External appointments
Chairman of the board of MasterCard
production and the management of
corporate functions such as safety,
marketing, technology and human resources.
Consulting Group.
International, QIO Technologies and Arc
External appointments
International.
Non-executive director of BT Group plc.
MARGHERITA
DELLA VALLE
Non-Executive
Director
AC NC RC SC
JOAN GILLMAN
Non-Executive
Director
NC SC
Margherita joined the Board on
1 January 2011 and is Chairman of the
Audit Committee.
Skills and experience
Joan joined the Board on 11 October 2016.
Mark joined the Board on 14 July 2008.
Skills and experience
Skills and experience
Joan is a former executive vice president
Mark has senior management experience
of Time Warner Cable, as well as chief
across the energy value chain from
Margherita brings considerable corporate
operating officer Time Warner Cable Media
exploration and production to product sales.
finance and accounting experience and she
and president, Time Warner Cable Media
He has excellent midstream and trading
has a sound background in marketing. She
LLC. Prior to its acquisition by Charter
credentials as well as a strong track record
was chief financial officer of Vodafone’s
Communications, Time Warner Cable
in developing supply and marketing
European region from April 2007 to October
was the second largest cable company
businesses. Before joining Centrica, Mark
2010 and chief financial officer of Vodafone
in the United States, operating in 29 states
spent 21 years with Royal Dutch Shell.
Italy from 2004 to 2007. Previously she
and generating over $23 billion in annual
worked for Omnitel Pronto Italia and held
revenue. Joan led one of the company’s
various consumer marketing positions
three operating divisions, doubling
in business analytics and customer base
revenues and overseeing the company’s
management before moving into finance.
big data strategy.
External appointments
Non-executive director of EDF Energy
Nuclear Generation Group Limited
(representing Centrica).
External appointments
Deputy group chief financial officer of
Vodafone Group Plc and a trustee of the
Vodafone Foundation.
External appointments
Director of Airgain, Inc.
Governance | Senior Executives
Senior Executives
Full biographies can be found at
centrica.com/seniorexecutives
DC
Disclosure
Committee
CHARLES CAMERON
Director of Technology
& Engineering
and Centrica
Innovations
GRANT DAWSON
Group General
Counsel & Company
Secretary
DC
Charles was appointed Director of
Technology & Engineering on 1 January
2016 and Chairman of Centrica Innovations
on 1 May 2017.
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.
Grant was appointed Group General
Counsel & Company Secretary in
February 1997.
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, then STC plc as legal
adviser in 1986 until it was 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.
MIKE YOUNG
Group Chief Information
Officer
JILL SHEDDEN, MBE
Group Human
Resources Director
Mike was appointed Group Chief Information
Officer on 1 November 2016.
Jill was appointed Group Director, Human
Resources on 1 July 2011.
Skills and experience
Mike brings a wide range of experience in
managing global information systems
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.
Skills and experience
Jill joined British Gas plc as a graduate in
1988 and has since held a wide range of
senior HR roles across the Group. Prior to
her appointment as Group HR Director
Jill was HR Director in British Gas Business,
British Gas Energy and Centrica Energy.
In 2017 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.
66 | Centrica plc Annual Report and Accounts 2017
Governance | Directors’ and Corporate Governance Report
Directors’ and Corporate Governance Report
Good corporate
governance alone cannot
guarantee business
performance, but it is a
necessary precondition
– sustainable business
success is not possible
without sound corporate
governance.
Rick Haythornthwaite
Chairman
Dear Shareholder
I am pleased to confirm that your Company has fully complied
with the principles and provisions of the UK Corporate Governance
Code (the Code) throughout the year and the following pages set
out in detail how we have done so.
I should like to begin by expressing my sincere thanks to Lesley Knox
who stepped down at the end of the year after six years’ service as a
Non-Executive Director of Centrica. We are grateful for Lesley’s wise
counsel around the board table and for her excellent stewardship as
chair of the Remuneration Committee. We are currently conducting a
search for a new Non-Executive Director and more detail on that can
be found in the report of the Nominations Committee on page 77.
2017 was another busy year for UK Corporate Governance more
widely. The Corporate Governance Reform Green Paper at the
beginning of the year focused on three aspects where Government
saw the need for further reform – executive pay, corporate
governance in large privately-held businesses, and the steps that
company boards take to engage and listen to employees, suppliers
and other groups with an interest in corporate performance. At the
time of writing, the Financial Reporting Council (FRC) was consulting
on proposed changes to the Code aimed at addressing some of
these issues.
I believe that since its introduction over 20 years ago, the Code has
been, and remains, the foundation of excellence in how companies
are run, and has helped the UK achieve a leading position in
corporate governance. The Code has been successful, however,
precisely because it has always been an evolving set of best practice
guidelines, not a static list of rules. We therefore welcome the latest
evolution and will work to support its aims.
As I set out in my statement on pages 4 to 5 of this Annual Report,
we are proposing some changes to our governance arrangements
within Centrica. I have asked our Non-Executive Director Joan Gillman
to undertake a review of employee engagement and, once recruited,
our new Non-Executive Director to review the needs of customers,
and to ensure the voice of these key stakeholder groups is heard
in the boardroom. As a company with over 30,000 employees and
millions of customers, these stakeholders’ interests have always been
integral to our discussions in Board meetings. These reviews will,
however, build upon this and further sharpen our focus. I believe
these steps will also work with the grain of the corporate governance
reforms contemplated by Government and the FRC.
Good corporate governance alone cannot guarantee business
performance, but it is a necessary precondition – sustainable
business success is not possible without sound corporate
governance. This section describes the governance arrangements
within Centrica and I hope readers will find it interesting and informative.
Rick Haythornthwaite
Chairman
21 February 2018
Centrica plc Annual Report and Accounts 2017 | 67
Governance | Directors’ and Corporate Governance Report
Directors’ and Corporate Governance Report (continued)
Our Governance Structure
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 72 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.
Read more about Our Strategy and Our Business Model
Pages 10 to 11 and 12 to 13.
Matters reserved exclusively for the Board
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.
Read more at
centrica.com/role-of-the-board
Board composition and roles
Chairman
Group Chief
Executive
Group Chief Financial
Officer
Independent Non-
Executive Directors
Senior Independent
Director
Group Executive
Directors
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.
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.
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.
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.
Committees
Audit Committee
Nominations Committee
Remuneration Committee
Safety, Health,
Environment, Security
and Ethics Committee
Disclosure Committee
Read more on
Pages 72 to 75
Read more on
Page 77
Read more on
Pages 78 to 79
Read more on
Page 76
Read more on
Page 77
The role and responsibilities of each Committee is set out in its Terms of Reference found on the Company’s website.
Read more at
centrica.com/board-committees
68 | Centrica plc Annual Report and Accounts 2017
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 Board has agreed that each Director shall stand for reappointment
at each Annual General Meeting (AGM). 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.
Director independence and conflicts
All of our Non-Executive Directors are considered to be independent
against the criteria in the Code 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.
In accordance with the Companies Act 2006 (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 composition
33%
Executive
(four Directors)
66%
Non-Executive
(eight Directors)
50%
0–3 years
(six Directors)
Tenure
17%
6–9 years
(two Directors)
33%
3–6 years
(four Directors)
UK Corporate Governance Code (the Code) compliance
Effective corporate governance provides an essential foundation
for the long-term success of the Company. This report sets out the
key elements of Centrica’s corporate governance arrangements,
including how we have sought to apply the principles and provisions
of the Code. The Board confirms that, up to the date of this report,
it fully complied with the Code.
The Board further confirms that, through the activities of the Audit
and Safety, Health, Environment, Security and Ethics Committees,
described on pages 72 and 76, it has reviewed the effectiveness
of the Company’s system of risk management and internal controls.
The Code and associated guidance are available on the Financial
Reporting Council website at frc.org.uk
Board meetings
The Board held nine meetings in 2017, seven of which were in person
and two by scheduled telephone conferences. Each year the Board
seeks to combine one or two meetings with visits to the Group’s
operations and in 2017 visited the Barrow Gas Terminal in March
and the Group’s US Headquarters in Houston in September. Details
of these visits can be found on page 71.
Board members’ attendance for the year ended
31 December 2017
Rick Haythornthwaite (Chairman)
Iain Conn
Jeff Bell
Margherita Della Valle
Mark Hanafin
Joan Gillman
Stephen Hester
Mark Hodges
Lesley Knox(1)
Carlos Pascual(2)
Steve Pusey
Scott Wheway
9/9
9/9
9/9
9/9
9/9
9/9
9/9
9/9
7/9
8/9
9/9
9/9
(1) Lesley Knox was unable to attend two Board meetings due to unavoidable
diary clashes.
(2) Carlos Pascual was unable to attend one Board meeting due to the earthquake
in Mexico.
Directors
During the year under review the Board comprised 12 Directors,
of whom four were Executive and eight, including the Chairman, were
Non-Executive. Lesley Knox stepped down from the Board with
effect from 31 December 2017. As we announced in February 2017,
Scott Wheway succeeded Lesley as Remuneration Committee
Chairman in May 2017. While the Company believes strongly in the
benefits of regularly refreshing Board membership, it was felt that
having appointed five new Non-Executive and three new Executive
Directors over the 2015 to 2016 period, no further changes to Board
composition were required in 2017.
Further information on the background, experience, current tenure,
Committee membership and other appointments of each Director
can be found in the individual biographies on pages 64 and 65.
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 are shown in our
governance structure on page 68.
Centrica plc Annual Report and Accounts 2017 | 69
Governance | Directors’ and Corporate Governance Report
Directors’ and Corporate Governance Report (continued)
Directors’ induction
All new Directors appointed to the Board receive a comprehensive
induction programme. These include briefings from members of
the Executive and management teams covering key areas of the
business, an overview of the Group’s risk management processes,
the internal audit function and the corporate governance framework
within Centrica. The induction programme also includes a series
of site visits for new Directors to familiarise themselves with the
Group’s businesses.
Training and support for Directors
Ongoing training is provided for all Directors, including formal and
informal briefings, meetings with management and visits to the
Group’s operations. As part of this approach, two formal Board
insight and training sessions are held each year. In 2017, these
sessions covered ‘Our Code’ (the replacement for Centrica’s former
Business Principles and other codes of conduct that existed across
the business) in July and, in November, a briefing from Deloitte on
changes to Accounting Standards and on Internal Controls and Risk
Management. In addition, 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.
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 2017, these
discussions included:
• Strategic reviews for Centrica Consumer
and Centrica Business divisions;
• the adoption of Centrica’s new Values;
• Process Safety;
• Group Brand architecture and reputation;
•
• the Competitive Landscape;
• Exploration & Production portfolio and pipeline; and
• People and Capability.
IT, Technology and Innovation;
Board diversity
Centrica recognises the benefits of diversity in all its forms, at Board
level and throughout the Group. During 2017, 25% of the Board were
women and comprised Directors from the UK, US, Canada and Italy
with a wide range of backgrounds and expertise. Centrica supports
the recommendations of the Hampton-Alexander Review and is
continuing to develop the skills, experience and knowledge of a
diverse pipeline of talent. Our Nominations Committee is committed
to ensuring and promoting a diverse blend of skills, backgrounds and
nationalities on the Board.
Nationality
8%
Canadian
(one Director)
17%
American
(two Directors)
8%
Italian
(one Director)
67%
British
(eight Directors)
70 | Centrica plc Annual Report and Accounts 2017
Gender
25%
Female
(three Directors)
75%
Male
(nine Directors)
Employee and senior management diversity
Centrica’s policies and practices reflect and encourage a culture
where decisions are based on individual ability and potential
in relation to the needs of the business. We promote equal
opportunities and diversity to create an inclusive working
environment that attracts and retains the best people and enables
everyone in Centrica to fulfil their potential. In 2017, we started to
roll-out unconscious bias training as part of a wider effort to remove
barriers to employment and ensure all individuals are treated in
a non-discriminatory manner at all stages of their employment,
including recruitment and selection, promotion and performance
management. We are committed to creating an inclusive workplace
in which all employees are able to thrive. By delivering on this we
are able to:
• attract and retain a diverse range of talent;
• enhance our employer brand;
• create an inclusive environment so that everyone feels safe
to bring their whole self to work; and
• ensure people receive career opportunities based on merit
so that we have the best talent in the right jobs.
At the senior management level 28%† of our people are female.
For other employees that figure is 29%†. Centrica continues to offer a
range of initiatives including coaching and mentoring of diverse talent.
We also participate in the 30% Club’s cross-company, cross-sector
mentoring scheme for mid-career women. We are excited to be
developing a programme aimed at enabling women to return to the
workplace who have been out of work for two years or longer, which
will be launched in 2018.
This year we launched a new Disability and Wellbeing Network
(DAWN). Alongside our existing networks in the UK (Women, Carers,
LGBT) and in the US (Women, LGBT, BOLD (Black Organisation
Leadership Development) and HONOR (for Veterans)), this will
continue to grow and support our employees. As a mark of
Centrica’s commitment to diversity and inclusion, we achieved
Bronze recognition in the annual Business in the Community
benchmarking survey. The Managing Director of Distributed Energy
& Power, Jorge Pikunic, was also named among the Top 100
Executives in the Financial Times’ 2017 OUTstanding Leading LGBT+
& Ally Executives and LGBT+ Future Leaders lists. This year, for the
first time in our history, we celebrated National Inclusion Week
bringing together all our diversity groups and acknowledging the
benefits of inclusion.
In 2017, we worked toward achieving Disability Confident level 1
status and we are pleased that this has been accredited for 2018.
In addition, we are delighted to be recognised in the 2017 Stonewall
Workplace Equality Index, where we were ranked in the 66th
percentile.
We support the UK Government’s gender pay gap reporting
requirement. In the UK our gender pay gap is 12% mean and 30%
median(1). The gap is not driven by unequal pay but by the uneven
distribution of men and women across the business and the type of
roles they do. Like other employers in our sector, we have a greater
proportion of men in higher paid, traditionally male-dominated
technical roles such as engineering, which form a significant portion
of our workforce. By contrast, we have a larger number of women
in lower paid, less technical roles such as administration. We are
focused on closing the gap by building a gender balanced talent
pipeline through initiatives to attract, develop and retain women.
(1) Data based on a 5 April 2017 snapshot of UK employees.
View our Gender Pay Statement
centrica.com/genderpay
Breakdown by gender
Senior management
2017
0
2016
0
20
20
Other employees
2017
0
20
40
40
40
2016
0
72%†
Male
719
74%
Male
788
71%†
Male
60
60
60
22,349
71%
Male
80
80
80
100
100
100
28%†
Female
278
26%
Female
284
29%†
Female
9,246
29%
Female
20
40
60
80
100
24,782
10,009
Board evaluation
In accordance with the Code, Centrica conducts an annual
evaluation of Board performance, which is facilitated by an
independent third-party at least once every three years.
As reported last year, the results of the 2016 internal evaluation
exercise were considered by the Board and Committees in February
2017 and the topics where Directors had indicated a need for further
discussion (new growth markets and the competitive landscape)
were incorporated into the 2017 Board programme.
The 2017 independent third-party evaluation is being conducted by
Independent Audit. This exercise, which was ongoing at the date of
this Annual Report, comprised online questionnaires, interviews with
all Directors, a review of Board papers and observation of a Board
meeting. The results of the evaluation will be reviewed by the Board
at its meeting in March 2018 and any findings built into an action plan.
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.
Site visits
While the bulk of the Board’s work is necessarily conducted
around the Boardroom table, Directors recognise the
importance of visiting the ‘coal face’ and seeing the Group’s
operations first-hand. During 2017, the Board visited
operations at the Barrow Gas Terminal in the UK and the
Group’s North America headquarters in Houston.
In February 2017, a decision was made to stop production
at Barrow and take a Stand Down for Safety focused on
maintenance, streamlining the management of change
process and development of improved operating procedures.
The Board visited in March 2017 to understand better how
process safety risks are managed and to bring to life real
examples of process safety in action within a high hazard
operation. The visit, over two days, involved presentations
from local management, discussions with employees and
an in-depth tour of the facility.
In September 2017, the Board visited Centrica’s North
America headquarters in Houston, Texas. The visit comprised
a scheduled Board meeting and discussions with the North
American leadership team on strategy and performance but,
most importantly, afforded an opportunity for Directors to
meet with North American colleagues and understand how
they were faring in the immediate aftermath of the hurricanes
Harvey and Irma. Whilst the impact had been devastating
and many of our employees affected, it was heartening to see
the way in which our people, the city of Houston and the State
of Texas had pulled together in adversity. Moreover, the wider
Centrica family had come together, with offers of help and
generous donations to the Centrica Employee Relief Fund
from employees across the Group.
Read more about supporting our Texan colleagues
and customers through Hurricane Harvey
Page 22
Centrica plc Annual Report and Accounts 2017 | 71
Governance | Directors’ and Corporate Governance Report
Audit Committee
Audit
Committee
MARGHERITA DELLA VALLE
Chairman of the Audit
Committee
Audit Committee members’ attendance for the year
ended 31 December 2017
Margherita Della Valle (Chairman)
Stephen Hester
Lesley Knox
Steve Pusey
7/7
7/7
7/7
7/7
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.
Margherita Della Valle, as deputy group chief financial officer of
Vodafone Group Plc, is considered by the Board to have recent
and relevant financial experience as required by the Code.
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 which fall into their area of responsibility.
The external auditors, Deloitte LLP (Deloitte), also attended each
meeting. The Committee meets individually with the external
auditors, the Group Chief Financial Officer and the Head of
Internal Audit, Risk & Control at each meeting without other
Executives present.
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 & Control;
72 | Centrica plc Annual Report and Accounts 2017
• 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; and
• to consider and review legal and regulatory compliance issues,
specifically in relation to financial reporting and controls, and
together with the Safety, Health, Environment, Security and Ethics
Committee (SHESEC), maintain oversight of the arrangements in
place for the management of statutory and regulatory compliance
in areas such as financial crime.
Report of the Committee Chairman
This report aims to provide a summary of the workings and activities
of the Committee during 2017, outlining how 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.
The Committee has developed its agenda to enable, over the course
of a year, active oversight of all key areas of responsibility and to
facilitate deeper dives into topics of particular importance or
pertinence. In 2017 this agenda included regular reports on Risk,
Control and Assurance, Ethics and Compliance and Centrica
Storage compliance with its undertakings, together with periodic
items reviewed at fixed points annually (for example, interim and final
financial results, internal and external audit plans, etc.). In addition,
there were deep dives during the year covering, among other things,
the Group Risk Universe, financial controls maturity, including
benchmarking against other organisations and Deloitte first year
observations, lessons learned from external examples of control
failures in large corporations and Finance transformation initiatives
and staff rotations. In its November meeting, the Committee
discussed the emerging accounting issue in the North America
Business unit and held a further meeting by teleconference shortly
after to fully understand the scope of the issue, remedial actions
taken and lessons learned. Following a thorough review of the issue
a number of enhancements are being implemented to internal
controls in the North America Business unit. The Committee also
met twice with the SHESEC Committee to jointly consider the
Group’s System of Risk Management and Internal Control; in the first
quarter to assess the system’s effectiveness and in the fourth quarter
to look prospectively at plans for 2018. More detail on the key issues
considered by the Committee in 2017 are given below.
I believe that the Committee has performed effectively in 2017.
Compliance with the Code, including the risk management and the
viability statement requirements, is set out on pages 61 to 62.
Areas of focus and training
An annual schedule of training is designed to provide Directors with
practical training and insight into specific areas of interest. In 2017,
these sessions covered Our Code (the replacement for Centrica’s
former Business Principles and other codes of conduct that existed
across the business) in July and, in November, a briefing from Deloitte
on changes to Accounting Standards and on internal controls and
risk management. In February 2018, the Committee also received
training on the practical application of the certain re-measurements
accounting and exceptional item policy.
In addition, to ensure the independence of the external auditors and
in accordance with International Standards on Auditing (UK & Ireland)
260 and Ethical Standard 1 issued by the Accounting Practices
Board and as a matter of best practice, Deloitte has confirmed its
independence as auditors of the Company. Together with Deloitte’s
confirmation and report on its approach to audit quality and
transparency, the Committee concluded that Deloitte 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 Deloitte was
appointed, it was considered that its skills and experience made
it the most appropriate supplier of the work.
Deloitte had been engaged to perform certain activities for the Group
prior to their appointment as auditors and before their appointment,
the Group undertook a thorough review of all pre-existing
arrangements. As a result of this, certain arrangements were
terminated during 2016 and whilst others were permissible under all
relevant regulatory requirements, the decision was taken to wind
them down during the first half of 2017. The majority of non-audit fees
included as ‘All other services’ noted in Note S9 to the Financial
Statements relate to such transitional arrangements, which have
now ceased.
Appointment of the external auditors
In 2016, the Committee led a formal audit tender process,
PricewaterhouseCoopers LLP having been the external auditor of the
Group since the demerger of Centrica in 1997. The conclusion of the
tender process was a firm recommendation to appoint Deloitte as
the Company’s auditor for the financial year commencing 1 January
2017 and this appointment was approved by shareholders at the
Annual General Meeting in 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 Deloitte is 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 Deloitte is aware of that 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 Risks and Controls 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.
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.
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 System of Risk Management
and Internal Control performed by the Audit Committee and the
SHESEC Committee, on behalf of the Board, in 2017. Where
necessary, improvements and enhancements to financial and
commercial controls in the North America Business unit have been
recommended and will be implemented in 2018.
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 Deloitte.
This included a review of the report issued by the audit quality review
team regarding Deloitte and an internal questionnaire completed by
Committee members and relevant members of management on their
views of Deloitte’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.
Centrica plc Annual Report and Accounts 2017 | 73
Governance | Directors’ and Corporate Governance Report
Audit Committee (continued)
Key judgements and financial reporting matters in 2017
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.
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 pre-tax net impairments
of Exploration & Production (E&P) assets of £408 million relating
to the UK, Dutch and Norwegian assets were required, primarily due
to a general reduction in price forecasts and changes to expected
decommissioning costs. The Committee reviewed at the half year the
recoverable value of the UK gas storage assets, following the decision
to apply for a production licence for the Rough storage facility, and
agreed a pre-tax impairment of £270 million. The Committee has
reviewed the updated assumptions of the recoverable value of the
UK gas storage assets at the end of the year and have concluded no
adjustment to this impairment is required. The Committee reviewed
the recoverable amount of all other significant balance sheet assets
and concluded they had recoverable values in excess of the carrying
value and were not impaired. 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 129 to 131 and 163 to 165.
Classification and presentation of 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 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.
The classification of items as exceptional and specific trades as certain
re-measurements (or conversely own use or proprietary trades) are
subject to defined Group policies. These policies are reviewed annually
by management.
In the prior year the Committee approved management’s policy for
the classification of items as certain re-measurements or exceptional
items. During the year the Committee reviewed the items classified as
exceptional items, considering their size, nature and incidence. They
concluded that separate disclosure of these items was appropriate in
the Financial Statements. Exceptional items include the impairments
of the Rough storage facility and the UK, Dutch and Norwegian E&P
assets. They also include the gains and losses from the disposal of the
Canadian E&P business and the UK CCGT fleet, and restructuring
costs related to the strategic review announced in 2015 and costs
associated with changing business structure in Storage, the E&P Spirit
Energy formation transaction and the closure of US Solar. Further
detail is provided in note 7 on pages 129 to 131.
Energy supply 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.
The Committee has reviewed and held discussions with the external
auditors on the level of revenue accrual and provisions made during
the year. In particular, the Committee has reviewed the reassessment
of the historic recognition of unbilled power revenues, identified in late
2017 in North America Business, which resulted in a one-off non-cash
income statement charge of £46 million. The Committee reviewed
both the cause and control issues that led to the reassessment and
agreed additional measures with management to assess key
judgements and processes as part of the year-end procedures,
supported by independent experts. Further improvements to relevant
processes and controls have been incorporated into future business
planning. More details of accrued energy income and provision for
credit loss is provided in note 17 on pages 144 to 145.
74 | Centrica plc Annual Report and Accounts 2017
Key judgements and financial reporting matters in 2017
Audit Committee reviews and conclusions
Determination of long-term commodity prices and their
use valuing commodity trades and other long-life assets
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, where appropriate, are adjusted to ensure they lie within
the range of a reasonable market participant. The long-term commodity
price forecasts are then 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 and Business
Combination opening balance sheet valuations.
Business combinations
During the year, the Group acquired Bayerngas Norge to create a new
combined E&P business with a non-controlling interest held by
Stadtwerke München. The REstore NV business was also acquired to
join the Distributed Energy & Power (DE&P) segment. 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. For the Bayerngas acquisition,
judgement was required to conclude on the appropriate accounting
treatment for the transaction and to assess the value of both the deemed
purchase price and the asset valuations.
Pensions
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.
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 our 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 International Financial Reporting
Standards Annual Report and Accounts. The Group publishes the CSS
at the same time as the 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 the proposed 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 to 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 page 130 to 131.
The Committee reviewed the valuations, and the key judgements
and estimates (see note 3(a)). 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 136 to 137.
The Committee reviewed and approved the key assumptions and
disclosures in the Financial Statements. Independent actuaries are
consulted on the appropriateness of the assumptions and discussions
are held with the external auditors. Further details on pensions are set
out in note 22 on pages 148 to 152.
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 2017.
Further details on sources of finance are set out in note 24 on pages
154 to 156 and in the Going Concern section in Other Statutory
Information on page 100.
The Committee reviewed the Ofgem Consolidated Segmental
Statement 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 214.
Centrica plc Annual Report and Accounts 2017 | 75
Governance | Directors’ and Corporate Governance Report
Safety, Health, Environment, Security and Ethics Committee
Safety, Health, Environment,
Security and Ethics
Committee (SHESEC)
STEVE PUSEY
Committee
Chairman
SHESEC members’ attendance for the year ended
31 December 2017
Steve Pusey (Chairman)
Margherita Della Valle(1)
Joan Gillman
Carlos Pascual(2)
Scott Wheway(3)
6/6
5/6
6/6
5/6
5/6
(1) Margherita Della Valle was unable to attend one SHESEC meeting due
to an unavoidable diary clash.
(2) Carlos Pascual was unable to attend one SHESEC meeting due to the
earthquake in Mexico.
(3) Scott Wheway was unable to attend one SHESEC meeting due to an
unavoidable diary clash.
Role of the Committee
The Committee is responsible for the oversight and adequacy
of the Group’s internal controls and risk management systems
in respect of the following areas:
• 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.
During the year, the Chairman of the Board and the Group
Chief Executive attended all Committee meetings, as did other
key executives.
Report of the Committee Chairman
Now in its second full year of operation, the Committee has
developed its agenda to enable, over the course of a year, active
oversight of all key areas of responsibility and to facilitate deeper
dives into topics of particular importance or pertinence.
For example, every Committee meeting includes reports and reviews
of Health, Safety, Environment and Security; Ethics and Compliance;
and Risk, Control and Assurance. In addition, in 2017, there were
deep dives covering, among other things, the preparation and
publication of Centrica’s first Modern Slavery Act Statement and
a detailed review of asset integrity governance and practices.
The Committee continued to prioritise safety, and in particular
process safety, as a key focus area. In March 2017, Directors visited
the Barrow Gas terminal to see first-hand how process safety risks
are being managed. More details on the visit to Barrow can be found
on page 71. Whilst improving safety performance remains an ongoing
priority, it was pleasing to note the considerable improvements in
process safety performance over the year with zero† process safety
events (Tier 1) in 2017 (2016: 2) while process safety incident
frequency rate (Tier 1 and 2) reduced to 0.14† per 200,000 hours
worked (2016: 0.33).
In July 2017, the Committee held a special briefing session on
Our Code and subsequently approved its implementation. Our Code
is the replacement for Centrica’s former Business Principles and other
codes of conduct that existed across the business. It will provide
a single Group-wide reference point, both internally and externally,
for all stakeholders about how we expect our people to protect the
Company and themselves when working at Centrica.
The Committee 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 plans for 2018. The joint
Committee also reviewed Information Systems & Cyber-Security,
covering the evolving cyber-threat landscape and how this risk is
being managed within Centrica.
76 | Centrica plc Annual Report and Accounts 2017
Nominations Committee
Disclosure Committee
Nominations
Committee
RICK HAYTHORNTHWAITE
Committee
Chairman
Disclosure
Committee
IAIN CONN
Committee
Chairman
Nominations Committee members’ attendance for the
year ended 31 December 2017
Disclosure Committee members’ attendance for the
year ended 31 December 2017
Iain Conn (Chairman)
Jeff Bell
Grant Dawson
13/13
13/13
13/13
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. The
Committee has scheduled meetings each year to approve the
interim and preliminary results announcements and trading
statements and meets as required to review and approve ad
hoc announcements (for example, acquisitions and disposals,
Board appointments). In 2017, the Committee met 13 times
for these purposes.
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 Board/key management
changes; and
• Consideration of announcements in respect of specific
projects.
Rick Haythornthwaite (Chairman)
Margherita Della Valle
Joan Gillman
Stephen Hester
Lesley Knox
Carlos Pascual
Steve Pusey
Scott Wheway
3/3
3/3
3/3
3/3
3/3
3/3
3/3
3/3
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.
The Committee is chaired by the Chairman of the Board. During
the year, the Group Chief Executive attended all Committee
meetings, as did other key executives.
Report of the Committee Chairman
Although no new Directors were appointed to the Board in 2017,
Lesley Knox indicated in February that she would step down as
a Director at the end of the year. The Committee recommended,
and the Board approved, the appointment of Scott Wheway to
replace Lesley as Remuneration Committee Chair from May
2017. The Committee also discussed and approved the scope
and role profile for the search for a suitable candidate to replace
Lesley as a Non-Executive Director. The Committee utilised the
Board skills matrix to inform the role profile and expressed a
preference for a female candidate with a strong entrepreneurial
and commercial background. It was felt the search criteria
should be sufficiently wide so as to encourage a diverse range
of candidates and, in this regard, the Committee agreed that
previous listed board experience need not be a prerequisite.
This search was progressing at the time of writing. The
Committee also reviewed the strength of succession plans for
Executive Directors and certain senior management roles,
including internal talent development resources and processes.
Centrica plc Annual Report and Accounts 2017 | 77
Governance | Remuneration Report
Remuneration Report
Remuneration
Committee
SCOTT WHEWAY
Committee
Chairman
Remuneration Committee members’ attendance for the
year ended 31 December 2017
Scott Wheway (Chairman)
Lesley Knox
Margherita Della Valle
Carlos Pascual
7/7
7/7
7/7
7/7
Membership and attendance
The Remuneration Committee (Committee) is chaired by Scott
Wheway, an independent Non-Executive Director. 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.
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 are normally invited to attend each Committee meeting
and provide advice and guidance, other than in respect of their
own remuneration.
Responsibilities of the Remuneration Committee:
• determine total individual remuneration packages and terms
and conditions of employment for the Executive Directors
(Executives), the Executive Committee (CEC) and the
Chairman of the Board;
• approve the design, metrics and targets for incentive
schemes for the Executives and CEC members, review
results and approve any payouts under these schemes;
• prepare and recommend to the Board for approval at
least every three years the Remuneration Policy (Policy) for
the Directors; and
• prepare and recommend to the Board for approval each
year a report on the implementation of the Policy in the last
financial year.
During 2017, the Committee also discussed developments,
trends and stakeholder views on executive remuneration with
the independent external Committee adviser, and reviewed
the base salary increases and bonus awards for the senior
management population across the Group. An annual evaluation
of the Committee was conducted in December 2016 and the
results were discussed during the early part of the year.
On behalf of the Board, I am pleased to present the Committee’s
report for 2017.
In summary
As highlighted elsewhere in this report, second half performance was
weak even though Centrica has made significant progress on many
fronts in 2017 whilst facing a number of difficult external pressures.
In particular, the Committee noted that most Group objectives and
milestones were achieved including completion of the material
divestment programme, strengthening of the balance sheet through
net debt reduction to £2.6 billion, cost efficiency targets were
exceeded and significant progress was made on safety issues.
Despite this, the Committee has a duty to consider these achievements
against shareholder experience and give due weight to all of the
outcomes in 2017, which have not always reflected the exceptional
efforts of Centrica’s workforce. In this context we have decided:
• to reduce Annual Incentive Plan (AIP) awards for the Executives
to zero;
• to reduce the maximum potential Long Term Incentive Plan (LTIP)
grant for the 2018/20 cycle from 300% to 250% in recognition of
a lower starting share price; and
• to impose a pay freeze on all Executives’ salaries, where no pay
rise will be granted in 2018.
These were difficult decisions but reflect a determination by the
Centrica Board to demonstrate alignment between Centrica and
its stakeholders.
We are required to present a new Policy for approval at the 2018
Annual General Meeting (AGM) and have been consulting with our
major shareholders on proposed changes. We do not believe that
the existing Policy requires wholesale change in structure or overall
quantum, however, we have taken the opportunity to further align
our Policy with strategy and market best practice. We are proposing
to add a total shareholder return (TSR) measure to the LTIP, reduce
the non-financial elements of both the AIP and LTIP, further align the
AIP financial measures with current business plans and increase
shareholding requirements for the Executives to 300% of base salary.
Remuneration outcomes for the year
Centrica’s performance in 2017 has been disappointing for
shareholders and the Committee has taken measures to ensure
that variable remuneration outcomes reflect alignment with the
shareholder experience.
The Committee has assessed performance under the AIP for 2017
on a formulaic basis against the original targets set. On this basis
the performance achieved was above the threshold level of financial
performance for cash flow and strong performance by the
management team was reflected in considerable progress made
against the strategic objectives in many areas. This would have
resulted in an AIP outcome for the Executives in the range between
threshold and target.
However, in making its assessment of performance the Committee
took into full consideration the overall shareholder experience over
the period and, as a result, concluded that irrespective of the formulaic
outcome it was not appropriate to make an AIP award to any of the
Executives in relation to 2017. The Committee has therefore exercised
its discretion to reduce the AIP outcome to zero.
The Committee also needed to assess the vesting outcome for long-
term incentive awards that were made in early 2015. The LTIP awards
were dependent on adjusted earnings per share (EPS), economic profit
(EP), safety performance, employee engagement and customer
service delivery as assessed by net promoter scores. Based on
performance against these metrics over the three years the LTIP will
vest at a level of 26% of the award. The value of the shares initially
granted under the 2015 award has fallen and as such represents an
outcome of approximately 47% of salary.
78 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 79
Mark Hanafin, the only Executive in employment during the operation
of the Policy prior to that approved by shareholders in 2015, was
entitled to and received a matching award in relation to the deferral
of part of his 2014 annual bonus under the final year of operation of
the Deferred and Matching Share Scheme (DMSS). The Committee
reviewed the original EP target set in early 2015, which related to the
portfolio of business units that Mark was responsible for at that
time and, due to significant changes within his portfolio during the
performance period and the volatility in commodity prices impacting
the Exploration & Production (E&P) business unit, decided that the
calculated result when compared to the target, which suggested
that the maximum should vest, was no longer a fair measure of
performance. Using its discretion and in accordance with the
scheme rules, the Committee revised the target upwards and set
it on a constant environment basis. The revised threshold and
maximum levels were £80 million and £160 million respectively.
The result was £129 million and consequently the Committee
decided that 81% of the award should vest.
It has been previous practice to agree salary adjustments in April of
each year and report them retrospectively in the Remuneration Report.
From 2018 it is our intention to report them on a forward looking basis
for the year. Accordingly this report details the decisions for both 2017
and 2018.
In 2017, increases in salary not exceeding 2% were awarded to the
Executives in line with the wider workforce, save for Jeff Bell who
also received a 2.55% progression-related increase. The Committee
intentionally set Jeff’s salary on appointment to the Board in August
2015 at a level that reflected his experience at that time and on the
understanding that it would in future be reviewed. Having made the
adjustment in April 2017, the Committee was then satisfied that Jeff’s
salary appropriately reflected his role and contribution and would not
expect such an adjustment to be repeated in the future.
Remuneration in the upcoming year
In 2018, no Executive will receive a salary increase. The Committee
has also considered the impact that the current share price could
have on the number of shares to be granted under the 2018/20 LTIP
cycle. As a result the Committee has decided to reduce the award
level for 2018 to 250% of salary in recognition of the current level of
Centrica’s share price.
Fairness/equal pay
Enhancements to both practice and reporting capability throughout
the year have enabled the Committee to review and disclose for the
first time an assessment of pay against the relevant functional and
geographic market median for all roles across the Group. The
median, lower and upper quartile ratio is set out on page 96, along
with the equivalent comparison to market median for the Group Chief
Executive, and demonstrates a fair and consistent approach to the
determination of pay. We have robust processes in place to uphold
equal pay. This includes conducting an equal pay audit each year.
When comparing pay across equivalent jobs, our gender pay gap
is 1% at median with the difference attributed to factors relating to
experience. We work hard to be a company where everyone can
progress in their careers and achieve their full potential. We know,
however, that there is more we can and must do. Further information
on pay fairness will be disclosed in March within the Gender Pay
Statement.
Remuneration Policy review
As Centrica’s Policy was last approved by shareholders in 2015 it will
be the subject of a shareholder vote at the AGM in May 2018. During
the year the Committee undertook a full review of our existing
arrangements. We concluded from this that while our current
remuneration structure generally worked well and was largely fit
for purpose, there was an opportunity to improve the alignment
of executive remuneration with both our strategic goals and the
experience and expectations of shareholders. We are committed to
ensuring that our revised Policy more closely aligns to our strategy
and the delivery of long-term shareholder value through returns and
growth whilst also taking into account evolving stakeholder views on
executive pay.
Under the AIP, we propose to increase the weighting towards
financial performance and move to 75% financial measures and 25%
personal objectives (for 2017, the measures were 62.5% cash flow
and 37.5% personal objectives). The financial measures will in future
be a mix based on Centrica’s priorities for the forthcoming year. For
2018 the measures will be adjusted operating cash flow, operating
profit and cost efficiency.
For the LTIP, going forward from the 2018/20 cycle, the performance
measures will consist of relative TSR with the most significant weighting
(33.3%) and cash flow growth (22.2%), EP (22.2%), and non-financial
KPIs (22.2%). The Committee believes that this combination creates
the right balance between doing the right thing for the business, whilst
aligning Executives to the shareholder experience.
For the Group’s non-financial KPIs, we are proposing to change from
using annual targets aggregated across the LTIP performance period,
to three-year targets for improvement. The LTIP targets for awards
due to be made in 2018 are set out on page 89.
We continue to be committed to full transparency and disclosure,
and in future will disclose all other targets as soon as any commercial
sensitivity falls away, and at the latest at the end of the performance
period.
We are also proposing the following changes to the Policy to reflect
evolving market practice:
• an increase in the shareholding requirement for Executives from
200% to 300% of base salary, with a condition to retain 75%
of vested incentive shares (post-tax) until the requirement has
been met;
• the introduction of a post-cessation shareholding requirement of
50% of the shareholding requirement (or full actual holding if lower)
applicable for 24 months post-cessation;
• the simplification of our bonus deferral to three-year cliff vesting
(rather than phased vesting); and
• a reduction in the maximum pension salary supplement available
to newly recruited Executives to 25% of salary (currently 30%
of salary for the Group Chief Executive and 25% of salary for
other Executives).
We have come to these decisions on our Policy following extensive
consultation with our largest shareholders. I would like to thank them
for their time and constructive input to our deliberations. Our inclusion
of TSR within the long-term metrics reflects the feedback we received
from the majority of our shareholders on the importance they placed
on the inclusion of output measures within the LTIP.
Conclusion
Overall, 2017 has been a challenging year for Centrica as a business
and our shareholders. The Committee remains dedicated to ensuring
that remuneration arrangements recognise the strong performance
of the business whilst remaining appropriate in the context of
shareholder experience. The Committee believes that the decisions
made over the year in designing the new Policy, exercising discretion
in relation to the AIP, and the discretion relating to the final DMSS
vesting and 2018 LTIP grant, allow us to achieve this aim and align
pay and performance effectively. The Committee is dedicated to
an open and transparent dialogue with our investors and therefore
I welcome views on any part of our remuneration arrangements.
78 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 79
Governance | Remuneration Report
Remuneration Summary for 2017
Total remuneration received in 2017 (£000)(1)
Iain Conn
£1,694
2016: £4,040
Jeff Bell
£967
2016: £1,564
Mark Hanafin
Mark Hodges
£1,794
2016: £1,879
£1,129
2016: £1,951
Fixed remuneration
Short-term incentive
Long-term incentive (LTIP)
Long-term incentive (DMSS)
Recruitment award
Opportunity
Maximum total pay
On-target total pay
Minimum total pay
(1) Prepared on the same
basis as the single figure for
total remuneration table set
out on page 82.
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
0
0
0
£
2017
Actual
2016
Actual
2017
Actual
2016
Actual
2017
Actual
2016
Actual
2017
Actual
2016
Actual
Notwithstanding the formulaic result in the short-term incentive outcome chart below, the Committee exercised its discretion and reduced all
Executive bonuses to zero.
Short-term incentive outcome (Annual Incentive Plan)
Strategic objectives
Iain Conn
Maximum
Achieved
Not achieved
25%
Adjusted operating cash flow
Jeff Bell
Maximum
Achieved
Not achieved
15%
Mark Hanafin
20%
Mark Hodges
40%
75%
50%
75%
60%
75%
55%
75%
35%
Long-term incentive outcome (Long Term Incentive Plan)
Adjusted earnings
per share (EPS)
Maximum
Achieved
Not achieved
Economic profit (EP)
Maximum
Achieved
Not achieved
Non-financial KPIs
Maximum
Achieved
Not achieved
Iain Conn
25%
Jeff Bell
Mark Hanafin
Mark Hodges
7%
7%
7%
25%
25%
25%
25%
25%
25%
39%
39%
39%
39%
37.5%
30.5%
37.5%
30.5%
37.5%
30.5%
37.5%
125%
86%
125%
86%
125%
86%
125%
86%
37.5%
18.75%
37.5%
18.75%
37.5%
18.75%
37.5%
18.75%
18.75%
18.75%
25%
7%
30.5%
18.75%
18.75%
80 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 81
2017 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 below, the Directors’ aggregate total remuneration for the year equates to 0.09% (2016: 0.08%) of the Group’s operating cash flow.
13%
To shareholders
0.09%
To Directors
12%
To shareholders
0.08%
To Directors
18%
To government
38%
To staff
19%
To government
2017
2017
2016
36%
To staff
31%
Investing activities
33%
Investing activities
Summary of Policy changes
Centrica’s Remuneration Policy (the Policy) will be the subject
of a shareholder vote at the AGM in May 2018. Set out below
is a summary of the proposed Policy changes. The full Policy
is set out on pages 90 to 97.
• No material changes to remuneration structure or
•
•
•
•
incentive quantum;
increase in the weighting of financial performance
in the Annual Incentive Plan (AIP) (to 75% financial,
25% personal objectives);
inclusion of total shareholder return (TSR) as a
financial performance measure in the Long Term
Incentive Plan (LTIP);
increase in the shareholding requirement for Executives
from 200% to 300% of salary;
introduction of a post-cessation shareholding of 50%
of requirement for 24 months; and
• reduction in the maximum pension salary supplement
for newly recruited Executives to 25% of salary.
Incentive measures
Current
Proposed
62.5%
Adjusted operating
cash flow (AOCF)
37.5%
Personal measures
33%
Adjusted earnings
per share (EPS)
33%
Economic profit
(EP)
33%
Non-financial KPIs
75%
Financial
(mix of measures
based on priorities
for year)
AIP
25%
Personal
measures
33.3%
Relative TSR
22.2%
Underlying adjusted
operating cash flow
(UAOCF) growth
22.2%
EP
22.2%
Non-financial KPIs
LTIP
80 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 81
Governance | Remuneration Report
Directors’ Annual Remuneration Report
Directors’ remuneration in 2017
This report sets out information on the remuneration of the Directors for the financial year ended 31 December 2017.
Single figure for total remuneration (audited)
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
2017
2016
Salary/
fees
Salary/
fees
Bonus
(cash)
Bonus
(cash)
Bonus
(deferred)
Bonus
(deferred)
Benefits
(1)
Benefits
(1)
LTIPs
(2)(3) LTIPs
Recruit-
ment
award
(restated)
(4)
Recruit-
ment
award
Pension
(5)(6) Pension
Total
Total
(restated)
(4)
936
569
634
634
925
550
625
625
–
–
–
–
759
424
481
544
–
–
–
–
759
424
481
544
30
27
25
34
29
26
25
82
447
266
873
302
–
–
–
–
–
–
–
–
1,291
–
–
–
281
105
262
159
277
140
267
156
1,694
967
1,794
1,129
4,040
1,564
1,879
1,951
5,584
9,434
£000
Executives
Iain Conn
Jeff Bell
Mark Hanafin(3)
Mark Hodges
Total
(1) Taxable benefits include car allowance, health and medical benefits and financial planning advice. Non-taxable benefits include matching shares received under the Share
Incentive Plan (SIP). Benefits paid to Mark Hodges in 2016 include relocation support paid in line with Centrica’s relocation policy.
(2) LTIPs include the estimated value of the LTIP awards granted in 2015 and due to vest in May 2018 (August 2018 in respect of Jeff Bell), relating to the three-year performance
period ending in 2017. Details of the performance outcomes are set out on pages 85 to 86. The estimated value of dividend equivalent shares has been included and the share
price used to value the awards is 159.17 pence (the average share price from 1 October to 31 December 2017).
(3) For Mark Hanafin, as set out below, LTIPs also include the estimated value of the final DMSS matching award granted in 2015 (under the previously approved policy) and due
to vest in April 2018. As detailed on page 79, 81% of the DMSS matching award will vest. The estimated value of dividend equivalents has been included and the share price
used to value the award is 159.17 pence (the average share price from 1 October to 31 December 2017).
£000
2017 LTIP
2017 DMSS 2017 Total LTIPs
Mark Hanafin – breakdown of LTIPs
302
571
873
(4) The value of the recruitment award shares vesting in April 2017 has been recalculated based on the share price on the date of vest which was 215.5 pence. The previous disclosure
in the 2016 single figure table used an estimated share price. Iain Conn’s total remuneration for 2016 has therefore been restated to include the amended value of this award.
(5) Notional contributions to the Centrica Unapproved Pension Scheme defined contribution section (CUPS DC) for Jeff Bell and Mark Hanafin have been included in this table
as if CUPS DC was a cash balance scheme. This includes a deduction in respect of an allowance for CPI inflation on the opening balances of 0.9% in 2017 (no allowance was
applicable in 2016).
(6) Iain Conn and Mark Hodges are entitled to receive a salary supplement of 30% and 25% of base salary respectively.
Single figure for total remuneration (audited)
2017
2016
2017
2016
2017
2016
2017
2016 2017
2016
2017
2016
2017
2016
2017
2016
Salary/
fees
Salary/
fees
Bonus
(cash)
Bonus
(cash)
Bonus
(deferred)
Bonus
(deferred) Benefits Benefits LTIPs LTIPs
Recruit-
ment
award
Recruit-
ment
award Pension Pension
495
495
98
73
93
80
–
–
73
93
85
98
16
47
93
28
70
73
87
48
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
£000
Non-Executives
Rick
Haythornthwaite
Margherita
Della Valle
Joan Gillman
Stephen Hester
Lesley Knox
Mike Linn(1)
Ian Meakins(2)
Carlos Pascual
Steve Pusey
Scott Wheway
Total
Total
Total
495
495
98
73
93
80
–
–
73
93
85
98
16
47
93
28
70
73
87
48
1,090
1,055
(1) Mike Linn resigned as a Non-Executive Director on 18 April 2016.
(2) Ian Meakins resigned as a Non-Executive Director on 1 October 2016.
82 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 83
Base salary/fees
Base salaries for Executives were reviewed during the year and were
increased with effect from 1 April 2017, as follows:
Iain Conn
Jeff Bell
Mark Hanafin
Mark Hodges
Previous Salary
Increase %
New Salary
£925,000
£550,000
£625,000
£625,000
1.62%
4.55%
2.00%
2.00%
£940,000
£575,000
£637,500
£637,500
Jeff Bell received an additional increase to appropriately reflect his
role and contribution, recognising that his salary had been set at a
lower level on promotion to the Board in 2015. The other increases
for the Executives in aggregate were lower than the average increase
across the rest of the organisation.
Base fees for Non-Executives, as well as the additional fee for the
Chairman of the Audit Committee, were increased on 1 January
2016. There were no increases to Non-Executive fees during 2017.
Bonus – Annual Incentive Plan (AIP)
The charts on page 80 under short-term incentive outcome indicate
the extent of achievement against individual strategic objectives for
each Executive and against the adjusted operating cash flow (AOCF)
target. In accordance with the Policy, the maximum AIP is 200% of
base salary. Half of the maximum is payable for on-target performance.
Up to 75% of base salary is based on the achievement against
individual strategic objectives aligned to the Group’s strategic
priorities, with the remainder based on AOCF.
AOCF of £2,231 million was required for target achievement and
£2,343 million was required for maximum. The threshold level was
£2,008 million. Although the formulaic result of £2,069 million was
above the threshold level and considerable progress had been made
against strategic objectives in many areas, the Committee concluded
that irrespective of the formulaic outcome, it was not appropriate to
make an AIP award to any Executive in relation to 2017.
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.
Performance against individual strategic
objectives in 2017
In line with the Group’s annual performance management process,
each Executive had an agreed set of stretching individual objectives
for 2017. Set out below is the Committee’s assessment of the
achievement against these objectives for each Executive.
Iain Conn
Iain Conn’s performance against the strategic objectives of the
Group has resulted in strong delivery of the first phase of the strategy,
including the successful portfolio repositioning and Mergers &
Acquisitions (M&A) programme, cash discipline, balance sheet
improvement, credit rating protection and the delivery of the 2020
efficiency target three years early. Occupational safety rates have
remained consistent across the year whilst significant improvements
have been achieved in process safety, driving safety and customer
safety. Regulatory relationships continued to be well managed.
There has been significant development of customer propositions
and the capabilities and strategic frameworks of both Consumer and
Business divisions. Customer service levels have, in general, also
continued to improve.
Outcomes elsewhere have, however, been weaker than planned.
The pace of growth of the Connected Home and Distributed Energy
& Power (DE&P) businesses has been considerable but did not meet
all expectations and whilst performance across the Group’s financial
targets, which were focused on cash flow, balance sheet strength
and efficiency have been met, Group earnings were significantly
impacted by issues in North America Business and UK Business
in the second half of the year.
The timing and scale of the North America Business performance
and accounting issues combined with the uncertainty created by
political and regulatory intervention into the UK energy market have
overshadowed the significant strategic progress and operational
delivery throughout the rest of the Group over the year. The net
result has been a severe drop in the market worth of the Company,
a situation for which a CEO will always be held to account.
Jeff Bell
Jeff Bell’s achievements against his strategic objectives for the year
include significant progress on the finance transformation programme
and delivery of cost efficiency, improvement in performance
monitoring and strong management of the rating agency relationships.
A key deliverable was oversight of strong M&A portfolio programme
delivery with the successful divestments of Lincs Wind Farm, Canada
E&P, the combined cycle gas turbines (CCGTs), the establishment
of Spirit Energy and the acquisition of REstore. As a result the Group
balance sheet was strengthened materially during the year with
Group net debt reduced to within the targeted year-end range.
There have been challenges for Jeff during the year, particularly in
North America Business associated with planning and performance
forecasting, and the discovery of the revenue recognition issue.
However, Jeff has significantly contributed to the general improvement
of the strategic planning, performance management and monitoring
processes of the Group, including a tighter quarterly review process
and monitoring of the Group efficiency programme. The approach
to the Enterprise Risk Framework and risk management has been
further improved and standardised.
Jeff continued to focus significant attention on Investor Relations,
but clearly the Trading Update in November combined with
uncertainty associated with the UK energy market have undermined
investor confidence.
Overall, 2017 has been a challenging year for Jeff with significant
efforts on inputs and strong delivery on functional priorities, against
an unsatisfactory financial performance for the Group overall which
resulted in a negative investor/share price reaction in the fourth quarter.
82 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 83
Governance | Remuneration Report
Mark Hanafin
Mark Hanafin achieved a significant amount in 2017, including
delivering very strong results relative to plan in Energy Marketing &
Trading (EM&T), establishing and growing DE&P and significantly
delivering all major outcomes in M&A.
Safety and regulatory performance have improved in Centrica
Business and a new approach to risk and market conduct has been
established within EM&T. Mark effectively led the thinking on the
five pillar strategic framework for the Business division and he has
successfully motivated and developed his leadership teams.
Under Mark’s leadership, EM&T and DE&P are developing in line
with strategy, improving capability, integrating recent acquisitions
and growing customer relationships. DE&P has integrated recent
acquisitions to establish new customer propositions and a new
branded marketing platform, and order book growth has been
encouraging. The LNG business has developed significantly
throughout the year, successfully mitigating portfolio risk and
establishing important new relationships with a range of counterparts.
Mark continued to oversee Centrica’s Nuclear shareholding and
became Chairman of Spirit Energy in December.
However, North America and UK Business, which moved into Mark’s
portfolio in early 2017, were materially behind plan and although there
were significant competitive pressures and market developments,
weaknesses in areas of forecasting and risk management were
a material factor in North America and this was the largest contributor
to Centrica’s profit warning in November.
Mark Hodges
Mark Hodges performed strongly in 2017 with good overall delivery
in Centrica Consumer against material pressures externally. Mark led
a broad agenda and demonstrated strong leadership, establishing
a capable and motivated divisional team, a robust platform and
resilient plans for the future.
Safety performance improved materially in the areas of customer and
road safety, although occupational safety deteriorated, most notably
within the smart meter programme. The regulatory relationships
with both Ofgem and the Financial Conduct Authority continued
to improve. Mark shaped Centrica’s response to the proposed
intervention in the UK Energy Market, managing external relationships
well, and developed our ‘14 point plan’ for improving the market.
The Centrica Consumer division as a whole delivered solid financial
results and cost efficiency programme targets and headcount
reductions were exceeded. Operationally, the customer losses during
the year were a major concern for the market, but we have been clear
about targeting sustainable and profitable channels rather than simply
volume in our customer base. Connected Home missed its hub target
but beat the product target and achieved the first major partnership
deal with Eni gas e luce in Italy.
Mark put significant effort into customer segmentation, proposition
development, more dynamic pricing and customer journeys.
Customer service improved for the third year in a row, UK Home
Services also began to see growth in accounts and Local Heroes
and British Gas Rewards were established.
Overall, Mark has established the Business division successfully
although financial performance across his portfolio during the year
has been weak with particularly disappointing results in North
America Business.
Overall, although customer losses were beyond planned levels
and results within Connected Home were mixed, given the breadth
of Mark’s responsibilities he achieved a strong set of inputs
demonstrating considerable leadership, focus and determination.
84 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 85
Directors’ Annual Remuneration Report (continued) Long-term incentive plans vesting in 2017
Performance conditions
The performance conditions relating to the LTIP awards vesting in 2017 are set out below, together with an explanation of the achievement
against these performance conditions.
LTIP performance conditions
Vesting criteria
1/4 based on EPS growth over 2016 and 2017 (with 2015 as
the base year)
Performance conditions over three-year period
Full vesting for EPS growth of 16% or more
Zero vesting if EPS growth does not exceed 6%
Vesting increases on a straight-line basis between these points
3/8 based on absolute aggregate EP over the 3-year
performance period
Full vesting for aggregate EP of £3,500 million
Zero vesting if aggregate EP is below £1,500 million
Vesting increases on a straight-line basis between these points
3/8 based on non-financial KPI dashboard
over the 3-year performance period
As disclosed below
Performance outcome
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.
Aggregate EP achieved during the three-year period ending with
2017 was £1,886 million when compared to a threshold level of
£1,500 million and a maximum level of £3,500 million. Consequently,
19% of the EP portion of the 2015 LTIP award will vest.
EPS growth during the two-year period ending with 2017 did not
exceed RPI growth by 6%. Consequently, the EPS portion of the
2015 LTIP award will not vest.
Economic profit (EP)
EP is the 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.
LTIP non-financial KPI dashboard
Performance against five equally-weighted KPIs is measured each
year. Achievement against each target determines the performance
zone outcome. The KPI dashboard comprises results over a three-
year period.
Throughout each three-year performance period, for each median
performance zone outcome, 5% of the KPI portion of the award will
be forfeited and for each low performance zone outcome, 10% of the
KPI portion of the award will be forfeited.
High performance zone
Median performance zone
Low performance zone
Non-financial KPI update for long-term incentive plans vesting in 2018, 2019 and 2020
KPI performance under the LTIP
Set out below is the achievement against the KPI dashboard for the LTIP awards granted in 2015, 2016 and 2017.
Performance period
– LTIP awards granted in 2015
and due to vest in 2018
Year 3†
Year 2
Year 1
Performance period
– LTIP awards granted in 2016
and due to vest in 2019
Year 2†
Year 1
Performance period
– LTIP awards granted in 2017
and due to vest in 2020
Year 1†
Measure
Lost time injury frequency rate (LTIFR)(1)
Significant process safety events (Tier 1)(1)
British Gas net promoter score (NPS)(2)(3)
Direct Energy NPS(2)(4)
Employee engagement(5)
(1) View our performance in more detail on page 31.
(2) NPS and employee engagement measures disclosed on this page are part of the non-financial KPI dashboard used for the LTIP and are calculated using historical
methodology and business areas which were set at the time that the current Remuneration Policy was approved. They differ from the new NPS and employee engagement
metrics referenced elsewhere in the Annual Report and Accounts 2017.
(3) British Gas NPS decreased to -3† from -1.
(4) Direct Energy NPS declined slightly to +42† from +43.
(5) Employee engagement increased slightly from 56% favourable to 62%† favourable.
† We engaged PricewaterhouseCoopers LLP (PwC) to undertake a limited assurance engagement over 22 metrics, including the above metrics, which are highlighted
with the symbol ‘†’ throughout the Annual Report and Accounts 2017. Further details are set out on page 218 in Responsible Business – Performance Measures or online
at centrica.com/assurance
Performance against the non-financial KPI dashboard during the three-year performance period resulted in 50% of the KPI portion of the 2015
LTIP award vesting.
84 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 85
Governance | Remuneration Report
Directors’ Annual Remuneration Report (continued)
Based on achievement against the LTIP performance conditions over the three-year performance period, as set out on page 85, the LTIP
granted in 2015 will vest at a level of 26% of the award. The value of the shares initially granted under the 2015 award has fallen and as such
represents an outcome of approximately 47% of salary (the final value will be established on the vesting date).
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 82.
Jeff Bell is entitled to receive a salary supplement of 25% of base salary or participate in the CUPS DC scheme. As Mark Hanafin was an
Executive prior to 2014, he is entitled to receive a salary supplement of 40% of base salary 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 salary 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(1)
Jeff Bell
Mark Hanafin
(1) The retirement age for the CUPS DC scheme is 62.
Total notional
pension fund
as at
31 December
2017
£
Total notional
pension fund
as at
31 December
2016
£
304,327
197,101
1,357,689
1,085,701
Directors’ interests in shares (number of shares) (audited)
The table below shows the interests in the ordinary shares of the Company for the Directors on the Board at the end of the year together
with the minimum shareholding guideline for the Executives, which is 200% of base salary, and the achievement against the guideline.
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.
Executives
Iain Conn(5)
Jeff Bell(6)
Mark Hanafin(4)(7)
Mark Hodges(8)
Non-Executives
Rick Haythornthwaite
Margherita Della Valle
Joan Gillman
Stephen Hester
Lesley Knox
Carlos Pascual
Steve Pusey
Scott Wheway
Shares owned
as at
31 December
2016(1)
Shares owned
as at
31 December
2017(1)
Minimum
shareholding
guideline
(% of salary)
Achievement
as at
31 December
2017
(% of salary)(2)
Shares owned
(subject to
continued
service) as at
31 December
2017(3)
663,219
238,416
518,550
125,817
1,834,682
510,720
782,250
376,081
34,721
37,308
–
20,700
15,076
–
35,151
10,187
93,247
52,672
–
20,700
15,831
–
52,701
10,187
200
200
200
200
–
–
–
–
–
–
–
–
268
122
168
81
–
–
–
–
–
–
–
–
242
74,760
52,189
638
–
–
–
–
–
–
–
–
(1) These shares are owned by the Director or a connected person and they are not, save for exceptional circumstances, subject to continued service or the achievement of
performance conditions. They include for Executives shares purchased in April 2016 and 2017 with deferred AIP funds which have mandatory holding periods of three and
four years and which will be subject to tax at the end of the holding periods. For Iain Conn, these shares include shares which vested in April 2017 relating to his recruitment
award which have a mandatory holding period of one year and which will be subject to tax at the end of the holding period.
(2) The share price used to calculate the achievement against the guideline was 137.3 pence, the price on 31 December 2017.
(3) Shares owned subject to continued service include SIP matching shares that have not yet been held for the three year holding period. For Mark Hanafin, these shares include
a DMSS deferred award and for Jeff Bell, shares that were awarded in 2015 under the On Track Incentive Plan (OTIP), before he was appointed to the Board. The DMSS and
OTIP shares are due to be released in April 2018.
(4) Mark Hanafin also holds 215,261 fully vested unexercised options that are exercisable until April 2022.
(5) Following the release of shares in April and May 2018, after tax has been deducted, it is estimated that Iain Conn will hold shares with a value equal to 249% of salary.
(6) Following the release of shares in April and August 2018, after tax has been deducted, it is estimated that Jeff Bell will hold shares with a value equal to 154% of salary.
(7) Following the release of shares in April and May 2018, after tax has been deducted, it is estimated that Mark Hanafin will hold shares with a value equal to 184% of salary.
(8) Following the release of shares in May 2018, after tax has been deducted, it is estimated that Mark Hodges will hold shares with a value equal to 103% of salary.
86 | Centrica plc Annual Report and Accounts 2017
Executives’ interests in shares (number of shares) subject to Company performance conditions
The table below shows the share awards that have been granted in 2015 and 2016 to Executives under the LTIP and the DMSS. These
awards are subject to the achievement of Company performance conditions. Under the LTIP, there is a mandatory two-year holding period
following the vesting date, before the shares can be released.
Iain Conn
Jeff Bell
Mark Hanafin
Mark Hodges
Plan
LTIP
LTIP
LTIP
LTIP
Number
of shares
Vesting
date
943,012
May 2018
1,221,498
April 2019
Release
date
May 2020
April 2021
546,398 August 2018
August 2020
726,296
April 2019
DMSS
362,878
April 2018
LTIP
LTIP
LTIP
LTIP
637,170
May 2018
825,336
April 2019
637,170
May 2018
825,336
April 2019
April 2021
April 2018
May 2020
April 2021
May 2020
April 2021
Share awards granted in 2017 (audited)
The table below shows the share awards that were granted to Executives under the LTIP in April 2017. These awards are subject to the
achievement of Company performance conditions before vest and there is a mandatory two-year holding period following the vesting date
before the shares can be released.
LTIP awards granted in 2017
Iain Conn
Jeff Bell
Mark Hanafin
Mark Hodges
Number
of shares
1,270,953
755,702
858,752
858,752
Value
£000
(1)(2)
2,775
1,650
1,875
1,875
Vesting
date
April 2020
April 2020
April 2020
April 2020
Release
date
April 2022
April 2022
April 2022
April 2022
(1) Awards were made in 2017 to Executives based on a value of 300% of salary. The performance conditions relating to these awards are set out below.
(2) The share price used to calculate the number of shares granted was 218.34 pence being the average closing share price over the five business days immediately preceding
the grant date of 1 April 2017.
LTIP performance conditions
Vesting criteria
Performance conditions over three-year period
1/3 based on EPS growth over the 3-year period 2017/19
Full vesting for EPS growth of 24% or more
Zero vesting if EPS growth does not exceed 9%
Vesting increases on a straight-line basis between these points
1/3 based on absolute aggregate EP over the 3-year period
2017/19
Full vesting for aggregate EP of £3,500 million
Zero vesting if aggregate EP is below £1,500 million
Vesting increases on a straight-line basis between these points
1/3 based on non-financial KPI dashboard
over the 3-year period 2017/19
Detailed on page 85
Centrica plc Annual Report and Accounts 2017 | 87
Governance | 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 salary,
taxable benefits and bonus (annual incentive) payments between
2016 and 2017 for Iain Conn, compared with a comparator group
of UK employees, over the same period of time.
Change in Group Chief
Executive’s remuneration
Change in employee
remuneration
Salary and fees
1.62%
Taxable benefits
3.45%
Annual incentive
-100%
Salary and fees
2.20%
Taxable benefits
0.19%
Annual incentive
-33.87%
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 2016 and 2017 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 short-term and
long-term incentive pay awards as a percentage of the plan maximum.
Group Chief
Executive single
figure for total
remuneration
£000
Annual short-term
incentive payout
against max
opportunity
%
Long-term incentive
vesting against max
opportunity
%
Iain Conn
2017
2016
2015
Sam Laidlaw
2014
2013
2012
2011
2010
1,694
4,040
3,025
3,272
2,235
5,709
5,047
5,322
0
82
63
34
50
61
50
91
26
0
0
35
0
67
59
62
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 2017. 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
200
180
160
140
120
100
80
60
2009
2010
2011
2012
2013
2014
2015
2016
2017
Centrica Total return index
FTSE 100 Total return index
Source: Bloomberg
Fees received for external appointments of Executive
Directors
In 2017, Iain Conn received £121,000 (£121,000 in 2016) as a non-
executive director of BT Group plc.
Mark Hanafin represents Centrica as a non-executive director of
EDF Energy Nuclear Generation Group Limited and Mark Hodges
represents Centrica as a director of Energy UK. Neither Executive
receives any fees or remuneration relating to these external
appointments.
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 2016 and 2017.
Dividends
Staff and employee costs(1)
2017
£m
463
1,998
2016
£m
532
2,183
%
Change
-13%
-8%
(1) Staff and employee costs are as per note 5 in the Notes to the Financial
Statements.
Payments for loss of office (audited)
During 2017, there were no payments made for loss of office.
Payments to past Directors (audited)
During 2017, no payments were made to past Directors with the
exception of the payments disclosed in the single figure for total
remuneration table on page 82.
Funding of share schemes in 2017
During 2017, market purchased shares, held in an employee benefits
trust, were used to satisfy outstanding allocations under the DMSS
(deferred and investment shares), the Long Term Incentive Scheme
(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 awards or the exercise of options under the DMSS, the LTIS, the
Share Award Scheme, the On Track Incentive Plan and Centrica’s
all-employee share plans. At 31 December 2017, 42,060,842 shares
were held in treasury (2016: 50,833,460), following the share
repurchase programme throughout 2013 and 2014.
88 | Centrica plc Annual Report and Accounts 2017
Advice to the Remuneration Committee
Following a competitive tender process, PwC was appointed as
independent external adviser to the Committee in May 2017,
replacing Aon Consulting Ltd (Aon) who had been acting as the
interim external adviser since March 2016.
PwC also provided advice to Centrica globally during 2017 in the
areas of employment taxes, regulatory risk and compliance issues
and additional consultancy services.
PwC’s fees for advice to the Committee during 2017 amounted
to £48,000 which included the preparation for and attendance at
Committee meetings. The fees were charged on a time spent basis
in delivering advice that materially assisted the Committee in their
consideration of matters relating to executive remuneration.
Aon has also provided advice and services to Centrica globally
during 2017 in the areas of payroll and workforce administration
as well as system and process implementation. Aon’s fees for
advice to the Committee during 2017 amounted to £2,900.
The Committee takes into account the Remuneration Consultants
Group’s (RCG) Code of Conduct when dealing with its advisers.
Both PwC and Aon are members of the RCG and 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 PwC and
Aon in no way compromises their independence.
Statement of voting
Shareholder voting on the resolutions to approve the Directors’
Remuneration Policy, put to the 2015 AGM, and the Directors’
Remuneration Report, put to the 2017 AGM, was as follows:
Directors’ Remuneration Policy
Votes for
%
Votes against
3,102,582,374
91.62
283,889,125
16,276,123 votes were withheld.
Directors’ Remuneration Report
Votes for
%
Votes against
3,197,228,432
86.2
511,925,395
157,070,092 votes were withheld.
%
8.38
%
13.8
Implementation in the next financial year
Base salaries for Executives were reviewed in January 2018 and the
Committee agreed that there will be no salary increases for any of the
Executives in 2018.
No changes to pensions or benefits for current Executives
are anticipated.
AIP awards will be in line with the limits set out in the Remuneration
Policy table, not exceeding 200% of base salary. 75% of the award
will be based on a mix of financial measures based on Centrica’s
priorities for the forthcoming year and 25% will be based on personal
objectives.
For the operation of the AIP in 2018, 20% of the financial measures
will be based on cost efficiency, 40% of the financial measures will
be based on adjusted operating cash flow (AOCF) and 40% of the
financial measures will be based on operating profit, with targets
aligning to the Group Annual Plan. The targets are considered
commercially sensitive until the year end and will therefore be
disclosed retrospectively in the Remuneration Report for 2018.
LTIP awards will be granted based on 250% of base salary, in
recognition of the current level of Centrica’s share price. The
performance measures will consist of relative total shareholder
return (TSR) with a weighting of 33.3%, underlying adjusted operating
cash flow (UAOCF) growth with a weighting of 22.2%, economic
profit (EP) with a weighting of 22.2% and non-financial KPIs with
a weighting of 22.2%.
It is proposed that the following financial targets will apply to the 2018
LTIP awards:
Proposed measures
UAOCF growth
Absolute aggregate EP
Relative TSR
(1) Compound annual growth rate.
Proposed targets
Threshold
Maximum
CAGR 2%(1)
CAGR 5%(1)
£1,625m
£2,125m
FTSE 100
median
FTSE 100
upper quartile
It is proposed that threshold performance will equate to 25% vesting
and maximum performance will be 100% vesting. Vesting between
stated points will be on a straight-line basis.
We propose to measure KPI improvement by reference to closure
of the gap between current performance and our long-term
aspirational goals which are generally aligned with upper quartile
market performance:
Current performance
Long-term goal
KPI
Threshold
vesting
Maximum
vesting
For each LTIP cycle we expect the KPI performance gap to close by
25% for threshold vesting and 50% for maximum vesting.
The KPI measures and targets will be:
Current
Targets
performance† Threshold Maximum
Long-term
goal
0.98
0.80
0.45
0.25
0.14
0.13
0.12
0.1
+9.4
+12.05
+14.70
+20
3,739
3,284
2,815
1,877
Safety
Total recordable injury frequency
rate (TRIFR)(1)
Tier 1 and Tier 2 process safety
event frequency rate(1)
Customer satisfaction
Aggregate brand NPS across
our customer businesses
weighted by customer numbers
Complaints per 100,000
customers across our customer
businesses weighted by
customer accounts
Employee engagement
52
58.25
64.50
77
(1) Per 200,000 hours worked.
Changes since 1 January 2018
Share Incentive Plan (SIP)
During the period from 1 January 2018 to 21 February 2018
Mark Hanafin acquired 263 shares and Iain Conn and Mark Hodges
both acquired 262 shares through the SIP.
The Remuneration Report has been approved by the Board of
Directors and signed on its behalf by:
Grant Dawson
Group General Counsel & Company Secretary
21 February 2018
Centrica plc Annual Report and Accounts 2017 | 89
Governance | Remuneration Policy
Remuneration Policy
As Centrica’s Directors’ Remuneration Policy (Policy) was last
approved by shareholders at the Annual General Meeting (AGM)
in 2015, it will be the subject of a shareholder vote at the AGM
in May 2018. In carrying out the Policy review during the year, the
Committee was mindful of the need to consider further simplification,
improved alignment with our strategy and evolving stakeholder views
on executive pay.
Set out over the following pages is the Policy that will take legal effect
from the conclusion of the 2018 AGM, subject to shareholder approval.
Executive Directors’ remuneration
The Committee believes that the remuneration arrangements
are aligned with the organisation’s strategic goals as well as the
experience and expectation of shareholders.
The revised Policy more closely aligns the interests of the Executive
Directors (Executives) with the delivery of long-term shareholder
value through returns and growth whilst ensuring behaviours remain
consistent with the governance and values of the business.
Objectives
The Policy aims to deliver remuneration arrangements that:
• attract and retain high calibre Executives in a challenging
and competitive global business environment;
• place strong emphasis on both short-term and long-term
performance;
• are strongly aligned to the achievement of strategic objectives
and the delivery of sustainable long-term shareholder value
through returns and growth; and
• seek to avoid creating excessive risks in the achievement of
performance targets.
Remuneration framework
The design of the remuneration framework for Executives ensures
that a substantial portion of the maximum opportunity is dependent
upon performance and delivered in shares over a three-five year period.
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).
Fixed remuneration includes base salary, benefits and pension.
Short-term incentive is delivered through the Annual Incentive Plan
(AIP) which is described on page 92. Long-term incentive is delivered
through the Long Term Incentive Plan (LTIP) which is described on
page 92. Both plans are underpinned by stretching performance
measures and targets that closely link to our strategy.
Performance measures
The Committee believes that the performance measures selected
will help drive our customer-focused strategy, allowing us to deliver
for our customers, our employees and our shareholders.
How the LTIP measures link to our strategy
The chart below shows our strategy linked to the proposed LTIP
measures. Our strategy is set out in more detail on pages 10 to 11.
Centrica’s strategy
Delivering for the changing
needs of our customers
Trusted corporate citizen
Employer of choice
Delivering long-term shareholder
value through returns and growth
Proposed LTIP
measures
22.2%
Non-financial KPIs
33.3%
Relative total
shareholder return
(TSR)
22.2%
Underlying adjusted
operating cash flow
(UAOCF) growth
22.2%
Economic profit
(EP)
The chart below shows our long-term financial goals linked to the
proposed LTIP measures. Our long-term financial goals are set out
in more detail on page 13.
Centrica’s financial framework
Measure
Target
UAOCF
3-5% underlying growth
p.a. on average
Dividend
Progressive in line with
AOCF
Controllable
costs
Cost growth < inflation
Capital
reinvestment
Investment <70% of
AOCF
Credit rating
Strong investment grade
Return on
average capital
employed
(ROACE)
10-12%
Proposed LTIP
measures
33.3%
Relative TSR
22.2%
UAOCF growth
22.2%
EP
22.2%
Non-financial KPIs
90 | Centrica plc Annual Report and Accounts 2017
Summary of Policy design
Fixed remuneration
Short-term incentive
Long-term incentive
25%
Individual
performance
22.2%
EP
22.2%
Non-financial
KPIs
Base pay/
salary
Pension
Benefits
75%
Financial performance
(mix of measures based
on priorities for year)
33.3%
Relative
TSR
22.2%
UAOCF
growth
50% of award deferred into shares for three years
Three-year performance period followed by
two-year holding period
Malus and clawback
Remuneration Policy table
The table below sets out the Policy that will apply from 14 May 2018, subject to shareholder approval.
Purpose and link to strategy Operation and clawback
Maximum opportunity
Performance measures
Base salaries are reviewed annually, taking into
account individual and business performance,
market conditions and pay in the Group as
a whole. Changes are usually effective from
1 April each year.
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 for the Group
to compete for
international talent and
to attract and retain
Executives of the calibre
required to develop and
deliver our strategy.
Not applicable.
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/development 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.
Centrica plc Annual Report and Accounts 2017 | 91
Purpose and link to strategy Operation and clawback
Maximum opportunity
Performance measures
Short-term
incentive plan
Designed to incentivise
and reward the annual
performance of
individuals and teams
in the delivery of short-
term financial and non-
financial metrics.
Performance measures
are linked to the delivery
of the Group’s long-term
financial goals and key
Group priorities.
Long-term
incentive plan
Designed to retain
Executives and to
encourage sustainable
high performance.
Provides an incentive
that aligns with the
Group’s strategy to
deliver long-term
shareholder value
through returns and
growth.
Provides a direct link
between executive
remuneration and the
Group’s long-term
financial goals and
priorities.
In line with the Group’s annual performance
management process, each Executive has an
agreed set of stretching individual objectives
each year.
Following measurement of the individual and
company financial performance outcome Annual
Incentive Plan (AIP) awards are made. Half of the
AIP award is paid in cash. The other half is required
to be deferred into shares which are held for three
years, to further align the interests of Executives
with the long-term interests of shareholders.
Dividends are payable on the shares during the
holding 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).
Long Term Incentive Plan (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 performance targets, but
are not released until the fifth anniversary of the
award date.
LTIP awards are usually delivered as conditional
shares. 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 holding period (see
policy table notes).
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.
Maximum of 200% of base
salary. Half the maximum is
payable for on-target
performance.
This is consistent with the
previously approved policy.
Maximum of 300% of base
salary plus dividend equivalents.
This is consistent with the
previously approved policy.
The amount payable for
achieving the minimum level of
performance is 5.55% of award.
Under the previously approved
policy, the minimum level
was 0%.
75% based on a mix of
financial performance
measures aligned to
Centrica’s priorities for
the forthcoming year and
25% based on individual
objectives aligned to
the Group’s priorities
and strategy.
Under the previously
approved policy, 62.5%
was based on adjusted
operating cash flow and
37.5% was based on
individual objectives.
Performance is assessed
over one financial year.
33.3% based on relative
total shareholder return
(TSR) with the remainder
equally weighted and
based on underlying
adjusted operating cash
flow (UAOCF) growth,
absolute aggregate
economic profit (EP) and
non-financial KPIs, all
measured over a three-year
performance period.
Under the previously
approved policy,
performance measures
were equally weighted and
based on earnings per
share (EPS), absolute
aggregate EP and non-
financial KPIs, measured
over a three-year
performance period.
92 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 93
Governance | Remuneration PolicyRemuneration Policy (continued) Purpose and link to strategy Operation and clawback
Maximum opportunity
Performance measures
Pension
Positioned to provide
a market-competitive
post-retirement benefit,
in a way that manages
the overall cost to the
Company.
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.
For newly recruited Executives
the maximum benefit is 25%
of base salary.
For existing Executives
appointed between 2015 and
2017, the maximum benefit
is 30% of base salary for the
Group Chief Executive and
25% of base salary for all
other Executives.
Not applicable.
Executives appointed prior to 2015 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.
We would only 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 benefit.
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 wellbeing services; and
• a contribution towards financial planning
advice.
For Executives appointed prior
to 2015, the maximum benefit
is 40% of base salary.
Not applicable.
Not applicable.
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.
Assistance may include (but is not limited to)
removal and other relocation costs, housing or
temporary accommodation, education, home
leave, repatriation and tax equalisation.
Maximum of 100% of base
salary.
This is consistent with the
previously approved Policy.
Not applicable.
Executives are entitled to participate in all-
employee share plans on the same terms as
all other eligible employees.
Not applicable.
Maximum contribution limits
are set by legislation or by the
rules of each plan. Levels of
participation apply equally to
all participants.
This is consistent with the
previously approved Policy.
Benefits
Positioned to support
health and wellbeing
and to provide a
competitive package of
benefits that is aligned
with market practice.
Relocation and
expatriate
assistance
Enable the Group to
recruit or promote the
appropriate 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.
92 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 93
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 Policy set out on pages 90 to 97, 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 on pages 90 to 97 (for regulatory, exchange control, tax or
administrative purposes or to take account of a change in legislation)
without obtaining shareholder approval for that amendment.
Performance measures
We continue to be committed to full transparency and disclosure.
We will disclose all targets as soon as any commercial sensitivity falls
away. At the latest, this will be at the end of the performance period.
Relative total shareholder return (TSR)
Compares Centrica’s TSR (share price growth plus dividends) for the
performance period with the TSR ranking of the other companies in
the FTSE 100 Index.
The FTSE 100 Index has been chosen as it is a broad equity index of
which Centrica is a constituent member and reflects the investment
interests of our UK shareholder base.
Underlying adjusted operating cash flow (UAOCF) growth
Growth in 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.
This is adjusted for the impact of commodity price movements
in Exploration & Production/nuclear, foreign exchange movements
and any material one-off working capital items to give a measure
of underlying growth.
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.
Further details of these performance measures are provided in notes
2, 4 and 10 of the Financial Statements, in the Annual Report and
Accounts 2017. In addition, see page 216 for an explanation of UAOCF.
Non-financial KPIs
Based on the Group’s non-financial KPIs, using three-year targets for
improvement.
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.
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.
94 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 95
Governance | Remuneration PolicyRemuneration Policy (continued) Total remuneration by performance scenario
The charts below indicate the minimum, on-target and maximum
remuneration that could be received by each Executive, excluding
share price movement, under the Policy. Assumptions made for each
scenario are:
• minimum – fixed remuneration only (base salary at current level,
together with pension and benefits as set out in the Remuneration
Policy table);
• on-target – fixed remuneration plus target AIP (as set out in the
Remuneration Policy table) and expected value under the LTIP
on vesting of 50%; and
• maximum – fixed remuneration plus maximum AIP opportunity
and maximum levels of vesting under the LTIP (as set out in the
Remuneration Policy table).
Iain Conn
Maximum
On-target
Minimum
20%
29%
34%
24%
42%
51%
6,414
Total
3,853
Total
100%
1,291
Total
Jeff Bell
Maximum
On-target
Minimum
20%
29%
51%
33%
25%
42%
3,903
Total
2,336
Total
100%
770
Total
£000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
£000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Fixed remuneration
Short-term incentive
Long-term incentive
Fixed remuneration
Short-term incentive
Long-term incentive
Mark Hanafin
21%
Maximum
29%
50%
35%
24%
41%
4,421
Total
On-target
Minimum
100%
946
Total
2,684
Total
Mark Hodges
20%
Maximum
29%
51%
33%
25%
42%
4,325
Total
On-target
Minimum
100%
851
Total
2,588
Total
£000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
£000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Fixed remuneration
Short-term incentive
Long-term incentive
Fixed remuneration
Short-term incentive
Long-term incentive
Discretion and judgement
It is important that the Committee maintains the flexibility to apply
discretion and judgement to achieve fair outcomes as no
remuneration policy and framework, however carefully designed and
implemented, can pre-empt every possible scenario. The Committee
needs to be able to exercise appropriate discretion to determine
whether mechanistic or formulaic outcomes are fair, in context and
can be applied in an upward or downward manner when required.
Judgement is applied appropriately by the Committee, for example
when considering the political and social pressures on the business,
the impact of significant movements in external factors such as
commodity prices, in setting and evaluating delivery against individual
and non-financial performance targets to ensure they are considered
sufficiently stretching and that the maximum and minimum levels are
appropriate and fair.
The Committee has absolute discretion to decide who receives
awards, the level of the awards under the incentive plans and the
timing, within the parameters set in the rules.
In the case of a corporate action, the Committee can agree when
a corporate action applies to a share award, whether awards pay out
or are rolled over in this situation and how any special dividend might
apply. The Committee also maintains the discretion to adjust any
awards in the event of a variation of capital, for example to maintain
the incentive value at the level originally intended.
The Committee retains discretion, consistent with market practice,
regarding the operation and administration of the incentive plans
including, but not limited to, the following:
• agreeing appropriate measures and setting targets aligned to the
Group’s priorities or KPIs;
• determination of the result of any disputes relating to the
interpretation of the rules;
• alteration of the terms of the performance targets if it feels that
they are no longer a fair measure of the Company’s performance,
as long as the new targets are not materially less challenging than
the original ones; and
• determination that any award is forfeit in whole or in part.
The Committee also retains the discretion to forfeit or clawback
deferred awards if it determines that prior performance which
resulted in the annual bonus being awarded was discovered to
be a misrepresentation of results or inappropriate management
behaviour which fails to reflect the governance or values of
the business.
94 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 95
Recruitment policy
The Committee will apply the same remuneration policy during the
policy period as that which applies to existing Executives when
considering the recruitment of a new Executive in respect of all
elements of remuneration as set out in the Remuneration Policy table.
Whilst the maximum level of remuneration which may be granted
would be within plan rules and ordinarily subject to the maximum
opportunity set out in the Remuneration Policy table, in certain
circumstances, an arrangement may be established specifically to
facilitate recruitment of a particular individual up to 25% above the
maximum opportunity, albeit that any such arrangement would be
made within the context of minimising the cost to the Company.
The policy for the recruitment of Executives during the policy period
includes the opportunity to provide a level of compensation for
forfeiture of bonus entitlements and/or unvested long-term incentive
awards from an existing employer, if any, and the additional provision
of benefits in kind, pensions and other allowances, as may be
required in order to achieve a successful recruitment.
Service contracts
Service contracts provide that either the Executive or the Company
may terminate the employment by giving one year’s written notice.
The Committee retains a level of flexibility, as permitted by the Code,
in order to attract and retain suitable candidates. It reserves the right
to offer contracts which contain an initial notice period in excess of
one year, provided that at the end of the first such period the notice
period reduces to one year.
All Executive and Non-Executive Directors are required to be
re-elected at each AGM.
Termination policy
The Committee carefully considers compensation commitments in
the event of an Executive’s termination. The aim is to avoid rewarding
poor performance and to reduce compensation to reflect the departing
Executive’s obligations and to mitigate losses.
Save for summary dismissal, the policy is to either continue to provide
base salary, pension and other benefits for any unworked period of
notice or, at the option of the Company, to make a payment in lieu
of notice comprising base salary only. Typically any payment in lieu
of notice will be made in monthly instalments and reduce, or cease
completely, in the event that remuneration from new employment
is received.
An AIP award for the year in which the termination occurs may be
made following the normal year end assessment process, subject
to achievement of the agreed performance measures and time-
apportioned for the period worked. Any award would be payable at
the normal time with a 50% deferral and no new long-term incentive
plan awards would be made.
Except in cases of death in service, the policy is not to vest any
existing long-term incentive plan awards earlier than their normal
vesting date. In all cases any vesting remains subject to satisfaction
of the associated performance conditions and will be time-
apportioned for the period worked.
Executives leaving following resignation will forfeit any potential AIP
award for the performance year in which the resignation occurs and
all unvested LTIP awards. In addition, Executives summarily dismissed
will also forfeit any deferred shares. Deferred awards can also be
clawed back if it is subsequently discovered that the results have
been achieved by behaviour which fails to reflect the governance and
values of the business or where the results for any period appear
inaccurate or misleading.
On a change of control, existing LTIP awards will be exchanged on
similar terms or vest to the extent that the performance conditions
have been met at the date of the event and be time-apportioned to
the date of the event or the vesting date, subject to the overriding
discretion of the Committee.
Pay fairness across the Group
The Group operates in a number of different environments and
has many employees who carry out a range of diverse roles across
a number of countries. In consideration of pay fairness across
the Group, the Committee believes that ratios related to market
competitive pay for each role profile in each distinct geography are
the most helpful.
When the ratio of salary to the relevant market median is compared
for all permanent employees across the Group the median ratio is
0.98. The 25th percentile is 0.96 and the 75th percentile is 1.09.
Unlike the significant majority of the workforce who receive largely
fixed remuneration, mainly in the form of salary, the most significant
component of Executive compensation is variable and dependent
on performance. As such, the Committee reviews total compensation
for Executives against benchmarks rather than salary alone. The ratio
of on-target total pay opportunity for the Group Chief Executive
versus the relevant market median is 0.99.
A number of performance-related incentive schemes are operated
across the Group which differ in terms of structure and metrics from
those applying to Executives.
The Group also offers a number of all-employee share schemes in
the UK, Ireland and North America and Executives participate on the
same basis as other eligible employees.
Performance measures applying to Executives are cascaded down
through the organisation and Group employment conditions include
high standards of health and safety and employee wellbeing initiatives.
No consultation in respect of Executive remuneration takes place
with employees during the year.
Shareholding requirement
A minimum shareholding requirement is in place for Executive
Directors to build and maintain a value of shares over a five-year
period equal to 300% of base salary, with a condition that 75%
of vested incentive shares (post-tax) will be retained until the
requirement has been met.
A post-cessation shareholding requirement of 50% of the
shareholding requirement (or full actual holding if lower) is applicable
for 24 months post-cessation.
External appointments of Executives
It is the Company’s policy to allow each Executive to accept one
non-executive directorship of another company, although the Board
retains the discretion to vary this policy.
Fees received in respect of external appointments are retained
by the individual Executive and are set out in the Directors’ Annual
Remuneration Report each year.
96 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 97
Governance | Remuneration PolicyRemuneration Policy (continued) Non-Executive Directors’ remuneration
Remuneration Policy
Centrica’s policy on Non-Executive Directors’ (Non-Executives) fees takes into account the need to attract the high calibre individuals required
to support the delivery of our strategy.
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. All Non-Executives are required to be re-elected at each AGM.
Remuneration Policy table
Purpose and link to strategy Operation and clawback
Maximum opportunity
Performance measures
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.
Fees reflect market
practice as well as the
responsibilities and time
commitment required
by our Non-Executives.
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.
The maximum level of fees
payable to Non-Executives, in
aggregate, is set out in the
Articles of Association.
Not applicable.
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 applying from 1 January 2016
Chairman of the Board – £495,000 per annum.
Base fee for Non-Executives – £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.
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.
Recruitment policy
The policy on the recruitment of new Non-Executives during the policy period would be to apply the same remuneration elements as for the
existing Non-Executives. It is not intended that variable pay, day rates or benefits in kind be offered, although in exceptional circumstances
such remuneration may be required in currently unforeseen circumstances. The Committee will include in future Remuneration Reports details
of the implementation of the policy as utilised during the policy period in respect of any such recruitment to the Board.
96 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | 97
Governance | Other Statutory Information
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
2017. The directors’ report required under the Companies Act 2006
(the Act) comprises this Directors’ and Corporate Governance Report
(pages 63 to 77), the Remuneration Report (pages 78 to 97),
Other Statutory Information (pages 98 to 100) and the Responsible
Business section for disclosure of our greenhouse gas emissions
in the Strategic Report (page 36).
The management report required under Disclosure and Transparency
Rule 4.1.5R comprises the Strategic Report (pages 2 to 62) (which
includes the risks relating to our business), Shareholder Information
(page 215) and details of acquisitions and disposals made by the
Group during the year in note 12 (pages 136 to 138). This Directors’
and Corporate Governance Report fulfils the requirements of the
corporate governance statement required under Disclosure &
Transparency Rule 7.2.1.
Annual General Meeting (AGM)
The AGM of Centrica plc will be held at the QEII Centre, Broad
Sanctuary, Westminster, London SW1P 3EE on Monday 14 May 2018
at 2.00pm. Further information is available in the Notice of AGM
(see centrica.com/agm18).
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 52 to 62.
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 135.
Financial instruments
Full details of the Group’s financial instruments can be found in
notes 19, S3 and S6 on pages 145 to 146, 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 64 to 65.
Details of the composition of the Board and role of Directors are
set out within this Directors’ and Corporate Governance Report on
page 68.
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 2017 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.
98 | Centrica plc Annual Report and Accounts 2017
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. We offer tax-advantaged
Sharesave (SAYE) schemes in the UK and Ireland, and a Share
Incentive Plan (SIP) in the UK, with good levels of take-up for all
share plans across the Group. Currently, 50% of eligible employees
participate in Sharesave, 31% of eligible employees participate in
the SIP.
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 in Responsible Business
Pages 32 to 38
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 we endeavour to
retain employees in the workforce if they become disabled during
employment. This commitment was recognised in January 2018
by our achievement of level 1 Disability Confident Status and in 2017
we launched a Disability and Wellbeing Network to help employees
impacted by disability to access the support they need to thrive
at work.
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 Code.
We also recognise the opportunity we have to contribute positively to
global efforts to ensure human rights are understood and observed.
Read more in Responsible Business
Pages 32 to 38
Political donations
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 2017, contributions to DEEPAC by employees amounted
to $62,768, and DEEPAC made 95 political donations totalling $72,800.
Engagement 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 2017, Centrica’s shareholder engagement programme included:
formal presentations for the announcement of the Group’s 2016
•
preliminary results, 2017 interim results and Capital Markets Day;
• 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;
• 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 further develop 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 2017 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 due to be 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, centrica.com, 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 2017, 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
% of share
capital(1)
5.93
5.72
4.99
(1) 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 21 February
2018, 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
2017 AGM to allot up to 1,829,855,996 ordinary shares as permitted
by the Act. A renewal of this authority will be proposed at the 2018
AGM. The Company’s issued share capital as at 31 December 2017,
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 2017 AGM to purchase its own shares up to a
maximum of 548,956,799 ordinary shares. No shares were
purchased under this authority in 2017.
As at 31 December 2017, 42,060,842 shares were held as treasury
shares. These shares held in treasury represent 0.75% of the
Company’s issued share capital. Dividends are waived in respect
of shares held in the treasury share account.
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 Trust, in accordance with best practice, have agreed not
to vote any unallocated shares held in the EBT or SIP Trust 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.
Sustainability
Information about the Company’s approach to sustainability risks
and opportunities is set out on pages 32 to 38. Also included in these
pages are details of our greenhouse gas emissions.
Related party transactions
Related party transactions are set out in note S8 to the Financial
Statements.
Centrica plc Annual Report and Accounts 2017 | 99
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and the Group and enable them to
ensure that the Financial Statements and the Remuneration Report
comply with the Act and, as regards the Group Financial Statements,
Article 4 of the IAS Regulation. They are also responsible for
safeguarding the assets of the Company and the Group and hence
for taking reasonable steps for the prevention and detection of fraud
and other irregularities.
Furthermore, the Directors are responsible for the maintenance and
integrity of the Company’s website. Legislation in the UK governing
the preparation and dissemination of financial statements may differ
from legislation in other jurisdictions.
The Directors consider that the Annual Report and Accounts 2017,
when taken as a whole, is fair, balanced and understandable and
provides the information necessary for shareholders to assess the
Group’s position and performance, business model and strategy.
Each of the Directors confirm that to the best of their knowledge:
• the Group Financial Statements, which have been prepared
in accordance with IFRS as adopted by the EU, give a true and fair
view of the assets, liabilities, financial position and profit or loss of
the Group;
• the Strategic Report contained on pages 2 to 62 together with the
Directors’ and Corporate Governance Report on pages 63 to 100,
includes a fair review of the development and performance of the
business and the position of the Group, together with a description
of the principal risks and uncertainties that it faces;
• as outlined on page 73, there is no relevant audit information of
which Deloitte LLP are unaware; and
• they have taken all the steps that they ought to have taken as
a Director in order to make themselves aware of any relevant audit
information and to establish that the Company’s auditors are
aware of that information.
By order of the Board
Grant Dawson
Group General Counsel & Company Secretary
21 February 2018
Events after the balance sheet date
Events after the balance sheet date are disclosed in note 26 to the
Financial Statements.
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 2017:
Information
Location in Annual Report
Directors’ compensation
Remuneration Report
Page(s)
78 to 97
Capitalised interest
(borrowing costs)
Details of long-term
incentive schemes
Financial Statements
131, note 8
Remuneration Report
85 to 86
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 40 to 47. After making enquiries, the Board has
a reasonable expectation that Centrica plc 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 64 to 65, are responsible for
preparing the Annual Report, the Remuneration Report, the Strategic
Report and the Financial Statements in accordance with applicable
law and regulations.
Company law requires the Directors to prepare financial statements
for each financial year. Accordingly, the Directors have prepared the
Group Financial Statements in accordance with International
Financial Reporting Standards (IFRS) as adopted by the European
Union (EU) and have elected to prepare the Company Financial
Statements in accordance with United Kingdom Generally Accepted
Accounting Practice including FRS 101 ‘Reduced Disclosure
Framework’ (United Kingdom Accounting Standards and applicable
law). Under company law, the Directors must not approve the
Financial Statements unless they are satisfied that they give a true
and fair view of the state of affairs of the Group and the Company and
of the profit or loss of the Group for that period. In preparing these
Financial Statements, the Directors are required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are reasonable
and prudent;
• state whether IFRS as adopted by the EU and applicable UK
Accounting Standards have been followed, subject to any material
departures disclosed and explained in the Group and Company
Financial Statements respectively; and
• prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
100 | Centrica plc Annual Report and Accounts 2017
Centrica plc Annual Report and Accounts 2017 | PB
Other Statutory Information (continued)Governance | Other Statutory Information Financial
Statements
Contents
102
Independent Auditors’ Report
110
Group Income Statement
111 Group Statement of
Comprehensive Income
190 Company Financial Statements
192
Notes to the Company Financial
Statements
201 Gas and Liquids Reserves (Unaudited)
112 Group Statement of Changes in Equity
202 Five Year Summary (Unaudited)
113 Group Balance Sheet
203 Ofgem Consolidated Segmental
114 Group Cash Flow Statement
115 Notes to the Financial Statements
Statement
Centrica plc Annual Report and Accounts 2017 | 101
Report on the audit of the Financial Statements
Opinion
In our opinion:
• the Financial Statements give a true and fair view of the state
of the Group’s and of the Company’s affairs as at 31 December
2017 and of the Group’s profit 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 Company Financial Statements have been properly prepared
in accordance with United Kingdom Generally Accepted
Accounting Practice including Financial Reporting Standard 101
‘Reduced Disclosure Framework’; 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.
We have audited the Financial Statements of Centrica plc
(the ‘Company’) and its subsidiaries (the ‘Group’) which comprise:
• the Group Income Statement;
• the Group Statement of Comprehensive Income;
• the Group Balance Sheet;
• the Company Balance Sheet;
• the Group Statement of Changes in Equity;
• the Company Statement of Changes in Equity;
• the Group Cash Flow Statement; and
• related notes on pages 115 to 200 which include the summary
of accounting policies.
The financial reporting framework that has been applied in the
preparation of the Group Financial Statements is applicable law and
IFRSs as adopted by the European Union. The financial reporting
framework that has been applied in the preparation of the Company
Financial Statements is applicable law and United Kingdom
Accounting Standards, including FRS 101 ‘Reduced Disclosure
Framework’ (United Kingdom Generally Accepted Accounting
Practice).
Basis for opinion
We conducted our audit in accordance with International Standards
on Auditing (UK) (ISAs (UK)) and applicable law. Our responsibilities
under those standards are further described in the Auditor’s
responsibilities for the audit of the Financial Statements section
of our report.
We are independent of the Group and the Company in accordance
with the ethical requirements that are relevant to our audit of the
Financial Statements in the UK, including the FRC’s Ethical Standard
as applied to listed public interest entities, and we have fulfilled our
other ethical responsibilities in accordance with these requirements.
We confirm that the non-audit services prohibited by the FRC’s
Ethical Standard were not provided to the Group or the Company.
We believe that the audit evidence we have obtained is sufficient
and appropriate to provide a basis for our opinion.
Summary of our audit approach
Key audit matters
The key audit matters that we identified in the current year were:
•
impairment assessment for long-life assets and goodwill;
• estimation of energy supply revenue;
• valuation of commodity trades;
• presentation of exceptional items and certain re-measurements; and
• accounting for the acquisition of the Bayerngas exploration and production assets.
Materiality
£50 million
Scoping
All segments in full scope
First year audit transition
We have completed a smooth
and effective transition
Key audit matters considered by the Group’s auditor in the prior year were broadly aligned with the items identified
above, but also included consideration of onerous contracts (which are less significant in the current year with no
new contracts considered to be onerous) and pensions (which while material, we do not consider to be a key audit
matter as the assumptions have not changed materially in the current year). Accounting for the acquisition of
Bayerngas Norge AS’s exploration and production business was not relevant in the prior year.
The materiality that we used in the current year was £50 million which was determined on the basis of 5.5% profit
before tax before exceptional items and certain re-measurements as defined in note 7.
All divisions of the Group have been subject to a full scope audit using a component materiality level relevant
to the size and risk associated with that business. The decision to include all divisions in our full audit scope was
to enhance our understanding of the Group and ensure that our audit was appropriately scoped in our first year
as auditor.
We developed a detailed audit transition plan, designed to deliver an effective transition from the Group’s
predecessor auditor, PricewaterhouseCoopers LLP (‘PwC’). Our audit planning and transition commenced on
1 January 2017, when we confirmed our independence to the Group’s Audit Committee. Our transition activities
were performed across the Group’s business divisions, which included (but were not limited to) meeting relevant
partners and senior staff from PwC, shadowing PwC in the 2016 audit close meetings, attending the February
2017 Audit Committee meeting where the final report on the audit was presented and reviewing PwC’s 2016
audit work papers. In March 2017, we held an audit transition planning workshop with senior members of our
component teams in order to design our audit strategy and approach. Senior management relevant to the audit also
participated in detailed transition workshops involving each division, together with Internal Audit and Group Finance.
Our transition focused on obtaining an understanding of the Group’s system of internal control, evaluating the
Group’s accounting policies and areas of accounting judgement and meeting with management across all divisions.
102 | Centrica plc Annual Report and Accounts 2017
Independent Auditor’s ReportFinancial Statements | Independent Auditor’s Report Conclusions relating to principal risks, going concern and viability statement
Going concern
We have reviewed the Directors’ statement on page 100 of the Financial
Statements about whether they considered it appropriate to adopt the going
concern basis of accounting in preparing them and their identification of any
material uncertainties to the Group’s and Company’s ability to continue to
do so over a period of at least 12 months from the date of approval of the
Financial Statements.
We confirm that we have nothing material to report, add or draw
attention to in respect of these matters.
We confirm that we have nothing material to report, add or draw
attention to in respect of these matters.
We are required to state whether we have anything material to add or draw
attention to in relation to that statement required by Listing Rule 9.8.6R(3)
and report if the statement is materially inconsistent with our knowledge
obtained in the audit.
Principal risks and viability statement
Based solely on reading the Directors’ statements and considering whether
they were consistent with the knowledge we obtained in the course of the
audit, including the knowledge obtained in the evaluation of the Directors’
assessment of the Group’s and the Company’s ability to continue as a going
concern, we are required to state whether we have anything material to add
or draw attention to in relation to:
•
•
•
the disclosures on pages 52 to 60 that describe the principal risks
and explain how they are being managed or mitigated;
the Directors’ confirmation on pages 55 and 100 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; or
the Directors’ explanation on pages 61 and 62 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 are also required to report whether the Directors’ statement relating to
the prospects of the Group required by Listing Rule 9.8.6R(3) is materially
inconsistent with our knowledge obtained in the audit.
Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the Financial Statements
of the current period and include the most significant assessed risks of material misstatement (whether or not due to fraud) that we
identified. These matters included those which had the greatest effect on: the overall audit strategy, the allocation of resources in the
audit and directing the efforts of the engagement team.
These matters were addressed in the context of our audit of the Financial Statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.
Centrica plc Annual Report and Accounts 2017 | 103
Key audit matter description
Impairment assessment for long-life assets and goodwill
The Group owns significant upstream gas and oil assets, certain power
generation assets and gas storage assets, and also recognises goodwill
from historic acquisitions, which are required to be reviewed for indicators
of impairment or tested at least annually for impairment as appropriate.
The impairment assessment involves management judgement in
considering whether the carrying value of those assets or cash generating
units are recoverable.
Determining the recoverable amount involves significant estimation
including:
forecasting future cash flows;
•
forecasting future production or generation profiles;
•
•
forecasting future commodity prices;
• estimating oil and gas reserves; and
• determining an appropriate discount rate.
We note that the Group’s impairment tests are particularly sensitive to future
commodity price assumptions and discount rates, as shown by the
sensitivities disclosed in note 7(c).
As disclosed in notes 13, 14 and 15 the total book value of long-life assets
and goodwill is £10.2 billion and following management’s impairment testing
a total impairment of £678 million was recorded. See note 3(b) for further
details of the specific assets subject to key estimation uncertainty and notes
7(c) and S2 for details of other key assumptions used in estimating fair value
less costs of disposal for these assets.
Due to the significance of the judgements and estimates involved in
determining the recoverable amount, those assets that are the most material
and subject to the greatest estimation were concluded to represent the
highest risk of impairment, as explained in note 3(b) and specified above.
For these long-life assets and goodwill, we identified a key risk of material
misstatement that these assets are not recoverable or that previously
recorded impairments should be reversed.
Refer to pages 74 to 75 for the Audit Committee’s review and conclusion
of the key judgements underpinning the impairment assessment.
How the scope of our audit responded
to the key audit matter
We understood management’s process for identifying indicators of
impairment and for performing their impairment assessment. We assessed
the design and implementation of key controls relating to asset impairment
models, the underlying forecasting processes and the impairment reviews
performed.
We evaluated and challenged the key assumptions and inputs into
the impairment models which included performing sensitivity analysis,
to evaluate the impact of selecting alternative assumptions.
We confirmed that forecast cash flows were consistent with Board approved
forecasts and analysed reasonably possible downside sensitivities.
We validated production profiles to external reserve and operator estimates
and agreed these to the cash flow forecast assumptions.
We evaluated the Group’s determination of future commodity prices using
our own internal experts, who benchmarked externally available future
commodity price estimates and performed sensitivity analysis with
alternative future prices.
We confirmed estimates of oil and gas reserves to third-party reserve reports,
assessing the skills, qualifications and independence of these experts.
We involved our internal valuation specialists to evaluate management’s
discount rates, which involved benchmarking against available market views
and analysis.
We evaluated the impairment or reversal judgements taken, with reference
to our assessment of key assumptions as outlined above and the outcome
of sensitivities performed. For potential reversal judgements, we understood
the causes of any such reversal, and corroborated this to evidence of trigger
events, and evaluated whether the reversal should or should not be
recognised.
We audited the integrity of the impairment models and cash flow forecasts
to test arithmetical accuracy. We recalculated the impairment charges,
reversals or headroom and agreed to financial records. We reviewed the
impairment disclosures against the requirements of IAS 36 ‘Impairment
of Assets’.
We reviewed the presentation and disclosure of management’s impairment
assessment in the Financial Statements to assess whether the disclosure
is consistent with the Group’s policy and relevant accounting standards.
Key observations
We are satisfied that key assumptions used to determine the recoverable amount are appropriate, including estimates of reserves, production and
generation profiles, and that the Group’s discount rate assumptions are determined based on acceptable valuation methodologies and are reasonable
when compared to the ranges determined by our internal valuation specialists.
We note that the Group’s future commodity price estimates used for the impairment assessment are within the acceptable range of external sources, albeit
at the higher end of this range. Based on the sensitivities that we performed on these assumptions, we are satisfied that the Group’s pre-tax impairment
charge of £678 million is not materially misstated, and long-life assets and goodwill are not further impaired. We concur with management’s judgement that
other than those reversals recognised, previously recorded impairments should not be reversed at this time.
104 | Centrica plc Annual Report and Accounts 2017
Financial Statements | Independent Auditor’s ReportIndependent Auditor’s Report (continued) Key audit matter description
Estimation of energy supply revenue
The recognition of energy supply revenue requires an estimation of
customer usage between the date of the last meter reading and year end,
known as unbilled revenue. There is particular uncertainty over estimating
consumption arising from unusual weather patterns. Unbilled revenue
recognised on the balance sheet at 31 December 2017 was £1.6 billion
per note 3(b).
Our risk is focused on the accuracy, completeness and cut off of unbilled
revenue, and the valuation of unbilled receivables in the UK and North
American Home and Business segments.
We are required by auditing standards to presume there is a fraud risk
in relation to revenue recognition, which we have pinpointed to the estimates
underpinning the recognition of unbilled energy supply revenue and the
potential for management override of related controls.
Refer to page 74 for the Audit Committee’s review and conclusion of the key
judgements included within unbilled revenue and notes 3(b) and 17 to the
Financial Statements.
How the scope of our audit responded
to the key audit matter
Our audit approach for unbilled revenue was a combination of tests of
internal control and data analytics work. This included understanding the
design of controls in the UK and North American revenue processes,
from meter to cash collection and controls over the period-end revenue
reconciliation process. In the UK, we tested the design, implementation
and operating effectiveness of key controls relied on to estimate unbilled
revenue. In North America, we assessed the design and implementation
of controls around unbilled revenue.
We used data analytic tools in UK Home and Business to independently
recalculate the unbilled revenue estimate generated by the billing systems
for each customer account, in addition to auditing key manual adjustments
made by management, and the key assumption, being the value of energy
consumed since last billing used in the estimation process.
In our North America testing, we focused on creating an independent
estimate of unbilled revenue at the year end and compared this to the
estimate determined by management. We also performed a look-back
analysis to compare the estimated settlement data against historical results
and a gross margin analysis to estimate the valuation based on external
market pricing.
In both the UK and North America, we also assessed the accuracy of the
estimates made by management in prior periods. Any differences as a result
of the work performed were investigated and challenged.
Key observations
We are satisfied that the estimation of the Group’s unbilled revenue is materially correct. The estimation processes in the UK are appropriately controlled,
but we note that the processes in North America are more manual in nature and we were not able to rely on the operating effectiveness of the relevant
controls. We note that a reassessment of historical unbilled revenue in North America was identified by management and adjusted in the year, as explained
in the Group Financial Review and the Audit Committee Report. We did not identify any material errors in the year-end estimate.
Valuation of commodity trades
In addition to proprietary trading activities, the Group enters into forward
commodity contracts to optimise the value of its production, generation,
storage and transportation assets as well as to meet the future needs of its
customers. Certain of these arrangements are accounted for as derivative
financial instruments and are recorded at fair value. We identified the
following risks in respect of commodity trades:
Valuation of complex trades
Judgement is required in valuing derivative contracts, particularly where
there is optionality in a contract that requires modelling on a bespoke basis
(Level 2 or 3 in accordance with IFRS 13 ‘Fair Value Measurement’). As such
we identified a risk relating to the valuation of complex trades.
Own-use treatment
Certain commodity contracts have been entered into for the purposes of
securing commodity for the energy supply businesses. Where contracts
have been entered into that wholly satisfy Centrica’s normal business
activities these have been determined to be own-use contracts and are not
fair valued. Due to the size and value of these contracts we have identified
the appropriateness of the own-use treatment as a key audit matter.
We have understood the Group’s processes and controls for authorising
and recording commodity trades, and assessed the design and
implementation of key controls.
In the Group’s Energy Marketing & Trading (EM&T) division, we used data
analytic tools to trace commodity trades from initiation to recording in the
Group’s accounting system, which included an assessment of whether
the accounting recognition was in line with the Group’s accounting policies
and relevant accounting standards. This confirmed that trades were
appropriately authorised, controlled and captured within the reporting
system, and were appropriately and consistently reported in left hand
column or middle column, in accordance with the Group’s accounting
policies on certain re-measurements (outlined in note 2(b)).
Valuation of complex trades
We used financial instrument specialists to assist the audit team in valuing
complex trades, which included auditing the Group’s valuation models by
creating an independent valuation, or performing input and output analysis,
for all material non-standard contracts.
Own-use treatment
We reviewed all the Group’s material own-use contracts to determine
whether the application of the own-use treatment was appropriate.
We audited the prospective and retrospective demand tests performed
by the Group to determine whether the contract volumes exceed the
amount of estimated own-use demand in the relevant periods, including
an evaluation of the contracts for net settlement activity.
Key observations
We are satisfied that commodity trades are valued appropriately.
In EM&T, we are satisfied that the accounting classification of trades is appropriate with trades tagged appropriately at inception.
In North America Business, we identified improvements to controls over the classification of trades and monitoring of net settlement activity for trades
deemed to be own-use, which are being remediated. None have resulted in material uncorrected misstatements.
Centrica plc Annual Report and Accounts 2017 | 105
Key audit matter description
How the scope of our audit responded
to the key audit matter
Presentation of exceptional items and certain re-measurements
The selection and presentation of items excluded from adjusted profit
involves significant management judgement and adjusted results are of
particular interest to stakeholders. For this reason, we have identified this
as an area where management would be able to directly influence results.
The Group’s accounting policy for the presentation of exceptional items and
certain re-measurements is disclosed in note 2(b). As disclosed in note 7 to
the Financial Statements, exceptional items after taxation of £476 million and
certain re-measurements after taxation of £69 million have been recognised
in the current year.
Exceptional items include impairments or write backs on long-life assets,
gains or losses on business disposals and costs associated with the
Group’s restructuring programme.
Where the Group enters into trades that give rise to an accounting mismatch
between accrual accounted assets, contracts and demand and the marked
to market accounted forward commodity contracts, the fair values of those
contracts are accounted for separately as ‘certain re-measurements’ within
the middle column of the Group’s Income Statement and are excluded from
business performance.
Due to the judgement involved in identifying and valuing these contracts, we
have identified the appropriateness of the allocation of trades to the middle
column as a key audit matter, as this has a significant impact on the Group’s
reported business performance.
There is a risk that adjusted profit measures are misleading and that the
principles used to determine the classification as exceptional are not in line
with relevant guidance, substantiated or applied on a consistent basis.
Refer to page 74 for the Audit Committee’s consideration of exceptional
items and certain re-measurements.
We evaluated the Group’s accounting policy for exceptional items and
certain re-measurements against guidance issued by the Financial
Reporting Council (FRC) and European Securities and Markets Authority
(ESMA) regarding the publication of transparent, unbiased and comparable
financial information.
We considered management’s rationale for the treatment of exceptional
items presented and performed our own independent assessment of the
selection and presentation of each item against the Group’s accounting
policies and relevant regulatory guidance. We challenged management over
the principles used to determine items as exceptional, assessing whether
the application of the Group’s policy was appropriate and consistent.
For certain re-measurements, we audited the principles management use
to determine whether a trade should be recognised as part of ongoing
business performance or presented separately. We evaluated whether
those agreed principles had been applied consistently by reviewing key
contracts and testing a sample of trades to confirm that the accounting
treatment was appropriate.
We also verified that trades within certain re-measurements were entered
into at market prices where the counterparty was another Group business,
to ensure that profits and losses within the middle column reflect only
market-related movements.
We reviewed the presentation and disclosure of these items in the Financial
Statements to assess whether the disclosure is consistent with the Group’s
policy, in line with FRC and ESMA guidance, and understandable to readers.
Key observations
We are satisfied that the items presented as exceptional and within certain re-measurements in the Financial Statements are in compliance with the Group’s
accounting policies, which have been applied consistently with prior periods, and are clearly described to readers.
Accounting for the acquisition of Bayerngas exploration and production assets
In response to this key audit matter, we assessed the accounting treatment
for the transaction by reviewing key documents and evaluating the accounting
judgements against relevant accounting guidance. We have also reviewed
the disclosures of the business combination provided in note 12.
We audited the fair valuation of acquired assets and the fair valuation of the
Group’s existing Exploration & Production assets, which were used to
determine the consideration value. This involved internal valuation specialists
in both Norway and the UK.
Given the nature of the fair value exercise, much of this work was consistent
with our work performed for impairment purposes. Therefore refer to the key
audit matter for Impairment above regarding our audit of management’s
discount rate, future commodity prices and estimates of reserves.
The Group acquired the European exploration and production assets of
Bayerngas on 8 December 2017. Accounting for business combinations
is complex and this transaction involved the acquisition of certain assets
and liabilities, in return for a share of the Group’s existing Exploration
& Production assets, together with various complex contractual rights
between the parties. The acquisition accounting is set out in note 12 and
total consideration was £745 million with goodwill recognised on acquisition
of £102 million.
We identified the following risks of material misstatement associated with
the transaction:
• accounting for the transaction, including:
the assessment of control;
the assessment of shares issued as equity or debt instruments;
the valuation of consideration contributed and goodwill arising; and
the valuation of non-controlling interest.
–
–
–
–
the fair valuation of assets acquired in the transaction with Bayerngas,
which included evaluating reserve estimates, future production profiles
and commodity prices and the selection of appropriate discount rates;
and
the disclosure of the business combination as presented in note 12
of the Financial Statements.
•
•
Refer to page 75 for the Audit Committee’s review of business
combinations, including the acquisition of Bayerngas Norge AS.
Key observations
We are satisfied that the accounting judgements taken are appropriate and that the fair values adopted are not materially misstated, although we refer to our
observations on the Group’s future commodity price assumptions outlined in the Impairment matter above. We note that using alternative price assumptions
would have a significant impact on the valuation of acquired assets and the valuation of consideration payable for those assets.
106 | Centrica plc Annual Report and Accounts 2017
Financial Statements | Independent Auditor’s ReportIndependent Auditor’s Report (continued) Our application of materiality
We define materiality as the magnitude of misstatement in the Financial Statements that makes it probable that the economic decisions
of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope of our audit work
and in evaluating the results of our work.
Based on our professional judgement, we determined materiality for the Financial Statements as a whole as follows:
Materiality
£50 million (2016: £59 million)
Basis for determining materiality
Rationale for the benchmark applied
Reporting threshold
The materiality for the Company accounts was determined to be £40 million (2016: £53 million),
capped to be consistent with our highest component materiality.
We determined Group materiality on the basis of 5.5% of 2017 pre-tax profit adjusted for exceptional
items and certain re-measurements as defined and reconciled in note 7 to the Financial Statements.
The predecessor auditor used 5% of a three-year average of pre-tax profit adjusted for exceptional
items and certain re-measurements.
Pre-tax profit adjusted for exceptional items and certain re-measurements was considered to be the
most relevant benchmark as it is of most interest to stakeholders. Furthermore exceptional items and
certain re-measurements are volatile and materially impact the Group’s performance each year due
to events and transactions that are not part of the underlying activities of the Group and excluding them
enables a more consistent basis with which to consider the Group’s performance on an ongoing basis.
We agreed with the Audit Committee that we would report to the Committee all audit differences
in excess of £5 million (2016: £5 million), as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds. We also report to the Audit Committee on disclosure
matters that we identified when assessing the overall presentation of the Financial Statements.
An overview of the scope of our audit
The Group is organised by its different operating segments as
outlined in note 4. These operating segments represent the different
businesses in the Group and are how management monitor
performance. We used the Group’s operating segments as the
basis for our audit scope.
Our audit was scoped by obtaining an understanding of the Group
and its environment, including Group-wide controls, and assessing
the risks of material misstatement at the Group level. Having
performed this assessment it was concluded that the following
components were considered to be the most significant and were
subject to full scope audits:
• UK Home;
• UK Business;
• North America Home;
• North America Business;
• Energy Marketing & Trading; and
• Exploration & Production.
Ireland;
To enhance our understanding of the Group’s operating segments,
processes and balances in our first year as auditor, we also decided
to perform full scope audits for all non-significant segments, being:
•
• Connected Home;
• Distributed Energy & Power;
• Central Power Generation; and
• Centrica Storage.
This has resulted in coverage of 98% of Group revenue, 91%
of Group profit before tax and 89% of Group net assets.
The materiality levels of the components ranged from £15 million
to £40 million depending on the contribution of the component’s
operations to the Group and our assessment of risk relevant specific
to each location. Given our judgement to perform full scope audits
in the non-significant segments noted above, we determined that
a component materiality of £15 million for these businesses was
appropriate, which reflected the lower risk profile of these segments.
All components except for North America Home, North America
Business and Ireland are audited from the United Kingdom and
hence we oversee these component audits through regular meetings
and direct supervision. For the overseas components, each was
visited several times during both transition and throughout the year
by the lead audit partner and other senior members of the engagement
team. All teams were involved in our transition workshops and other
transition activities, all of which was overseen and directed by the
Group audit team. Throughout the year, the Group audit team has
been directly involved in overseeing the component audit planning
and execution, through frequent conversations, team briefings,
debate, challenge and review of reporting and underlying work
papers. In addition to our direct interactions, we sent detailed
instructions to our component audit teams, attended audit closing
meetings and reviewed their audit working papers. We are satisfied
that the level of involvement of the Group audit partner and team
in the component audits has been extensive and has enabled us
to conclude that sufficient appropriate audit evidence has been
obtained in support of our opinion on the Group Financial Statements
as a whole.
Centrica plc Annual Report and Accounts 2017 | 107
Responsibilities of 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,
and for such internal control as the Directors determine is necessary
to enable the preparation of Financial Statements that are free from
material misstatement, whether due to fraud or error.
In preparing the Financial Statements, the Directors are responsible
for assessing the Group’s and the Company’s ability to continue as
a going concern, disclosing as applicable, matters related to going
concern and using the going concern basis of accounting unless
the Directors either intend to liquidate the Group or the Company
or to cease operations, or have no realistic alternative but to do so.
Auditor’s responsibilities for the audit of the
Financial Statements
Our objectives are to obtain reasonable assurance about whether the
Financial Statements as a whole are 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 (UK) 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 these Financial Statements.
A further description of our responsibilities for the audit of the
Financial Statements is located on the Financial Reporting Council’s
website at: frc.org.uk/auditorsresponsibilities. This description forms
part of our Auditor’s Report.
Use of our report
This report is made solely to the Company’s shareholders, as a body,
in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the
Company’s shareholders those matters we are required to state to
them in an auditor’s report and for no other purpose. To the fullest
extent permitted by law, we do not accept or assume responsibility
to anyone other than the Company and the Company’s shareholders
as a body, for our audit work, for this report, or for the opinions we
have formed.
Other information
The Directors are responsible for the other information. The other
information comprises the information included in the Annual Report,
other than the Financial Statements and our auditor’s report thereon.
Our opinion on the Financial Statements does not cover the other
information and, except to the extent otherwise explicitly stated in our
report, we do not express any form of assurance conclusion thereon.
In connection with our audit of the Financial Statements, our
responsibility is to read the other information and, in doing so,
consider whether the other information is materially inconsistent
with the Financial Statements or our knowledge obtained in the
audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material
misstatements, we are required to determine whether there is a
material misstatement in the Financial Statements or a material
misstatement of the other information. If, based on the work we
have performed, we conclude that there is a material misstatement
of this other information, we are required to report that fact.
In this context, matters that we are specifically required to report to
you as uncorrected material misstatements of the other information
include where we conclude that:
•
fair, balanced and understandable – the statement given by the
Directors that they consider the Annual Report and Accounts
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, is materially inconsistent
with our knowledge obtained in the audit; or
Audit Committee reporting – the section describing the work
of the Audit Committee does not appropriately address matters
communicated by us to the Audit Committee; or
•
• Directors’ statement of compliance with the UK Corporate
Governance Code – the parts of the Directors’ statement required
under the Listing Rules relating to the Company’s compliance
with the UK Corporate Governance Code containing provisions
specified for review by the auditor in accordance with Listing Rule
9.8.10R(2) do not properly disclose a departure from a relevant
provision of the UK Corporate Governance Code.
We have nothing to report in respect of these matters.
108 | Centrica plc Annual Report and Accounts 2017
Financial Statements | Independent Auditor’s ReportIndependent Auditor’s Report (continued) Report on other legal and regulatory requirements
Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies
Act 2006.
In our opinion, based on the work undertaken in the course of the audit:
• the information given in the Strategic Report and the Directors’ 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’ Report have been prepared in accordance with applicable legal requirements.
In the light of the knowledge and understanding of the Group and of the Company and their environment obtained in the course of the audit,
we have not identified any material misstatements in the Strategic Report or the Directors’ Report.
Matters on which we are required to report by exception
Adequacy of explanations received and accounting records
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 Company, or returns adequate
•
for our audit have not been received from branches not visited by us; or
the Company Financial Statements are not in agreement with the accounting records
and returns.
Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain
disclosures of Directors’ remuneration have not been made or the part of the Directors’
Remuneration Report to be audited is not in agreement with the accounting records
and returns.
We have nothing to report in respect of these matters.
We have nothing to report in respect of these matters.
Other matters
Auditor tenure
Following the recommendation of the Audit Committee, we were appointed at the Annual General Meeting on 5 May 2017 to audit the
Financial Statements for the year ending 31 December 2017 and subsequent financial periods. The period of total uninterrupted engagement
of the firm is therefore one year.
Consistency of the audit report with the additional report to the Audit Committee
Our audit opinion is consistent with the additional report to the Audit Committee we are required to provide in accordance with ISAs (UK).
James Leigh FCA (Senior Statutory Auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
21 February 2018
Centrica plc Annual Report and Accounts 2017 | 109
Financial Statements
Group Income Statement
Group Statement of Comprehensive Income
Business
performance
£m
28,023
Exceptional
items and certain
re-measurements
£m
–
Notes
4(b)
Year ended 31 December
Group revenue
Cost of sales before exceptional items and
certain re-measurements
Re-measurement of certain energy contracts
Cost of sales
Gross profit
Operating costs before exceptional items
Exceptional items – net impairment of
retained assets
Exceptional items – net (loss)/gain on
disposal (i)
Exceptional items – restructuring and
business change costs
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
(23,981)
–
(23,981)
4,042
(2,848)
–
–
–
–
(2,848)
51
1,245
(364)
20
(344)
901
(191)
710
698
12
5
7
5
5
7
7
7
7
5
6, 7
4(c)
8
8
7, 9
10
10
11
11
2017
Results for
the year
£m
28,023
(23,981)
153
(23,828)
4,195
(2,848)
–
153
153
153
–
(678)
(678)
(62)
(62)
(144)
–
(884)
(28)
(759)
–
–
–
(759)
352
(407)
(365)
(42)
(144)
–
(3,732)
23
486
(364)
20
(344)
142
161
303
333
(30)
Pence
6.0
6.0
3.60
8.40
Business
performance
£m
27,102
Exceptional
items and certain
re-measurements
£m
–
(22,711)
–
(22,711)
4,391
(3,054)
–
–
–
–
(3,054)
130
1,467
(337)
37
(300)
1,167
(282)
885
895
(10)
–
1,058
1,058
1,058
–
(71)
157
(228)
131
(11)
(28)
1,019
–
–
–
1,019
(242)
777
777
–
2016
Results for
the year
£m
27,102
(22,711)
1,058
(21,653)
5,449
(3,054)
(71)
157
(228)
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
Year ended 31 December
Profit for the year
Other comprehensive income/(loss):
Items that will be or have been reclassified to the Group Income Statement:
Gains on revaluation of available-for-sale securities, net of taxation
Transfer of available-for-sale reserve gains to Group Income Statement
Net gains on cash flow hedges
Transferred to income and expense on cash flow hedges (ii)
Transferred to assets and liabilities on cash flow hedges
Cash flow hedging reserve recycled to Group Income Statement on disposal
Taxation on cash flow hedges
Exchange differences on translation of foreign operations (iii)
Exchange gains/(losses) on translation of actuarial reserve
Exchange differences recycled to Group Income Statement on disposal
Share of other comprehensive loss of joint ventures and associates, net of taxation
Items that will not be reclassified to the Group Income Statement:
Net actuarial gains/(losses) on defined benefit pension schemes
Taxation on net actuarial gains/(losses) on defined benefit pension schemes
Share of other comprehensive income of joint ventures and associates, net of taxation
Other comprehensive income/(loss), net of taxation
Total comprehensive income for the year
Attributable to:
Owners of the parent
Non-controlling interests
Notes
2017
2016 (restated) (i)
£m
303
£m
1,662
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S10
5
–
24
(34)
(7)
10
1
(6)
(128)
1
8
–
(120)
222
(38)
184
43
107
410
437
(27)
8
(5)
161
(129)
(4)
5
(3)
30
549
(7)
–
(9)
566
(1,174)
194
(980)
65
(349)
1,313
1,287
26
(i)
(ii)
Prior year comparatives have been re-presented to show exchange differences on translation of actuarial reserve as an item that will be reclassified to the Group Income Statement, and cash
flow hedging reserve recycled to Group Income Statement on disposal separately from share of other comprehensive loss of joint ventures and associates.
Cash flow hedging gains have been transferred to the following lines of the Group Income Statement: financing costs of £29 million (2016: £124 million), operating costs before exceptional
items £5 million (2016: nil) and cost of sales before exceptional items and certain re-measurements nil (2016: £5 million).
(iii)
Includes £3 million gain (2016: £36 million gain) of exchange differences on translation of foreign operations attributable to non-controlling interests.
The notes on pages 115 to 189 form part of these Financial Statements.
(i) Gains and losses on disposal include any impairments and write-backs associated with the assets disposed of upon classification as held for sale.
The notes on pages 115 to 189 form part of these Financial Statements.
110 | Centrica plc Annual Report and Accounts 2017
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Financial Statements Group Statement of Comprehensive Income
Year ended 31 December
Profit for the year
Other comprehensive income/(loss):
Items that will be or have been reclassified to the Group Income Statement:
Gains on revaluation of available-for-sale securities, net of taxation
Transfer of available-for-sale reserve gains to Group Income Statement
Net gains on cash flow hedges
Transferred to income and expense on cash flow hedges (ii)
Transferred to assets and liabilities on cash flow hedges
Cash flow hedging reserve recycled to Group Income Statement on disposal
Taxation on cash flow hedges
Exchange differences on translation of foreign operations (iii)
Exchange gains/(losses) on translation of actuarial reserve
Exchange differences recycled to Group Income Statement on disposal
Share of other comprehensive loss of joint ventures and associates, net of taxation
Items that will not be reclassified to the Group Income Statement:
Net actuarial gains/(losses) on defined benefit pension schemes
Taxation on net actuarial gains/(losses) on defined benefit pension schemes
Share of other comprehensive income of joint ventures and associates, net of taxation
Other comprehensive income/(loss), net of taxation
Total comprehensive income for the year
Attributable to:
Owners of the parent
Non-controlling interests
Notes
2017
£m
303
2016 (restated) (i)
£m
1,662
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S4
S10
5
–
24
(34)
(7)
10
1
(6)
(128)
1
8
–
(120)
222
(38)
184
43
107
410
437
(27)
8
(5)
161
(129)
(4)
5
(3)
30
549
(7)
–
(9)
566
(1,174)
194
(980)
65
(349)
1,313
1,287
26
(i)
Prior year comparatives have been re-presented to show exchange differences on translation of actuarial reserve as an item that will be reclassified to the Group Income Statement, and cash
flow hedging reserve recycled to Group Income Statement on disposal separately from share of other comprehensive loss of joint ventures and associates.
(ii) Cash flow hedging gains have been transferred to the following lines of the Group Income Statement: financing costs of £29 million (2016: £124 million), operating costs before exceptional
items £5 million (2016: nil) and cost of sales before exceptional items and certain re-measurements nil (2016: £5 million).
Includes £3 million gain (2016: £36 million gain) of exchange differences on translation of foreign operations attributable to non-controlling interests.
(iii)
The notes on pages 115 to 189 form part of these Financial Statements.
Centrica Financials_Back-End.indd 111
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Financial Statements
Group Statement of Changes in Equity
Group Balance Sheet
1 January 2016
Profit/(loss) for the year
Other comprehensive (loss)/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
Profit/(loss) for the year
Other comprehensive income
Employee share schemes
Scrip dividend
Dividends paid to equity holders (note 11)
Distributions to non-controlling interests
Acquisition of business (note 12)
Disposal of business (note 12)
Investment by non-controlling interests
31 December 2017
Share
capital
(note 25)
£m
317
–
–
–
4
–
–
21
342
–
–
–
6
–
–
–
–
–
348
Share
premium
£m
1,135
–
–
–
121
–
–
673
1,929
–
–
–
192
–
–
–
–
–
2,121
Retained
earnings
£m
482
1,672
–
1
–
(651)
–
–
1,504
333
–
4
–
(661)
–
–
–
–
1,180
Other
equity
(note S4)
£m
(756)
–
(385)
32
–
–
–
–
(1,109)
–
104
31
–
–
–
24
–
–
(950)
Non-controlling
interests
(note S10)
£m
164
(10)
36
–
–
–
(12)
–
178
(30)
3
–
–
–
(3)
721
(152)
12
729
Total
£m
1,178
1,672
(385)
33
125
(651)
–
694
2,666
333
104
35
198
(661)
–
24
–
–
2,699
The notes on pages 115 to 189 form part of these Financial Statements.
Total
equity
£m
1,342
1,662
(349)
33
125
(651)
(12)
694
2,844
303
107
35
198
(661)
(3)
745
(152)
12
3,428
Total shareholders’ equity and non-controlling interests
The Financial Statements on pages 110 to 189, of which the notes on pages 115 to 189 form part, were approved and authorised for
issue by the Board of Directors on 21 February 2018 and were signed below on its behalf by:
Iain Conn
Jeff Bell
Group Chief Executive
Group Chief Financial Officer
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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
Securities
Current assets
Trade and other receivables
Inventories
Derivative financial instruments
Current tax assets
Securities
Cash and cash equivalents
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
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 loans and other borrowings
Total liabilities
Net assets
Share capital
Share premium
Retained earnings
Other equity
Total shareholders’ equity
Non-controlling interests
31 December
31 December
2017
£m
2016
£m
Notes
13
14
15
15
16
17
19
24
17
18
19
24
24
19
20
21
24
12(c)
12(c)
16
19
20
21
22(d)
24
25
S4
S10
11,506
12,601
4,132
1,699
1,676
2,650
568
87
463
231
4,668
409
927
289
5
2,864
9,162
–
9,162
20,668
(733)
(5,412)
(336)
(264)
(707)
(7,452)
–
(7,452)
(173)
(287)
(167)
(2,684)
(886)
(5,591)
(9,788)
3,428
348
2,121
1,180
(950)
2,699
729
3,428
(17,240)
5,298
1,697
1,769
2,614
356
66
582
219
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
Financial Statements
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
Securities
Current assets
Trade and other receivables
Inventories
Derivative financial instruments
Current tax assets
Securities
Cash and cash equivalents
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
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 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
2017
£m
31 December
2016
£m
Notes
13
14
15
15
16
17
19
24
17
18
19
24
24
12(c)
19
20
21
24
12(c)
16
19
20
21
22(d)
24
25
S4
S10
4,132
1,699
1,676
2,650
568
87
463
231
11,506
4,668
409
927
289
5
2,864
9,162
–
9,162
20,668
(733)
(5,412)
(336)
(264)
(707)
(7,452)
–
(7,452)
(173)
(287)
(167)
(2,684)
(886)
(5,591)
(9,788)
(17,240)
3,428
348
2,121
1,180
(950)
2,699
729
3,428
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
The Financial Statements on pages 110 to 189, of which the notes on pages 115 to 189 form part, were approved and authorised for
issue by the Board of Directors on 21 February 2018 and were signed below on its behalf by:
Iain Conn
Group Chief Executive
Jeff Bell
Group Chief Financial Officer
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Financial Statements
Financial Statements | Notes to the Financial Statements
Group Cash Flow Statement
Notes to the Financial Statements
Year ended 31 December
Group operating profit including share of results of joint ventures and associates
Less share of profits of joint ventures and associates, net of interest and taxation
Group operating profit before share of results of joint ventures and associates
Add back/(deduct):
Depreciation, amortisation, write-downs, impairments and write-backs
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
(Increase)/decrease in inventories
Decrease in trade and other receivables
Increase in trade and other payables
Operating cash flows before payments relating to taxes 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
Disposal of interests in joint ventures and associates
Interest received
(Purchase)/sale of securities
Net cash flow from investing activities
Issue of ordinary share capital
Payments for own shares
Distribution to non-controlling interests
Financing interest paid
Repayment of borrowings and finance leases
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 115 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)
2017
£m
486
(23)
463
1,794
(41)
(227)
(104)
47
(45)
1,887
(56)
258
29
2,118
(102)
(176)
1,840
17
593
(882)
14
(6)
58
218
22
(2)
32
–
(11)
(7)
(318)
(271)
(463)
(1,070)
802
1,960
(25)
2,737
2,864
(127)
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)
114 | Centrica plc Annual Report and Accounts 2017
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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.
indicated:
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 2017 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 those parts of the
Companies Act 2006 applicable to companies reporting
under IFRS.
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; the liabilities of the Group’s defined benefit
pension schemes that have been measured using the projected unit
credit valuation method; and the carrying values of recognised assets
and liabilities qualifying as hedged items in fair value hedges that
have been adjusted from cost by the 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 2017
From 1 January 2017, the following standards and amendments
are effective in the consolidated Financial Statements. Their first
time adoption did not have a material impact on the consolidated
Financial Statements.
disclosure initiative; and
● Amendments to IAS 7: ‘Statement of cash flows’ related to the
Impairment
● Amendments to IAS 12: ‘Income taxes’ related to the recognition
of deferred tax assets for unrealised losses.
Annual Improvements to IFRS Standards 2014-2016 Cycle:
Amendments to IFRS 12: ‘Disclosure of interests in other entities’
was endorsed by the EU in February 2018. As the Group did not
have any assets and liabilities of disposal groups classified as held
for sale as at 31 December 2017 this would not have affected the
consolidated Financial Statements.
(c) Standards and amendments that are issued but
not yet applied by the Group
Endorsed by the EU
The Group has not applied the following standards and
amendments in the consolidated Group Financial Statements as
they are not yet effective, although they have been endorsed by the
EU and will be effective from 1 January 2018, unless otherwise
● IFRS 9: ‘Financial instruments’;
● IFRS 15: ‘Revenue from contracts with customers’;
● Amendments to IFRS 15: ‘Effective date of IFRS 15’;
● Clarifications to IFRS 15: ‘Revenue from contracts with
customers’;
● IFRS 16: ‘Leases’, effective from 1 January 2019; and
● Annual Improvements to IFRS Standards 2014-2016 Cycle:
Amendments to IFRS 1: ‘First-time adoption of International
Financial Reporting Standards’ and IAS 28: ‘Investments in
associates and joint ventures’.
Management has established and progressed separate projects
to oversee the implementation of IFRS 9 and IFRS 15 and further
details are provided below.
IFRS 9
The Group will apply IFRS 9 from 1 January 2018. The
implementation of IFRS 9 has been split into three parts,
representing the areas of change from the new financial instrument
standard. The Group’s assessment of the potential impact is at the
date of initial application of IFRS 9 (1 January 2018). The full impact
of adopting IFRS 9 on the Group’s consolidated Financial
Statements will depend on the financial instruments the Group has
during 2018, as well as on the economic conditions and
judgements made as at the 2018 year end.
Classification and measurement
IFRS 9 applies one classification approach for all types of financial
assets. Two criteria are used to determine how financial assets
should be classified and measured, namely, the entity’s business
model for the financial assets and the contractual cash flow
characteristics of the financial assets. IFRS 9 identifies three
categories of financial assets: amortised cost; fair value through
other comprehensive income (FVOCI) and; fair value through profit
or loss (FVTPL). The Group’s business units have reviewed their
financial instruments under the revised IFRS 9 classification and
measurement rules. The classification of debt financial instruments,
predominantly held by Treasury, that are currently classified as
available-for-sale and measured at FVOCI will be FVTPL under
IFRS 9. The value of these items can be seen in note S6(a). The
change in fair value that was recorded in Other Comprehensive
Income in 2017 in respect of these instruments was £4 million and
therefore the impact of this change on the Income Statement is not
expected to be material. The Group’s remaining available-for-sale
assets are equity instruments and on adoption of IFRS 9 the Group
intends to elect to measure these at FVOCI. The Group’s other
financial instruments (both financial assets and financial liabilities)
are not expected to result in material adjustments on classification
and measurement under IFRS 9.
IFRS 9 operates an expected credit loss model rather than an
incurred credit loss model. Under the impairment approach in IFRS
9, it is not necessary for a credit event to have occurred before
credit losses are recognised. Instead, an entity always accounts for
expected credit losses and changes in those expected credit
losses. The amounts of expected credit losses should be updated
at each reporting date. The new impairment model will apply to the
Centrica plc Annual Report and Accounts 2017 | 115
Financial Statements
Financial Statements | Notes to the Financial Statements
Financial Statements | Notes to the Financial Statements
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 2017 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 those parts of the
Companies Act 2006 applicable to companies reporting
under IFRS.
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; the liabilities of the Group’s defined benefit
pension schemes that have been measured using the projected unit
credit valuation method; and the carrying values of recognised assets
and liabilities qualifying as hedged items in fair value hedges that
have been adjusted from cost by the 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 2017
From 1 January 2017, the following standards and amendments
are effective in the consolidated Financial Statements. Their first
time adoption did not have a material impact on the consolidated
Financial Statements.
● Amendments to IAS 7: ‘Statement of cash flows’ related to the
disclosure initiative; and
● Amendments to IAS 12: ‘Income taxes’ related to the recognition
of deferred tax assets for unrealised losses.
Annual Improvements to IFRS Standards 2014-2016 Cycle:
Amendments to IFRS 12: ‘Disclosure of interests in other entities’
was endorsed by the EU in February 2018. As the Group did not
have any assets and liabilities of disposal groups classified as held
for sale as at 31 December 2017 this would not have affected the
consolidated Financial Statements.
(c) Standards and amendments that are issued but
not yet applied by the Group
Endorsed by the EU
The Group has not applied the following standards and
amendments in the consolidated Group Financial Statements as
they are not yet effective, although they have been endorsed by the
EU and will be effective from 1 January 2018, unless otherwise
indicated:
● IFRS 9: ‘Financial instruments’;
● IFRS 15: ‘Revenue from contracts with customers’;
● Amendments to IFRS 15: ‘Effective date of IFRS 15’;
● Clarifications to IFRS 15: ‘Revenue from contracts with
customers’;
● IFRS 16: ‘Leases’, effective from 1 January 2019; and
● Annual Improvements to IFRS Standards 2014-2016 Cycle:
Amendments to IFRS 1: ‘First-time adoption of International
Financial Reporting Standards’ and IAS 28: ‘Investments in
associates and joint ventures’.
Management has established and progressed separate projects
to oversee the implementation of IFRS 9 and IFRS 15 and further
details are provided below.
IFRS 9
The Group will apply IFRS 9 from 1 January 2018. The
implementation of IFRS 9 has been split into three parts,
representing the areas of change from the new financial instrument
standard. The Group’s assessment of the potential impact is at the
date of initial application of IFRS 9 (1 January 2018). The full impact
of adopting IFRS 9 on the Group’s consolidated Financial
Statements will depend on the financial instruments the Group has
during 2018, as well as on the economic conditions and
judgements made as at the 2018 year end.
Classification and measurement
IFRS 9 applies one classification approach for all types of financial
assets. Two criteria are used to determine how financial assets
should be classified and measured, namely, the entity’s business
model for the financial assets and the contractual cash flow
characteristics of the financial assets. IFRS 9 identifies three
categories of financial assets: amortised cost; fair value through
other comprehensive income (FVOCI) and; fair value through profit
or loss (FVTPL). The Group’s business units have reviewed their
financial instruments under the revised IFRS 9 classification and
measurement rules. The classification of debt financial instruments,
predominantly held by Treasury, that are currently classified as
available-for-sale and measured at FVOCI will be FVTPL under
IFRS 9. The value of these items can be seen in note S6(a). The
change in fair value that was recorded in Other Comprehensive
Income in 2017 in respect of these instruments was £4 million and
therefore the impact of this change on the Income Statement is not
expected to be material. The Group’s remaining available-for-sale
assets are equity instruments and on adoption of IFRS 9 the Group
intends to elect to measure these at FVOCI. The Group’s other
financial instruments (both financial assets and financial liabilities)
are not expected to result in material adjustments on classification
and measurement under IFRS 9.
Impairment
IFRS 9 operates an expected credit loss model rather than an
incurred credit loss model. Under the impairment approach in IFRS
9, it is not necessary for a credit event to have occurred before
credit losses are recognised. Instead, an entity always accounts for
expected credit losses and changes in those expected credit
losses. The amounts of expected credit losses should be updated
at each reporting date. The new impairment model will apply to the
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
1. SUMMARY OF SIGNIFICANT NEW ACCOUNTING
POLICIES AND REPORTING CHANGES
Group’s financial assets that are debt instruments measured at
amortised cost or FVOCI.
No material changes to the impairment provisions recorded
currently are expected on transition to IFRS 9. The majority of trade
receivables reside in the Group’s energy supply and services
business and these businesses already operate a sophisticated
provision matrix approach based on historic data to establish
impairment provisions. Adjustments to encompass forward-looking
estimates into this approach are not expected to be material. The
impairment of financial assets, subject to the IFRS 9 impairment
rules, in the other parts of the business are also not expected to
change materially.
Hedge accounting
The Group has elected to continue to apply the hedge accounting
requirements of IAS 39: ‘Financial instruments: recognition and
measurement’ instead of the requirements of IFRS 9 as permitted
by IFRS 9. Hence there will be no changes to the current hedge
accounting relationships.
The Group intends to apply the limited exemption in IFRS 9 relating
to transition for classification and measurement and impairment
and not restate its comparatives and instead adjust opening equity,
where applicable, on 1 January 2018 for the impact of adopting
IFRS 9, with this adjustment currently being finalised.
IFRS 15
An extensive review of the Group’s contractual arrangements that
comprise the Group’s current revenue streams has been
performed. The conclusion of these reviews is that the adoption of
IFRS 15, which is effective from 1 January 2018, will not have a
material impact on the recognition of revenue compared to current
accounting standards. This is for the following reasons:
● a significant amount of the Group’s revenue is outside the scope
of IFRS 15. For example, a portion of our UK Home services
revenue is from fixed fee service contracts, which are currently
within the scope of IFRS 4: ‘Insurance contracts’ and the sale of
much of the Group’s asset production (for example, the majority
of our Exploration & Production gas production, Central Power
Generation gas fired power station production and sales of
power received from the Group’s associate investment in
Nuclear) is sold in the market via the Group’s Energy Marketing
& Trading segment through contracts that are in the scope of
IFRS 9;
● for the majority of energy supply contracts, because there are no
minimum quantities whereby the Group delivers the amount of
energy required by customers on demand, it has been
concluded that there is only an enforceable right to bill for
consumption once the customer consumes energy. Revenue
recognition for these energy supply contracts (which is a
significant portion of the Group’s revenue) will therefore not differ
from our current revenue recognition policies; and
● currently the bundling of products and services is not significant
for the Group. However, expanding the sale of bundled products
and services is a key focus for the Group and could therefore
have a more significant impact on the Group’s revenue
recognition in the future. The accounting implications and system
requirements will be addressed as propositions are developed in
the Group’s customer facing businesses.
There have been some differences identified in less significant
revenue streams, notably the gross up of revenue and cost of sales
for demand side response revenue in Distributed Energy & Power
in North America where it has been concluded that the business is
acting as principal under IFRS 15. Additionally, North America
Home will defer the recognition of some of its revenue in its
franchise business and capitalise additional costs to obtain
116 | Centrica plc Annual Report and Accounts 2017
116 | Centrica plc Annual Report and Accounts 2017
contracts on adoption of IFRS 15. However, the impact of all of
these adjustments on opening equity and the Group’s revenue in
2017 is not material. The full impact of adopting IFRS 15 on the
Group’s consolidated Financial Statements for 2018 will also
depend on the contractual arrangements entered into by the Group
during 2018.
The Group intends to apply this standard fully retrospectively and
therefore the 2017 comparatives will be restated in the 2018
consolidated Financial Statements, with these adjustments
currently being finalised.
Other standards and amendments
IFRS 16: ‘Leases’ was issued in January 2016 and will have a
significant impact on the Group’s consolidated Financial
Statements as all leases will be recognised on the balance sheet
(with the exception of short-term and low value leases). A steering
committee has met several times during the year to discuss the
approach to the implementation of the standard. During the year,
an impact analysis on the Group’s results has been performed
using a sample of representative leases to enable the impact of the
different transition options to be understood. The feasibility of
adopting a full retrospective transition approach is being
investigated whilst the data capture solution is developed in early
2018. The implementation and data capture work will continue into
2018 and an appropriate systems solution will be selected. Due to
the number of leases held by the Group it has not been practicable
to quantify the full effect it will have on the Group’s consolidated
Financial Statements, although the operating lease commitment
data in note 23(a) gives an indication of the scale of lease
commitments that would be recognised on the balance sheet
on transition.
Management does not currently expect the future application of the
Annual Improvements to IFRS Standards 2014-2016 Cycle to have
a material impact on the amounts reported and disclosed in the
consolidated Financial Statements.
Not endorsed by the EU
The Group has not applied the following standards and
amendments in the consolidated Group Financial Statements
as they are not yet effective and they have not been endorsed by
the EU:
● IFRS 17: ‘Insurance contracts’, effective from 1 January 2021;
● IFRIC Interpretation 22: ‘Foreign currency transactions and
advance consideration’, effective from 1 January 2018;
● IFRIC Interpretation 23: ‘Uncertainty over income tax treatments’,
effective from 1 January 2019;
● Amendments to IFRS 2: ‘Classification and measurement
of share-based payment transactions’, effective from
1 January 2018;
● Amendments to IFRS 9: ‘Prepayment features with negative
compensation’, effective from 1 January 2019;
● Amendments to IAS 19: ‘Plan amendment, curtailment or
settlement’ effective from 1 January 2019;
● Amendments to IAS 28: ‘Long-term interests in associates and
joint ventures’, effective from 1 January 2019;
● Amendments to IAS 40: ‘Transfers of investment property’,
effective from 1 January 2018; and
● Annual Improvements to IFRS Standards 2015-2017 Cycle:
Amendments to IFRS 3: ‘Business combinations’, IFRS 11:
‘Joint arrangements’, IAS 12: ‘Income taxes’ and IAS 23:
‘Borrowing costs’, effective from 1 January 2019.
IFRS 17: ‘Insurance contracts’ was issued in May 2017. This new
standard will not be effective before 1 January 2021, assuming it is
endorsed by the EU. The Group currently has fixed-fee service
contracts that it accounts for as insurance contracts under IFRS 4:
‘Insurance contracts’. Under IFRS 17, subject to certain conditions,
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Financial Statements | Notes to the Financial Statements 1. SUMMARY OF SIGNIFICANT NEW ACCOUNTING
POLICIES AND REPORTING CHANGES
there is an accounting policy choice to account for these contracts
under IFRS 17 or IFRS 15. As this could change the accounting for
these contracts, this will be considered during the implementation
of IFRS 17.
Management does not currently expect the future application of the
IFRIC interpretations and amendments to have a material impact
on the amounts reported and disclosed in the consolidated
Financial Statements.
The amendments to IAS 19 apply to plan amendments,
curtailments or settlements that occur on or after 1 January 2019,
and the amendments to IFRS 3 and IFRS 11 apply to acquisitions
of additional interests in joint arrangements for which the
acquisition date is on or after 1 January 2019. As these types of
transactions can vary in size and are non-recurring in nature, the
Group cannot quantify the effect that these amendments could
potentially have in the future.
tax rates is excluded because it predominantly relates to future tax
impacts rather than the current year performance. The measure
excludes interest and related tax impacts because this measure
provides an analysis of the segment’s operating performance and
its contribution to earnings before the impact of the financing of
the segment.
Adjusted earnings is defined as earnings before:
● exceptional items net of taxation; and
● certain re-measurements net of taxation.
A reconciliation of adjusted earnings and adjusted earnings per
share 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; and
2. CENTRICA SPECIFIC ACCOUNTING MEASURES
● movements in variation margin and cash collateral that are
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.
Exceptional items and certain re-measurements are excluded
because these items are considered by the Directors to distort the
Group’s underlying business performance. See note 2(b) for further
details. The Group’s share of results from joint ventures and
associates is presented before interest and taxation because this
gives a consistent measurement of results compared to wholly
owned subsidiaries.
Note 4 contains an 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 contains 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
adjusted operating profit, net of associated taxation, before:
● the impact of changes to UK and US corporation tax rates; and
● certain Corporate and other taxation.
Given the significant variance in tax rates for different jurisdictions
and different businesses within the Group, this measure provides
management with an analysis of each segment’s contribution to
overall earnings. The impact of changes to UK and US corporation
included in net debt;
but including:
● dividends received from joint ventures and associates.
Payments related to exceptional items are excluded because the
Directors do not consider these to represent underlying business
performance. Deficit reduction payments and movements in variation
margin and cash collateral are excluded because the Directors do
not consider these to represent the operating cash flows generated
by underlying business performance, as they are predominantly
triggered by wider market factors and, in the case of variation margin
and cash collateral, these represent timing differences. 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 users 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 its 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’ and so IAS 39: ‘Financial instruments: recognition and
measurement’ requires them to be individually fair valued. Fair value
movements on these commodity derivative trades 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. 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.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
2. CENTRICA SPECIFIC ACCOUNTING MEASURES
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 of the Group
Income Statement, 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 the 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/releases, asset impairments/write-backs, certain pension
past service credits, the tax effects of these items and the effect of
changes in UK upstream tax rates.
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 2016, the Group disposed of its
investment in GLID Wind Farms TopCo Limited (GLID), which
owned Glens of Foudland, Lynn and Inner Dowsing wind farms, as
part of this strategy. The post-tax profit on disposal of £73 million
was classified as an exceptional item in the Group Income
Statement because the Directors judged the exit from the wind
business to be non-recurring in nature and distinct from the
Group’s established wind farm strategy.
The Group completed its exit from wind generation ownership with
the disposal of Lincs Wind Farm Limited, announced on 13 January
2017 and completed on 17 February 2017. This was treated in a
similar manner as GLID in the Group Income Statement, generating
an exceptional post-tax profit on disposal of £58 million (see
note 12).
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Leases – third-party power station tolling arrangements
The Group’s Spalding long-term power station tolling contract in
the UK was considered a lease during 2017.
The arrangement provided Centrica with the right to nominate
100% of the plant capacity for the duration of the contract 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 and December 2017, 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.
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 acquired: Bayerngas Norge AS’s
exploration and production business; REstore NV, Europe’s leading
demand response aggregator; and the assets of Rokitt Inc. These
acquisitions have been accounted for as business combinations as
set out in note 12(a).
Spirit Energy consolidation and preference shares
During the year, the Group acquired Bayerngas Norge’s exploration
and production business and combined this with the Group’s
existing Exploration & Production business within the newly formed
Spirit Energy business (SE). The Group’s interest in SE is 69%. The
Group can appoint four directors and the non-controlling interest
SWM Bayerische E&P Beteiligungsgesellschaft mbH can appoint
two directors with the CEO being an independent director. The
Group, through this board majority, can control decisions that
represent Board Reserved Matters, which include the approval
or amendment of the Business Plan or the Budget. The Directors
consider that the right to approve or amend the Business Plan
or Budget provides control over the relevant activities that most
significantly influence the variable returns of the SE business. The
Group, through its board majority, has power over this decision.
Whilst SE has been established as an independent business, this
is judged not to prevent the Group concluding that it controls SE.
Additionally, Fundamental Reserved Matters, which require
unanimous consent, are judged to represent minority protection
rather than decision making rights associated with the relevant
activities. Consequently SE is fully consolidated with a non-
controlling interest of 31%.
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Financial Statements | Notes to the Financial Statements
3. CRITICAL ACCOUNTING JUDGEMENTS AND
KEY SOURCES OF ESTIMATION UNCERTAINTY
Spirit Energy Limited (the parent company of SE) has issued
preference shares to the Group and SWM Gasbeteiligungs GmbH
& Co. KG. The Directors have reviewed the redemption and
conversion rights of the shares and have concluded that in each
case the redemption is at the discretion of the issuer, Spirit Energy
Limited. Whilst the agreements provide incentives for the Group to
redeem these shares through the waiver of its dividend under
certain circumstances, and the agreements indicate an intention to
redeem, the Group has concluded that Spirit Energy Limited retains
the discretion to avoid redemption and therefore the preference
shares do not represent an obligation. Similarly, the conversion
rights are at the discretion of Spirit Energy Limited and do not
create an obligation. The preference shares pay a fixed coupon or
dividend of 5.5% plus a floating element subject to a cap of 1.5%,
and again despite the agreement stating a dividend policy and the
intention to pay dividends, these remain at the discretion of the
directors of Spirit Energy Limited. Accordingly, the preference
shares are deemed to represent equity rather than a financial
liability and therefore the 31% held by SWM Gasbeteiligungs
GmbH & Co. KG forms part of the Group’s non-controlling
interest balance.
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 was owned
and funded by the Group and Qatar Petroleum International (QPI)
on a 60:40 basis. The partnership provided the Group with the
ability to control the business plan and budgets and consequently
the general operation of the assets. Accordingly, this arrangement
had been assessed under IFRS 10: ‘Consolidated financial
statements’ and the conclusion had been reached that the Group
had power over the relevant activities of CQECP. This entity was
fully consolidated into the Group’s Financial Statements and QPI’s
ownership share was represented as a non-controlling interest up
to its disposal on 29 September 2017. See note 12(d).
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 and ECO phase
2 had delivery dates of 31 March 2015 and 31 March 2017,
respectively. ECO phase 2 (now ECO phase 2t) has been extended
to 30 September 2018. The Group continues to judge that it is not
legally obligated by this order until 30 September 2018 for ECO
phase 2t. Accordingly, the costs of delivery are recognised as
incurred, when cash was spent or unilateral commitments made,
resulting in obligations that could not be avoided.
Metering contracts
The Department for Business, Energy & Industrial Strategy has
modified 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
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 were not leases because it did not have the right to
physically or operationally control the smart meters and other
parties also took a significant amount of the output from the assets.
(b) Key sources of estimation uncertainty
Estimates and associated assumptions are based on historical
experience and various other factors that are believed to be
reasonable under the circumstances, including current and
expected economic conditions, and, in some cases, actuarial
techniques. Although these estimates and associated assumptions
are based on management’s best knowledge of current events and
circumstances, actual results may differ.
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 (known as unread revenue). 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 readings being returned and system estimates.
Actual meter readings 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. Unbilled revenue
recognised on the balance sheet within trade and other receivables
at 31 December 2017 was £1,585 million (2016: £1,715 million).
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. The
adjustments for imbalance at 31 December 2017 are not
significant. However, changes resulting from these management
estimates can be material with adjustments of between £50 million
and £60 million having been made in the last few years.
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 2040. See note 21 for
further details including the impact of the triennial review of the
Group’s Exploration & Production assets.
The level of provision held is also sensitive to the discount rate
used to discount the estimated decommissioning costs. In 2016
the real discount rate used to discount the Group’s European
Exploration & Production decommissioning liabilities was reduced
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
3. CRITICAL ACCOUNTING JUDGEMENTS AND
KEY SOURCES OF ESTIMATION UNCERTAINTY
by 1%, which resulted in an increase in the provision of
£229 million. The real discount rate used to discount the
decommissioning liabilities at 31 December 2017 is unchanged
at 1.2%.
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 could 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 property, plant and
equipment (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 Exploration & Production gas and
oil assets, power generation assets, storage facility assets, Nuclear
investment (20% economic interest accounted for as an investment
in associate) and goodwill, as detailed below.
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.
Further details of the assumptions used in determining the
recoverable amounts, the impairments and the impairment
reversals booked during the year and sensitivity to the assumptions
are provided in note 7.
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 the Group’s operational storage
facilities is calculated by discounting the post-tax cash flows
expected to be generated by the assets based on forecasts of
the value from extracting cushion gas at the end of the life of the
storage facility less any related capital and operating expenditure
following the Group’s application to permanently end Rough’s
status as a storage facility and the Group’s application for a
production consent to produce gas from the reservoir, which was
granted on 15 January 2018, to take effect from 17 January 2018.
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 goodwill balances and the assumptions used
in determining the recoverable amounts are provided in notes 7,
15(b) and S2. Sensitivity to the assumptions is also found in note 7
for goodwill allocated to Exploration & Production CGUs.
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.
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.
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Financial Statements | 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 40 to 47).
(a) Segmental structure
The types of products and services from which each reportable segment derived its revenues during the year are detailed below:
Segment
Centrica Consumer
UK Home
Ireland
North America Home
Connected Home
Centrica Business
UK Business
North America Business
Distributed Energy & Power
Energy Marketing & Trading
Central Power Generation
Exploration & Production
Centrica Storage
Description
(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.
(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.
(i) The supply of gas and electricity to residential customers in North America; and (ii) the
installation and maintenance of heating, ventilation and air conditioning (HVAC) equipment
and water heaters and the provision of breakdown services, including the provision of fixed-
fee maintenance/breakdown service and insurance contracts in North America.
The supply of new technologies and energy efficiency solutions to residential customers in all
geographies in which the Group operates.
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-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, 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.
Generation of power from combined cycle gas turbines (CCGT) and nuclear assets in the UK.
Production and processing of gas and oil and the development of new fields to maintain
reserves in the UK and Europe and North America.
Gas storage in the UK, including production of cushion gas.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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. Sales between
reportable segments are conducted on an arm’s length basis.
Year ended 31 December
Centrica Consumer
UK Home
Ireland
North America Home
Connected Home
Centrica Business
UK Business
North America Business
Distributed Energy & Power
Energy Marketing & Trading
Central Power Generation
Exploration & Production
Centrica Storage
Gross
segment
revenue
£m
Less
inter-segment
revenue
£m
2017
Group
revenue
£m
Gross
segment
revenue
£m
Less
inter-segment
revenue
£m
8,536
827
2,722
42
12,127
1,830
8,158
171
4,766
622
15,547
1,600
148
29,422
(5)
–
–
(14)
(19)
(2)
–
(4)
(234)
(196)
(436)
(929)
(15)
(1,399)
8,531
827
2,722
28
12,108
1,828
8,158
167
4,532
426
15,111
671
133
28,023
9,252
781
2,702
33
12,768
2,031
7,664
161
3,282
667
13,805
1,642
93
28,308
(8)
–
–
(8)
(16)
(1)
–
(2)
(88)
(209)
(300)
(871)
(19)
(1,206)
2016
Group
revenue
£m
9,244
781
2,702
25
12,752
2,030
7,664
159
3,194
458
13,505
771
74
27,102
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
Republic of Ireland
Germany
Norway
Rest of Europe
United States of America
Canada
Rest of the world
Revenue
(based on location of customer)
2016
£m
14,459
719
345
370
537
9,270
1,232
170
27,102
2017
£m
13,506
769
608
359
1,565
9,579
1,411
226
28,023
Non-current assets
(based on location of assets) (i)
2016
£m
6,454
95
–
1,299
205
1,869
1,428
53
11,403
2017
£m
5,849
102
–
1,758
445
1,653
378
5
10,190
(i)
Non-current assets comprise goodwill, other intangible assets, PP&E, interests in joint ventures and associates and non-financial prepayments and other receivables.
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Financial Statements | Notes to the Financial Statements
Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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. Sales between
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.
reportable segments are conducted on an arm’s length basis.
This note also details adjusted operating profit after taxation. Both measures are reconciled to their statutory equivalents.
4. SEGMENTAL ANALYSIS
(c) Operating profit before and after taxation
Year ended 31 December
Centrica Consumer
UK Home
Ireland
North America Home
Connected Home
Centrica Business
UK Business
North America Business
Distributed Energy & Power
Energy Marketing & Trading
Central Power Generation
Exploration & Production
Centrica Storage
Year ended 31 December
UK
Republic of Ireland
Germany
Norway
Rest of Europe
United States of America
Canada
Rest of the world
Gross
Less
segment
inter-segment
revenue
£m
revenue
£m
Gross
segment
revenue
£m
Less
inter-segment
revenue
£m
2017
Group
revenue
£m
8,531
827
2,722
28
1,828
8,158
167
4,532
426
15,111
671
133
(5)
–
–
(14)
(19)
(2)
–
(4)
(234)
(196)
(436)
(929)
(15)
12,108
12,768
9,252
781
2,702
33
2,031
7,664
161
3,282
667
13,805
1,642
93
(8)
–
–
(8)
(16)
(1)
–
(2)
(88)
(209)
(300)
(871)
(19)
8,536
827
2,722
42
12,127
1,830
8,158
171
4,766
622
15,547
1,600
148
29,422
(1,399)
28,023
28,308
(1,206)
27,102
(based on location of customer)
(based on location of assets) (i)
Revenue
Non-current assets
13,506
14,459
2017
£m
769
608
359
1,565
9,579
1,411
226
2016
£m
719
345
370
537
9,270
1,232
170
2017
£m
5,849
102
–
1,758
445
1,653
378
5
28,023
27,102
10,190
11,403
2016
Group
revenue
£m
9,244
781
2,702
25
12,752
2,030
7,664
159
3,194
458
13,505
771
74
2016
£m
6,454
95
–
1,299
205
1,869
1,428
53
Adjusted operating profit/(loss)
2017
£m
819
47
119
(95)
890
4
71
(53)
104
35
161
184
17
1,252
(7)
1,245
(884)
153
(28)
2016
£m
810
46
93
(50)
899
50
221
(26)
161
75
481
187
(52)
1,515
(48)
1,467
(11)
1,058
(28)
486
2,486
Year ended 31 December
Centrica Consumer
UK Home
Ireland (i)
North America Home
Connected Home
Centrica Business
UK Business (i)
North America Business
Distributed Energy & Power
Energy Marketing & Trading
Central Power Generation (i)
Exploration & Production
Centrica Storage (ii)
Adjusted operating profit
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 after exceptional items and certain
re-measurements
Year ended 31 December
Adjusted operating profit after taxation (iii)
Impact of changes to corporate tax rates (note 9) (iv)
Corporate and other taxation, and interest (net of taxation) (v)
Business performance profit for the year
Exceptional items and certain re-measurements (net of taxation) (note 7)
Statutory profit for the year
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.
Adjusted operating profit/(loss)
after taxation
2016
£m
£m
2017
674
37
74
(71)
714
5
44
(41)
87
47
142
37
1
894
672
41
61
(40)
734
42
145
(20)
124
66
357
50
(53)
1,088
2017
£m
894
34
(218)
710
(407)
303
2016
£m
1,088
30
(233)
885
777
1,662
(i)
Non-current assets comprise goodwill, other intangible assets, PP&E, interests in joint ventures and associates and non-financial prepayments and other receivables.
(i)
(ii)
In 2017 the effective tax rates of certain segments, including Ireland, UK Business and Central Power Generation, are impacted by prior year adjustments. In both 2017 and 2016 the Central
Power Generation segment effective tax rate was also impacted by non-taxable income in the segment’s associate’s profits.
In 2017, the effective tax rate in the Centrica Storage segment is higher (2016: lower) than the standard UK Corporation tax rate of 19.25% due principally to the mix of profits and losses
across upstream and downstream activities, to which different tax rates apply (see note 9).
(iii) Segment adjusted operating profit after taxation includes profit of £7 million (2016: loss of £5 million) attributable to non-controlling interests.
(iv) The 2017 amount relates to a change to the US tax rate; the 2016 amount related to changes to UK tax rates. The amounts include nil (2016: £9 million) relating to equity-accounted
interests.
Includes joint ventures’/associates’ interest, net of associated taxation.
(v)
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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
Centrica Consumer
UK Home
Ireland
North America Home
Connected Home
Centrica Business
UK Business
North America Business
Distributed Energy & Power
Energy Marketing & Trading
Central Power Generation
Exploration & Production
Centrica Storage
Other (i)
Share of results of joint
ventures and associates
before interest and taxation
2017
£m
2016
£m
Depreciation and impairments of
property, plant and equipment
2017
£m
2016
£m
Amortisation, write-downs and
impairments of intangibles
2016
2017
£m
£m
–
–
–
–
–
–
–
–
–
58
58
–
–
–
58
–
–
–
–
–
–
–
–
–
178
178
–
–
–
178
(51)
(3)
(13)
(1)
(68)
(2)
(8)
(8)
(1)
(10)
(29)
(533)
(38)
(5)
(673)
(51)
(2)
(6)
–
(59)
(2)
(2)
(6)
–
(27)
(37)
(578)
(36)
(27)
(737)
(108)
(9)
(50)
(11)
(178)
(12)
(40)
(8)
(10)
–
(70)
(14)
–
(9)
(271)
(111)
(9)
(49)
(6)
(175)
(11)
(39)
(9)
(11)
–
(70)
(25)
(1)
(17)
(288)
(i)
The Other segment includes corporate functions, subsequently recharged.
Impairments of property, plant and equipment
During 2017, a £2 million impairment charge was recognised in the Distributed Energy & Power segment. During 2016, impairments and
write-backs were recognised as follows: Exploration & Production: £86 million impairment, Central Power Generation: £3 million write-
back, Distributed Energy & Power: £1 million impairment. Considering their size and nature, all such current and prior year impairments
and write-backs were recognised within business performance.
Write-downs and impairments of intangible assets
During 2017, £9 million of write-downs (2016: £19 million) relating to exploration and evaluation assets were recognised in the Exploration
& Production segment. During 2016, a £1 million impairment of application software was recognised in the Ireland segment. All such
current and prior year impairments and write-downs were recognised within business performance as they were not deemed exceptional
in nature.
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Financial Statements | 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
Centrica Consumer
UK Home
Ireland
North America Home
Connected Home
Centrica Business
UK Business
North America Business
Distributed Energy & Power
Energy Marketing & Trading
Central Power Generation
Exploration & Production
Centrica Storage
Other (i)
Capital expenditure
Capitalised borrowing costs
Inception of new finance leases and movements in payables and prepayments
related to capital expenditure
Purchases of emissions allowances and renewable obligation certificates
Net cash outflow (ii)
Capital expenditure on property,
plant and equipment (note 13)
2017
£m
2016
£m
Capital expenditure on intangible
assets other than goodwill (note 15)
2016
£m
£m
2017
69
2
18
4
93
1
6
106
3
28
144
391
43
36
707
(10)
(87)
–
610
48
5
6
3
62
1
6
9
7
13
36
528
33
15
674
(61)
8
–
621
398
8
5
31
442
190
290
9
77
–
566
40
–
36
1,084
–
1
(813)
272
327
6
3
21
357
164
210
1
40
–
415
11
–
53
836
(1)
–
(627)
208
(i)
(ii)
The Other segment relates to corporate assets.
The cash outflow relating to intangible assets includes £41 million (2016: £11 million) relating to exploration and evaluation of gas and oil assets.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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
Centrica Consumer
UK Home
Ireland
North America Home
Connected Home
Centrica Business
UK Business
North America Business
Distributed Energy & Power
Energy Marketing & Trading
Central Power Generation
Exploration & Production
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.
2017
£m
928
62
154
(121)
1,023
131
87
(30)
262
58
508
448
61
29
2,069
(58)
(131)
(176)
136
1,840
2016
£m
1,053
84
146
(58)
1,225
418
285
(15)
198
(1)
885
655
(49)
(30)
2,686
(117)
(77)
(273)
177
2,396
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Financial Statements | 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) (i)
Other direct costs
Total costs before exceptional items
and certain re-measurements
Exceptional items and certain re-measurements (note 7)
Total costs
Cost of
sales
£m
(5,039)
(15,651)
(605)
(708)
–
(1,978)
(23,981)
153
(23,828)
Operating
costs
£m
–
–
(343)
(1,271)
(132)
(1,102)
(2,848)
(884)
(3,732)
2017
Total
costs
£m
(5,039)
(15,651)
(948)
(1,979)
(132)
(3,080)
Cost of
sales
£m
(4,990)
(14,355)
(580)
(787)
–
(1,999)
(26,829)
(731)
(27,560)
(22,711)
1,058
(21,653)
(i)
Impairment of trade receivables in 2017 is net of £5 million received in respect of the sale of debt that had been written off in prior years.
(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)
Capitalised employee costs
Employee costs recognised in the Group Income Statement
Operating
costs
£m
–
–
(448)
(1,363)
(182)
(1,061)
(3,054)
(11)
(3,065)
2017
£m
(1,591)
(159)
(201)
(47)
(1,998)
19
(1,979)
(i)
Details of Directors’ remuneration, share-based payments and pension entitlements in the Remuneration Report on pages 78 to 89 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
UK Home
Ireland
North America Home
Connected Home
UK Business
North America Business
Distributed Energy & Power
Energy Marketing & Trading
Central Power Generation
Exploration & Production
Centrica Storage
Group Functions (i)
2017
Number
22,158
211
3,122
363
2,065
770
947
433
131
785
269
3,647
34,901
2016
Total
costs
£m
(4,990)
(14,355)
(1,028)
(2,150)
(182)
(3,060)
(25,765)
1,047
(24,718)
2016
£m
(1,792)
(160)
(185)
(46)
(2,183)
33
(2,150)
2016
Number
26,459
325
4,729
280
2,257
1,270
844
289
256
1,242
327
–
38,278
(i) Group Functions was established in 2017 and includes employees performing activities related to central functions such as finance, human resources and legal. These employees were
reported in the other segments in 2016.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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 2017 principally arises from its interest
in Nuclear - Lake Acquisitions Limited, an associate, reported in the Central Power Generation segment.
Year ended 31 December
Income
Expenses excluding certain re-measurements
Certain re-measurements
Financing costs
Taxation excluding certain re-measurements
Taxation on certain re-measurements
Share of post-taxation results of joint ventures and associates (i)
2017
£m
538
(480)
(29)
29
(1)
(6)
1
23
2016
£m
686
(508)
(29)
149
(32)
(16)
1
102
(i)
The 2016 comparative includes the Group’s share of results of the GLID Wind Farms TopCo Limited and Lincs Wind Farm Limited joint ventures. The Group’s interest in GLID Wind Farms
TopCo Limited was disposed of during 2016. The Group’s interest in Lincs Wind Farm Limited was held for sale in 2017 up to the date of disposal on 17 February 2017 and therefore gave
rise to no equity accounted comprehensive income during the period. See note 12(d).
(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)
Financing costs
Taxation (excluding taxation on certain re-measurements)
Share of adjusted results of joint ventures and associates
Further information on the Group’s investments in joint ventures and associates is provided in notes 14 and S10.
2017
£m
23
28
1
6
58
2016
£m
102
28
32
16
178
128 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | 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 releases, and asset write-downs/impairments and write-backs.
(a) Exceptional items
Year ended 31 December
(Impairment)/write-back of retained Exploration & Production assets (ii)
Impairment of UK gas storage assets (iii)
Write-back of retained Central Power Generation assets
Net gain on disposal of Central Power Generation businesses and assets (iv)
(Loss)/net gain on disposal of Exploration & Production businesses and material assets (v)
Loss on disposal of North America Home businesses and assets
Pension past service credit
Onerous power procurement contract release
Restructuring costs (vi)
Business change costs (vii)
Exceptional items included within Group operating profit
Net taxation on exceptional items (note 9) (viii)
Effect of change in UK upstream tax rates (note 9)
Net exceptional items after taxation
2017
£m
(408)
(270)
–
72
(134)
–
–
–
(88)
(56)
(884)
408
–
(476)
2016
(restated) (i)
£m
79
(176)
26
73
106
(22)
78
53
(228)
–
(11)
9
29
27
(i)
(ii)
Prior year comparatives have been re-presented so that associated impairments and gains or losses on disposal are presented on a consistent basis with the current year classification.
In the Exploration & Production segment, net impairments of assets have been booked relating to the net decreases in value of certain UK, Dutch and Norwegian gas and oil fields (pre-tax
impairments £494 million, post-tax £162 million; including a PRT credit of £207 million), predominantly due to a reduction in long-term price forecasts, reserves and changes to expected
decommissioning costs following the conclusion of the triennial review. Also included is the reduction of decommissioning provisions (pre-tax £86 million, post-tax £51 million) for assets
previously impaired through exceptional items.
(iii) A pre-tax impairment of £270 million (post-tax £224 million) has been recorded in the current year in respect of the UK Rough gas storage asset, following the June 2017 announcement to
apply for a production licence and permanently end Rough’s status as a storage facility.
(iv) On 17 February 2017, the Group disposed of its joint venture investment in Lincs Wind Farm for net proceeds of £214 million, giving rise to a pre-tax gain on disposal of £64 million (post-tax
£58 million). On 31 August 2017, the Group disposed of its Langage, South Humber Bank and King’s Lynn B power station assets for net proceeds of £314 million, giving a pre and post-tax
loss of £7 million. These power station assets were originally classified as held for sale as at 30 June 2017 and a net pre-tax write-back of £15 million (post-tax £12 million) was recognised.
(v) On 27 May 2017, the Group disposed of its remaining portfolio of gas assets in Trinidad and Tobago for consideration of US$35 million (£26 million) giving rise to a pre and post-tax loss on
disposal of £9 million. On 29 September 2017, the Group disposed of its Canadian exploration and production business for C$420 million (£255 million) giving rise to a pre and post-tax loss
on disposal of £28 million. These Canadian exploration and production assets were classified as held for sale as at 30 June 2017 and a net pre-tax impairment of £97 million (post-tax £81
million) was recorded. Both the Canadian exploration and production business and the Trinidad and Tobago assets were foreign operations and accounted for in non-GBP currencies.
Consequently the relevant foreign currency translation reserve (including any net investment hedging) has been recycled to the Group Income Statement.
(vi) Following the Group’s strategic review announced in 2015, the Group has incurred restructuring costs during the year implementing the new organisational model relating principally to
redundancy costs, transformational spend and consultancy costs. The post-tax impact was £68 million.
(vii) Business change costs relate to changing the business operating model in Storage, the Exploration & Production Bayerngas Norge acquisition and the closure of the US solar business. The
costs principally relate to impairment of assets, redundancy and consultancy costs and various change of control costs associated with the Bayerngas Norge transaction. The post-tax impact
was £39 million.
Included within net taxation is a £21 million credit associated with the leased Spalding CCGT power station, previously impaired through exceptional items.
(viii)
(b) Certain re-measurements
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.
Year ended 31 December
Certain re-measurements recognised in relation to energy contracts:
Net (losses)/gains arising on delivery of contracts
Net gains 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
Taxation on certain re-measurements (note 9) (i)
Net re-measurements after taxation
2017
£m
(54)
207
153
(28)
125
(56)
69
2016
£m
968
90
1,058
(28)
1,030
(280)
750
(i)
2017 includes £37 million charge due to the effect of changes in US tax rates. 2017 also includes a prior year tax credit of £28 million (2016: £1 million charge).
The Group is generally a net buyer of commodity, procuring gas and power for our customers. Following some increases in commodity
prices during 2017, net gains arising on market price movements and new contracts of £207 million (2016: £90 million gain) have
been recognised.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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 CGU pro rata on the basis of the carrying amount of each asset in the CGU.
The impairment tests for the Exploration & Production gas and oil assets and CGUs (including goodwill), the Group’s associate investment
in Nuclear and the Storage PP&E asset, have used FVLCD to determine their recoverable amounts. This methodology is deemed to be
appropriate for these assets and 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. VIU calculations have been used to
determine recoverable amounts for all other CGUs that include goodwill and indefinite-lived intangible assets. UK power generation assets
have also been valued using 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
The price assumptions used to determine recoverable amounts for FVLCD calculations are based on the liquid market prices for the three
year period, 2018 to 2020. The longer-term price assumptions thereafter are derived using valuation techniques based on available
external data and with reference to market comparators. The average price for the period 2018 to 2022 was 45p per therm for NBP Gas,
US$65 per barrel for Brent and £43 per MWh for Baseload Power (all in real terms) thereafter nominal prices are broadly inflated. The
valuation of the Group’s portfolio of assets is more sensitive to NBP Gas and Baseload Power prices than to Brent.
Exploration & Production assets
A net impairment of £408 million (2016: write-back £79 million) has been recorded within exceptional items for retained Exploration &
Production assets net of £86 million of reductions to decommissioning provisions. For those assets subject to the net impairment, the
associated recoverable amounts (net of decommissioning costs) of £401 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 8.5% (2016: 9.0%) 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 assets and goodwill are 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 & Production assets, an increase in gas and oil prices of 10% would potentially reverse £148 million (2016: £89 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 legacy exploration and production assets of £140 million (2016: £166 million) but no
post-tax impairment of goodwill (2016: nil) due to adequate headroom.
Storage
The recoverable amount of the Group’s storage facility (Rough) is calculated on a FVLCD basis by discounting the post-tax cash flows
expected to be generated by the asset. In June 2017, the Group announced that the Rough facility could not be safely returned to
injection and storage operations and it therefore intended to make all relevant applications to permanently end Rough’s status as a
storage facility. The Group received production consent on 15 January 2018, effective from 17 January 2018, to produce gas from the
reservoir. Since the cash generating unit that comprises the UK gas storage assets will continue to operate, the Storage business does
not qualify as a discontinued operation under IFRS 5: ‘Non-current assets held for sale and discontinued operations’.
The cash flow estimates in the recoverable amount calculation have been based on the revenue from extracting the cushion gas less any
related capital, operating and decommissioning expenditure. The key assumptions in these estimates are forward gas prices, the timing
of government consent for production, the amount of gas available and the rate of extraction. Where forward market gas prices are not
available, 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% (2016: 7.5%) to determine FVLCD.
130 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Notes to the Financial Statements 7. EXCEPTIONAL ITEMS AND CERTAIN RE-MEASUREMENTS
A pre-tax impairment charge of £270 million (post-tax £224 million) has been recorded within exceptional items in the current period. The
valuation of the recoverable amount of the asset is categorised within Level 3 of the fair value hierarchy. The carrying amount after this
impairment amounts to a net liability position of £88 million, including the decommissioning provision and deferred tax. The impairment
test is particularly sensitive to price assumptions made in the impairment calculation. To illustrate this, the price assumptions for gas and
liquids have been varied by +/–10%. An increase of 10% would potentially reverse impairments of £76 million. A decrease of 10% would
potentially give rise to a further impairment of £20 million.
Central Power Generation – Nuclear
No impairment charge has been recorded (2016: nil) 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 7% (2016: 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% and separately to vary the discount rate by +/–1%. An increase in power
prices of 10%, assuming all other assumptions remain constant, would result in a reversal of previous impairments of £477 million (2016:
£444 million). A reduction of 10% would give rise to an impairment charge of £442 million (2016: £461 million). An increase in the discount
rate of 1%, assuming all other assumptions remain constant, would result in an impairment charge of £125 million (2016: £138 million).
A decrease in the discount rate of 1% would result in an impairment write-back of £187 million (2016: £145 million).
8. NET FINANCE COST
Financing costs mainly comprise interest on bonds and bank debt, 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 and pensions. 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,
and government bonds.
Year ended 31 December
Cost of servicing net debt:
Interest income
Interest cost on bonds, bank loans and overdrafts (i)
Interest cost on finance leases
Net gains on revaluation
Notional interest arising from discounting
Capitalised borrowing costs (ii)
(Cost)/income
Financing
costs
£m
Investment
income
£m
–
(289)
(14)
(303)
–
(71)
(374)
10
(364)
19
–
–
19
1
–
20
–
20
2017
Total
£m
19
(289)
(14)
(284)
1
(71)
(354)
10
(344)
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)
During 2017 the Group decreased its outstanding bond debt principal by US$200 million. See note 24(d).
(i)
(ii) Borrowing costs have been capitalised using an average rate of 4.55% (2016: 4.53%). Capitalised interest has attracted tax deductions totalling £8 million (2016: £18 million), with deferred
tax liabilities being set up for the same amounts.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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 together with amendments in respect of tax provisions made in earlier
years. 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 (i)
Adjustments in respect of prior years – non-UK
Total current tax
Deferred tax
Origination and reversal of temporary differences – UK
UK petroleum revenue tax (ii)
Origination and reversal of temporary differences –
non-UK
Change in tax rates (iii)
Adjustments in respect of prior years – UK (i)
Adjustments in respect of prior years – non-UK (iv)
Total deferred tax
Total taxation on profit/(loss) (v)
2017
Business
performance
£m
Exceptional
items and
certain re-
measurements
£m
Results for
the year
£m
Business
performance
£m
Exceptional items
and certain
re-measurements
£m
2016
Results for
the year
£m
(50)
63
(35)
29
(10)
(3)
(44)
(6)
(255)
34
57
26
(188)
(191)
(20)
–
7
(31)
(2)
(46)
169
207
(23)
(37)
90
(8)
398
352
(70)
63
(28)
(2)
(12)
(49)
125
201
(278)
(3)
147
18
210
161
(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)
(i)
The net UK adjustments in respect of prior years in 2017 include uncertain tax provision movements of £49 million and deferred tax adjustments of £35 million relating to the treatment of
certain derivatives.
(ii) An increased deferred PRT asset has been recognised, reflecting a reduction in long-term price forecasts and changes to expected decommissioning costs.
(iii) During the year, the US tax rate was reduced from 35% to 21%. This has resulted in a £3 million charge to be recognised within the year due to a change to the net deferred tax assets at the
date the rate changed.
(iv) A comprehensive review as part of business transformation activities in North America during 2016 enabled certain deferred tax balances to be adjusted.
(v)
Total taxation on profit/(loss) excludes taxation on the Group’s share of profits of joint ventures and associates.
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 2017 was 19.25% (2016: 20%). Upstream gas and oil production activities are taxed at a UK corporation tax rate of 30% (2016:
30%) plus a supplementary charge of 10% (2016: 10%) to give an overall rate of 40% (2016: 40%). In addition, certain upstream assets in
the UK attract petroleum revenue tax (PRT) at 0% (2016: 0%), giving an overall effective rate of 40% (2016: 40%).
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 2017, 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 24% (2016: 25%) plus a special tax of 54% (2016: 53%) resulting in an
aggregate tax rate of 78% (2016: 78%). Profits earned in the US prior to 22 December 2017 were taxed at a Federal rate of 35% together
with state taxes at various rates dependent on the state. On 22 December 2017, the US enacted a reduction in the Federal rate to 21%
effective from 1 January 2018. Deferred tax assets and liabilities at 31 December 2017 were based on the reduced rate. 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
50% in the Netherlands. The tax charges were 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.
132 | Centrica plc Annual Report and Accounts 2017
132 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Notes to the Financial Statements
9. TAXATION
(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 taxation shown above and the amount calculated by applying the standard rate of UK corporation tax to
the profit/(loss) before taxation are as follows:
Year ended 31 December
Profit/(loss) before taxation
Less: share of profits in joint ventures and associates,
net of interest and taxation
Group profit/(loss) before taxation
Tax on profit at standard UK corporation tax
rate of 19.25% (2016: 20%)
Effects of:
Depreciation/impairment on non-qualifying assets
(including write-backs)
Non-taxable disposals
Other non-allowable/non-taxable items
Higher rates applicable to upstream profits/losses
Upstream investment incentives
UK petroleum revenue tax
Non-UK tax rates (i)
Movement in uncertain tax provisions
Movement in unrecognised deferred tax assets
Differences in deferred tax reversal rates
Changes to tax rates (ii)
Adjustments in respect of prior years (iii)
Taxation on profits/(losses)
Less: movement in deferred tax
Total current tax
Business
performance
£m
901
Exceptional items
and certain
re-measurements
£m
(759)
2017
Results for
the year
£m
142
Business
performance
£m
1,167
Exceptional items
and certain
re-measurements
£m
1,019
2016
Results for
the year
£m
2,186
(51)
850
(164)
(51)
7
(2)
(149)
43
34
(35)
34
(2)
7
34
53
(191)
188
(3)
28
(731)
141
(3)
3
2
96
–
124
(14)
–
(4)
(5)
(37)
49
352
(398)
(46)
(23)
119
(23)
(54)
10
–
(53)
43
158
(49)
34
(6)
2
(3)
102
161
(210)
(49)
(130)
1,037
28
1,047
(102)
2,084
(207)
(209)
(416)
(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)
Excludes additional non-UK tax applicable to upstream profits, notably in Norway.
(i)
(ii) Changes to tax rates on exceptional items and certain re-measurements includes a petroleum revenue tax charge of nil (2016: £90 million).
(iii) Excludes amounts included in movement in uncertain tax provisions that relate to prior years of £49 million credit (2016: £9 million charge).
The Group is subject to taxation in a number of jurisdictions. The complexity of applicable rules may result in legitimate differences of
interpretation between the Group and taxing authorities (or between different taxing authorities) especially where an economic judgement
or valuation is involved. Resolution of these differences typically takes many years. The uncertain tax provisions represent multiple layers of
estimation for different time periods and different jurisdictions.
The principal element relates to transfer pricing challenges in jurisdictions outside the UK. While the Group applies the arm’s length
principle to all intra-group transactions, taking OECD guidance into account, taxing authorities may take different views. The outcome of
resolving any disputes is not predictable; the provisions represent management’s assessment of the most likely outcome of each issue.
The assessment is reviewed and updated on a regular basis.
(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 2018 and beyond
(19% for 2018 and 2019, 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% versus 19%). 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, particularly in Norway, is generally subject to higher effective rates of tax than the current UK
statutory rate.
US tax reform has reduced its Federal rate to 21% which will benefit the Group’s effective rate assuming US profits continue.
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.
Centrica plc Annual Report and Accounts 2017 | 133
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
9. TAXATION
Local tax laws and rates are subject to change, which may have a significant impact on the Group’s future tax charges.
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. The mix of upstream/downstream activities across regimes continues to be influential on the
effective tax rate.
(d) Relationship between current tax charge and taxes paid
Year ended 31 December
Current tax charge/(credit):
Corporation tax
Petroleum revenue tax
Taxes (refunded)/paid:
Corporation tax
Petroleum revenue tax
UK
£m
72
(63)
9
(72)
(16)
(88)
Non-UK
£m
40
–
40
190
–
190
2017
Total
£m
112
(63)
49
118
(16)
102
UK
£m
Non-UK
£m
(144)
(8)
(152)
89
(12)
77
200
–
200
129
–
129
2016
Total
£m
56
(8)
48
218
(12)
206
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.
In certain jurisdictions advance tax payments are required (based on estimated tax liabilities) which can result in overpayments. These
are included as tax assets, to be refunded in a subsequent period (2017 saw net refunds in the UK); and
● PRT refunds 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 cash movements are expected to reflect refunds, but on a less
predictable basis.
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 earnings per ordinary share has been calculated by dividing the profit attributable to equity holders of the Company for the year of
£333 million (2016: £1,672 million) by the weighted average number of ordinary shares in issue during the year of 5,537 million (2016:
5,318 million). The number of shares excludes 53 million ordinary shares (2016: 61 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 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 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
2017
Million
shares
5,537
42
5,579
2016
Million
shares
5,318
43
5,361
(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.
134 | Centrica plc Annual Report and Accounts 2017
134 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Notes to the Financial Statements
10. EARNINGS PER ORDINARY SHARE
Basic to adjusted basic earnings per share reconciliation
Year ended 31 December
Earnings – basic
Net exceptional items after taxation (notes 2 and 7) (i)
Certain re-measurement gains after taxation (notes 2 and 7) (i)
Earnings – adjusted basic
Earnings – diluted
Earnings – adjusted diluted
2017
Pence per
ordinary share
6.0
7.9
(1.3)
12.6
2016
Pence per
ordinary share
31.4
(0.5)
(14.1)
16.8
£m
1,672
(27)
(750)
895
6.0
1,672
12.5
895
31.2
16.7
£m
333
435
(70)
698
333
698
(i)
Net exceptional loss after taxation of £476 million (2016: profit £27 million) is reduced by £41 million (2016: nil) 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. Similarly, certain re-measurement gains of £69 million (2016: £750 million) are increased by
£1 million (2016: nil) to reflect the share of net re-measurement losses attributable to non-controlling interests.
11. DIVIDENDS
Dividends represent the 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 (i)
Interim dividend
Pence per
share
8.40
3.60
2017
Date of
payment
29 Jun 2017
30 Nov 2017
£m
459
202
661
2016
Pence per
Date of
share
payment
8.43 23 Jun 2016
3.60 24 Nov 2016
£m
454
197
651
(i)
Included within the prior year final dividend are forfeited dividends of £2 million (2016: £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 £470 million) for the year ended 31 December 2017. The
dividend will be submitted for formal approval at the Annual General Meeting to be held on 14 May 2018 and, subject to approval, will be
paid on 28 June 2018 to those shareholders registered on 11 May 2018.
Since 2015, the Company has offered a scrip dividend alternative to its shareholders. £191 million of the £459 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 £1.93 per share resulting in the issue of 99 million new shares and £185 million of share premium.
Similarly, £7 million of the £202 million interim dividend was taken as a scrip dividend. The market value per share at the date of payment
was £1.74 resulting in the issue of 4 million new shares and £7 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.
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Centrica plc Annual Report and Accounts 2017 | 135
Centrica plc Annual Report and Accounts 2017 | 135
Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
12. ACQUISITIONS AND DISPOSALS
(a) 2017 business combinations
This section details business combinations made by the Group. During the year, the significant acquisitions were of Bayerngas
Norge which was combined with the Group’s Exploration & Production business in a newly formed business, Spirit Energy, in
which the Group has a controlling stake of 69% and REstore, a Distributed Energy & Power demand response aggregator.
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.
Bayerngas Norge
Spirit Energy Limited is the newly formed business combining the Group’s existing Exploration & Production business with that of
Bayerngas Norge AS. This transaction was completed on 8 December 2017 with the Group owning 69% of Spirit Energy and Bayerngas
Norge’s former shareholders owning 31%. The formation of Spirit Energy creates a strong and sustainable Exploration & Production
business across the UK, Norway, the Netherlands and Denmark. It combines the Group’s cash generative and relatively near-term
production profile with Bayerngas Norge’s more recently on-stream producing assets and development profile. The new business will
invest in the range of £400-600 million per annum to deliver sustainable medium term production of 45-55 mmboe. The consideration for
the acquisition is the 31% share of the value of the combined Exploration & Production business of Spirit Energy attributable to the non-
controlling interest that is provided in return for the Bayerngas Norge assets. This value includes cash, the value of indemnities provided
by both parties and promises to pay further cash to fund net decommissioning liabilities of certain gas and oil fields. £102 million of
goodwill was recognised on acquisition which predominately relates to goodwill in relation to the deferred tax liabilities recognised on
acquisition. None of the goodwill is tax deductible.
REstore
On 3 November 2017, the Group acquired 100% of REstore NV’s demand response business for cash consideration of £62 million.
REstore provides key capabilities in energy optimisation and provides over 850MW of flexible power capacity to grid operators. This power
is aggregated from a 2.2GW flexible portfolio of industrial and commercial customers across Belgium, the UK, France and Germany, and
generates value for businesses through ancillary services including frequency response and capacity markets. The company’s software
and international patents are currently used by over 150 of Europe’s largest energy users. The business is a strong fit with the DE&P
business model and provides immediate capability to the division in terms of energy insight, asset optimisation and energy solutions to
large energy users.
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 new and distinct capability in demand side response and management of battery equipment
using a world class technology platform. In addition, the existing order book and future margins on renewed contracts are both captured
in the customer intangible asset. £53 million of goodwill was recognised on acquisition, none of which is tax deductible.
REstore reported under Belgian GAAP. Upon review of Belgian GAAP versus IFRS no material accounting policy alignments have
been identified.
Provisional fair value of the identifiable acquired assets and liabilities
Balance Sheet items
Other intangible assets
Property, plant and equipment
Other non-current assets
Current assets (including £81 million of cash and cash equivalents)
Current liabilities (including £66 million of borrowings)
Non-current liabilities
Net identifiable assets
Goodwill
Net assets acquired
Consideration comprises:
Cash consideration
31% share of Spirit Energy business (i)
Total consideration
Income Statement items
Revenue recognised since the acquisition date in the Group Income Statement (ii)
Profit/(loss) since the acquisition date in the Group Income Statement (ii)
Bayerngas Norge
£m
REstore
£m
42
761
107
134
(134)
(267)
643
102
745
–
745
745
33
4
13
3
–
4
(8)
(3)
9
53
62
62
–
62
2
(1)
Total
£m
55
764
107
138
(142)
(270)
652
155
807
62
745
807
35
3
This has been recorded as a non-controlling interest of £721 million and a £24 million other reserve. See note S4 for further details.
(i)
(ii) Revenue and profits/losses from business performance between the acquisition date and the balance sheet date exclude exceptional items and certain re-measurements.
Other acquisitions in the year, including Rokitt Inc., were immaterial and resulted in no goodwill being recognised.
Acquisition-related costs have been charged to ‘operating costs before exceptional items’ in the Group Income Statement for an
aggregated amount of £16 million.
136 | Centrica plc Annual Report and Accounts 2017
136 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Notes to the Financial Statements
12. ACQUISITIONS AND DISPOSALS
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 £28,263 million (compared to reported revenue of £28,023 million) and profit after taxation before exceptional items and certain
re-measurements of £702 million (compared to reported profit after taxation of £710 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.
(b) 2016 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 2016.
Goodwill in respect of these acquisitions decreased 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.
There were no disposal groups held for sale as at 31 December 2017, with items previously classified as held for sale at 31 December
2016 (Trinidad and Tobago gas assets and Lincs Wind Farm) and 30 June 2017 (Canadian exploration and production and UK gas-fired
power stations) disposed of during the period.
(d) Disposals
During the year, the Group sold its interest in the Lincs Wind Farm, Langage and South Humber power stations, Trinidad and
Tobago gas assets and the Canadian exploration and production business. 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
17 February 2017
Lincs Wind Farm
27 May 2017
Trinidad and Tobago gas
assets
31 August 2017
Langage and Humber gas fired
power stations and King’s Lynn
new build development
29 September 2017
Canadian exploration and
production
Sold to
UK Green Investment Bank Shell Exploration and Production
Held within disposal group:
Property, plant and equipment
Intangible assets
Interests in joint ventures
(including shareholder loans)
Other assets
(including cash of £20 million)
Current liabilities
Non-current provisions and other
liabilities and charges
Net assets disposed of
Consideration received net of associated
transaction costs (i)
Total consideration
Recycling of share of joint venture cash
flow hedging reserve on disposal
Recycling of foreign currency translation
reserve on disposal
Profit on termination of related power
purchase agreement
Transfer of non-controlling interest
(Loss)/profit on related commodity hedges
Profit/(loss) on disposal before tax (ii)
Taxation
Profit/(loss) on disposal after tax
£m
–
–
168
–
–
–
168
214
214
(10)
–
28
–
–
64
(6)
58
£m
66
–
–
6
–
(40)
32
26
26
–
(3)
–
–
–
(9)
–
(9)
EP UK Investments Limited MIE Holding Corporation, The
Can-China Global Resource
Fund and Mercuria
£m
£m
344
–
–
21
(34)
(24)
307
314
314
–
–
–
–
(14)
(7)
–
(7)
789
111
–
54
(25)
(493)
436
255
255
–
(5)
–
152
6
(28)
–
(28)
(i)
Cash flows from sale of businesses in the Group Cash Flow Statement are presented net of £6 million cash outflow for Langage and Humber gas fired power stations and £6 million cash
inflow for Canada exploration and production in respect of the settlement of related commodity hedges. For Langage and Humber there will be a further £8 million cash outflow in 2018 to
reflect full settlement of the commodity hedge.
(ii) As the disposal assets were identified as areas of the business to sell as part of the strategic review in 2015, the net pre-tax profit on disposal of £20 million has been identified as an
exceptional item. See note 7.
Centrica plc Annual Report and Accounts 2017 | 137
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
12. ACQUISITIONS AND DISPOSALS
On 17 February 2017, the Group sold its 50% shareholding in Lincs Wind Farm to the UK Green Investment Bank Financial Services
managed entities and the UK Green Investment Bank plc for net consideration of £214 million. None of the consideration was contingent
or deferred. A pre-tax profit on disposal of £64 million was recognised as an exceptional item (see note 7). The profit on disposal included
a gain of £28 million which was recognised following cessation of the associated power purchase agreement.
On 27 May 2017, the Group disposed of its Trinidad and Tobago gas assets to Shell Exploration and Production for net proceeds of
US$35 million (£26 million) recording an exceptional loss on disposal of £9 million which included the recycling of losses from the foreign
currency translation reserve of £3 million (see note 7). Contingent consideration of up to US$40 million is receivable subject to Block 22
and NCMA-4 achieving agreed development project milestones, however no amounts have been recognised in the year.
On 31 August 2017, the Group disposed of the Langage and South Humber Bank power stations and the King’s Lynn B new build
development to EP UK Investments Limited for net consideration after transaction costs of £314 million. A loss on disposal of £7 million
was recognised as an exceptional item (see note 7). The disposal loss included a loss of £14 million in relation to the settlement of
commodity related hedges.
On 29 September 2017, the Group disposed of its 60% interest in the CQ Energy Canada Partnership to a consortium comprising MIE
Holding Corporation, the Can-China Global Resource Fund and Mercuria for net proceeds of C$420 million (£255 million) which resulted in
a loss on disposal of £28 million which was recognised as an exceptional item (see note 7). The loss included recycling of losses from the
foreign currency translation reserve of £5 million and a gain of £6 million on settlement of related commodity hedges.
On 20 December 2017, the Group also disposed of NSIP (ETS) Limited to Antin North Sea 2 Limited for net proceeds of £15 million
resulting in a profit on disposal of £12 million.
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 material geographical area of operations.
138 | Centrica plc Annual Report and Accounts 2017
138 | Centrica plc Annual Report and Accounts 2017
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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 lives.
(a) Carrying amounts
Cost
1 January
Additions and capitalised
borrowing costs (note 4(e))
Acquisitions
Disposals/retirements (ii)
Transfers
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/(write-backs)
Disposals/retirements (ii)
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
2017
Total
£m
Land and
buildings
(restated) (i)
£m
Plant,
equipment
and vehicles
(restated) (i)
£m
Power
generation
(restated) (i)
£m
Gas
production
and storage
£m
2016
Total
£m
40
27
–
–
–
–
–
(3)
64
17
2
–
–
–
2
21
43
667
1,856
16,571
19,134
30
602
2,070
14,944
17,646
115
3
(198)
–
134
–
(2)
–
431
761
(10)
–
707
764
(210)
–
(11)
(1,041)
(2,301)
(3,353)
4
(14)
566
298
85
1
(191)
(7)
(7)
179
387
1
2
950
86
(110)
15,428
91
(125)
17,008
1,454
16
(13)
(2)
(697)
3
761
189
12,067
568
848
(2)
(1,516)
(50)
11,915
3,513
13,836
671
836
(195)
(2,220)
(52)
12,876
4,132
2
6
–
–
–
–
2
40
16
1
–
–
–
–
17
23
91
1
(88)
–
20
22
(260)
–
561
–
(18)
98
674
29
(366)
98
–
(4)
(315)
(319)
22
39
667
–
8
1,856
279
1,022
16,571
301
1,071
19,134
262
94
–
(79)
–
21
298
369
1,704
35
(28)
(258)
11,035
523
139
(11)
–
1
1,454
402
(249)
630
12,067
4,504
13,017
653
111
(348)
(249)
652
13,836
5,298
(i)
(ii)
(iii)
Following a review of PP&E classifications by management, opening balances have been reclassified to present certain distributed energy and power assets separately from power generation
assets. These assets are included in the relevant PP&E category that reflects their nature.
Included within plant, equipment and vehicles disposals/retirements are £106 million of gross assets in UK Home and £66 million in North America Business with a net book value of zero that
have been retired.
Includes £4 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
2017
£m
49
652
100
2016
£m
55
505
7
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
13. PROPERTY, PLANT AND EQUIPMENT
(c) Assets held under finance leases and to which title was restricted included in above carrying amounts
2016
2017
Cost at 1 January
Additions
Disposals
Cost at 31 December
Accumulated depreciation at 1 January
Charge for the year
Accumulated depreciation at
31 December
NBV at 31 December
Plant,
equipment
and vehicles
£m
80
53
(1)
132
9
14
Power
generation
£m
469
–
–
469
469
–
Gas
production
and storage
£m
415
–
–
415
398
1
23
109
469
–
399
16
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
Total
£m
964
53
(1)
1,016
876
15
891
125
Total
£m
932
32
–
964
868
8
876
88
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 the investment in Lake Acquisitions Limited, which owns the
existing EDF UK nuclear power station fleet.
(a) Interests in joint ventures and associates
1 January
Additions
Disposals
Share of profits for the year
Share of other comprehensive income
Transfer to held for sale
Impairment (ii)
Dividends (iii)
Exchange adjustments
31 December
2017
Investments in
joint ventures
and associates
(i)
£m
1,697
6
(4)
23
43
–
(4)
(60)
(2)
1,699
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
Total
£m
1,839
17
(20)
102
56
(168)
(3)
(129)
3
1,697
(i)
(ii)
(iii)
There are no shareholder loans remaining as at 31 December 2017.
Including impairment of shareholder loans of £1 million, subsequently disposed.
Included within dividends is a non-cash £2 million (2016: £12 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
Share of net assets of joint ventures and associates
Shareholder loans
Interests in joint ventures and associates
Associates
Nuclear
£m
3,678
692
4,370
(139)
(1,961)
(2,100)
(586)
1,684
–
1,684
2017
2016
Other
£m
11
9
20
(1)
(1)
(2)
(3)
15
–
15
Total
£m
3,689
701
4,390
(140)
(1,962)
(2,102)
(589)
1,699
–
1,699
Total
£m
3,687
641
4,328
(150)
(1,901)
(2,051)
(586)
1,691
6
1,697
Net cash included in share of net assets
84
–
84
78
Further information on the Group’s investments in joint ventures and associates is provided in notes 6 and S10.
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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 also arises 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 (iii)
Write-downs
Transfers
Transfers to disposal
groups held for sale (iv)
Exchange adjustments
31 December
Accumulated
amortisation
1 January
Amortisation (v)
Impairments
Disposals/retirements and
surrenders (iii)
Transfers to disposal
groups held for sale (iv)
Exchange adjustments
31 December
NBV at 31 December
Customer
relation-
ships and
brands
£m
Application
software
(i) (ii)
£m
Exploration
and
evaluation
expenditure
£m
EUAs
and
ROCs
£m
Goodwill
£m
Total
£m
Customer
relation-
ships and
brands
£m
Application
software
(i) (ii)
£m
Exploration
and
evaluation
expenditure
£m
EUAs
and
ROCs
£m
Goodwill
£m
Total
£m
2017
2016
804
1,581
311
425
3,321
6,442
683
1,380
299
485
2,778
5,625
–
2
(6)
–
–
230
16
(226)
–
–
–
(51)
749
(6)
(25)
1,570
813
–
(786)
–
–
–
(15)
323
41
42
(2)
(21)
–
–
154
1,084
214
–
–
–
(1,020)
(21)
–
(153)
(8)
324
(133)
(130)
3,212
(292)
(229)
6,178
496
65
–
695
197
–
2
–
–
159
–
–
707
–
–
2,059
262
–
–
48
(34)
–
–
–
107
804
387
73
–
196
13
(75)
–
–
–
67
1,581
524
195
14
(6)
(223)
(2)
–
–
(231)
(34)
(71)
–
(41)
514
235
(6)
(4)
659
911
–
–
–
323
(42)
–
117
207
(133)
(12)
562
2,650
(181)
(57)
1,852
4,326
–
70
496
308
–
33
695
886
629
19
(664)
–
–
–
28
311
2
–
–
–
–
–
2
309
11
–
–
(19)
(98)
–
250
(10)
–
–
836
330
(783)
(19)
(98)
–
46
425
(88)
391
3,321
(88)
639
6,442
159
–
–
729
–
–
1,801
268
14
–
–
(105)
–
–
159
266
(88)
66
707
2,614
(88)
169
2,059
4,383
Application software includes assets under construction with a cost of £250 million (2016: £229 million).
The remaining amortisation period of material application software assets, which had a carrying value of £206 million (2016: £223 million), is between six and eight years.
Included within disposals/retirements and surrenders are £226 million (2016: £86 million) of gross assets that have been retired and have a net book value of zero.
(i)
(ii)
(iii)
(iv) Transfers to disposal groups held for sale in 2017 are in respect of the Canadian exploration and production business and the Langage and Humber CCGT power stations. See note 12(d).
(v) Amortisation of £1 million (2016: £7 million) has been recognised in cost of sales before exceptional items and certain re-measurements, and £261 million (2016: £261 million) has been
recognised in operating costs before exceptional items.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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
31 December
CGUs
Centrica Consumer:
UK Home
AlertMe/Dyno-Rod
Ireland
North America Home
Connected Home
Centrica Business:
UK Business
North America Business
Distributed Energy &
Power
Bord Gáis Energy
Direct Energy/ATCO/
CPL/WTU/FCP/Bounce/Residential
Services Group/Clockwork/Astrum
Solar
AlertMe/FlowGem
Enron Direct/Electricity Direct
Direct Energy/ATCO/Strategic
Energy/FCP/HEM
ENER-G/Panoramic Power/REstore
Energy Marketing &
Trading
Neas Energy
Exploration & Production:
UK/Norway/Netherlands Newfield/Heimdal/Venture/Bayerngas
Carrying
amount of
indefinite-lived
intangible
assets (i)
£m
Carrying
amount of
goodwill
£m
2017
Carrying
amount of
goodwill
£m
Total
£m
Carrying
amount of
indefinite-lived
intangible
assets (i)
£m
63
16
57
120
–
16
63
15
1,029
31
14
–
1,043
31
1,105
31
181
524
169
150
–
–
–
–
181
181
524
565
169
119
150
145
57
–
16
–
–
–
–
–
2016
Total
£m
120
15
1,121
31
181
565
119
145
487
2,650
–
71
487
2,721
390
2,614
–
73
390
2,687
(i)
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.
Further details regarding assumptions used in the impairment tests of CGUs with goodwill or indefinite-lived intangible assets allocated to
them are provided in note S2. Sensitivities to these assumptions for goodwill allocated to the Exploration & Production CGU are provided
in note 7(c). The impairment tests for the Connected Home and Distributed Energy & Power CGUs did not result in any impairment. These
tests are dependent on these currently loss-making businesses becoming profitable in the future.
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Financial Statements | Notes to the Financial Statements
16. DEFERRED TAX ASSETS AND LIABILITIES
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 assets and liabilities recognised by the Group relate
to capital investments, decommissioning assets and provisions, tax losses, fair value movements on derivative financial
instruments, PRT and pensions.
1 January 2016
Credit/(charge) to income – change in
tax rates
(Charge)/credit to income – other
(Charge)/credit to equity
Acquisition/disposal of businesses
Transfer of deferred tax liabilities to
disposal groups held for sale
Exchange and other adjustments
31 December 2016
Credit/(charge) to income – change in
tax rates
Credit/(charge) to income – other
(Charge)/credit to equity
Acquisition/disposal of businesses
Transfer of deferred tax liabilities to
disposal groups held for sale
Exchange and other adjustments
31 December 2017
Accelerated tax
depreciation
(corporation
tax)
£m
(920)
Net
decomm-
issioning (i) (ii)
£m
779
Losses carried
forward (i) (iii)
£m
169
Other timing
differences (i)
£m
(123)
Marked to
market
positions
£m
442
Retirement
benefit
obligation and
other provisions
£m
(25)
Net deferred
PRT (iv)
£m
77
161
(345)
–
(6)
–
65
(1,045)
14
130
–
(150)
127
(7)
(931)
(68)
151
–
–
–
39
901
–
(57)
–
28
–
(8)
864
(25)
159
–
–
–
–
303
–
(235)
–
221
–
46
335
1
221
(1)
(15)
3
(126)
(40)
20
172
(1)
(7)
(97)
(38)
9
16
(630)
(3)
–
–
34
(141)
(37)
100
1
–
–
(3)
(80)
(41)
(21)
–
–
–
–
15
–
121
–
–
–
–
136
22
(77)
194
–
–
4
118
–
(18)
(38)
–
–
–
62
Total
£m
399
66
(542)
190
(21)
3
16
111
(3)
213
(38)
92
30
(10)
395
Balances restated to show net decommissioning and losses carried forward separately from other timing differences.
(i)
(ii) Net decommissioning includes deferred tax assets of £1,233 million (2016: £1,300 million) in respect of decommissioning provisions.
(iii) The losses arise principally from accelerated allowances for upstream investment expenditure, for which equivalent deferred tax liabilities are included under accelerated tax depreciation.
(iv) The deferred PRT amounts include the effect of deferred corporation tax as PRT is chargeable to corporation tax.
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
Offsetting deferred tax balances
Net deferred tax balances (after offsetting for financial reporting purposes)
Assets
£m
2,231
(1,663)
568
2017
Liabilities
£m
(1,836)
1,663
(173)
Assets
£m
1,725
(1,369)
356
2016
Liabilities
£m
(1,614)
1,369
(245)
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 £1,538 million (2016: £1,276 million),
of which £1,538 million (2016: £1,073 million) are carried forward tax losses available for utilisation against future taxable profits. Some
£98 million (2016: £313 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 (2016: nil). The
deferred tax liability arising on these temporary differences is estimated to be nil (2016: nil).
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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 provisions for bad debt. 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
2017
Non-current
£m
2,073
2,275
129
253
225
4,955
(599)
4,356
312
4,668
–
–
–
–
54
54
–
54
33
87
Current
£m
2,305
2,394
123
307
231
5,360
(697)
4,663
439
5,102
2016
Non-current
£m
–
–
–
–
41
41
–
41
25
66
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
2017
Non-current
£m
1,650
2,238
1,067
4,955
(599)
4,356
6
48
–
54
–
54
Current
£m
1,690
2,429
1,241
5,360
(697)
4,663
2016
Non-current
£m
8
32
1
41
–
41
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
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
2017
£m
3,370
939
47
4,356
2016
(restated) (i)
£m
3,616
1,005
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
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
2017
£m
475
144
619
67
136
117
939
2016
(restated) (i)
£m
461
206
667
113
142
83
1,005
(i)
The analysis of certain balances as at 31 December 2016 has been restated to reflect more accurately the underlying ageing of the trade and other receivables.
144 | Centrica plc Annual Report and Accounts 2017
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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
(395)
(102)
150
(347)
Business
customers
£m
(296)
(35)
83
(248)
Treasury,
trading
and energy
procurement
counterparties
£m
(6)
–
2
(4)
2017
Total
£m
(697)
(137)
235
(599)
Treasury,
trading
and energy
procurement
counterparties
£m
(3)
(3)
–
(6)
Business
customers
£m
(332)
(58)
94
(296)
Residential
customers
£m
(359)
(117)
81
(395)
2016
Total
£m
(694)
(178)
175
(697)
(i)
2016 includes £4 million reclassified to deferred income for related cancel/rebill activity.
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
2017
£m
191
151
67
409
2016
£m
190
175
7
372
The Group consumed £555 million of inventories (2016: £750 million) during the year. Write-downs amounting to £7 million (2016: £10
million) were charged to the Group Income Statement in the year. Gas held in storage amounting to £26 million is held at fair value.
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.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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
Foreign exchange derivatives
Energy 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
1,020
48
–
32
–
128
162
1,390
927
463
2017
Liabilities
£m
(868)
(70)
(28)
(32)
–
(6)
(16)
(1,020)
(733)
(287)
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)
(i)
Included within these categories are £266 million (2016: £291 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
2017
£m
(93)
123
153
(2)
(16)
(35)
130
Net gains/(losses) on derivative financial instruments due to
re-measurement
31 December
Financial assets and liabilities measured at fair value:
Derivative financial instruments – held for trading (proprietary trading)
Derivative financial instruments – held for trading
Energy contracts designated at fair value through profit or loss
Derivative financial instruments in hedge accounting relationships
Income
Statement
£m
2017
Equity
£m
Income
Statement
£m
29
173
(17)
(39)
146
–
–
–
1
1
(89)
1,040
(2)
25
974
2016
£m
(165)
(59)
296
(10)
(45)
2
19
2016
Equity
£m
–
–
–
185
185
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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
2017
Current
Non-current
£m
£m
Current
(restated) (i)
£m
2016
Non-current
£m
(607)
(359)
(175)
(393)
(1,776)
(378)
(858)
(3,012)
(4,546)
(694)
(172)
(5,412)
–
–
(110)
(14)
–
–
–
–
(124)
(17)
(26)
(167)
(468)
(534)
(142)
(399)
(1,778)
(407)
(898)
(3,083)
(4,626)
(673)
(226)
(5,525)
–
–
–
(40)
–
–
–
–
(40)
(18)
(11)
(69)
(i)
Following a review of the classification of trade and other payables, 2016 comparatives have been re-presented to show certain trade payables amounting to £231 million as commodity
accruals.
Financial liabilities within current trade and other payables
31 December
Less than 90 days
90 to 182 days
183 to 365 days
2017
£m
(4,304)
(139)
(103)
(4,546)
2016
£m
(4,402)
(123)
(101)
(4,626)
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
Restructuring costs
Decommissioning costs (ii)
Sale/purchase contract loss provision (iii)
Other (iv)
Non-current
Restructuring costs
Decommissioning costs (ii)
Sale/purchase contract loss provision (iii)
Other (iv)
1 January
2017
£m
(87)
(226)
(63)
(81)
(457)
Acquisitions
and
disposals
£m
–
(1)
–
–
(1)
1 January
2017
£m
(21)
(2,920)
(97)
(61)
(3,099)
Acquisitions
and
disposals
£m
–
(144)
–
(9)
(153)
Charged in
the year
£m
(70)
–
(8)
(27)
(105)
Charged in
the year
£m
(1)
(33)
(6)
(8)
(48)
Notional
interest
£m
–
–
–
–
–
Unused and
reversed in
the year
£m
34
–
5
44
83
Notional
interest
£m
–
(40)
–
(1)
(41)
Unused and
reversed in
the year
£m
5
130
1
–
136
Utilised
£m
56
117
44
44
261
Revisions
and
additions
£m
–
(87)
–
(4)
(91)
Transfers
(i)
£m
37
(51)
(24)
(7)
(45)
Exchange
adjustments
£m
1
(1)
2
(2)
–
31 December
2017
£m
(29)
(162)
(44)
(29)
(264)
Transfers
(i)
£m
8
544
24
7
583
Exchange
adjustments
£m
–
27
1
1
29
31 December
2017
£m
(9)
(2,523)
(77)
(75)
(2,684)
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
21. PROVISIONS FOR OTHER LIABILITIES AND CHARGES
Included within the above liabilities are the following financial liabilities:
Financial liabilities
31 December
Restructuring costs
Provisions other than restructuring costs
Current
£m
(29)
(70)
(99)
2017
Non-current
£m
(9)
(141)
(150)
Current
£m
(87)
(142)
(229)
2016
Non-current
£m
(18)
(148)
(166)
Includes transfers to/from other balance sheet accounts including retirement benefit obligations and liabilities of disposal groups classified as held for sale.
(i)
(ii) 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 2040.
(iii) 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.
(iv) Other provisions have been made for dilapidations, insurance, legal and various other claims.
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
Defined contribution pension
UK
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
2017
3,425
3,605
2,933
7
1,413
14,447
139
Total
membership
as at
31 December
2017
8,592
5,372
8,664
10,566
4,133
21,696
175
Defined contribution pension
Defined benefit final salary pension
Post-retirement benefits
Open to new members
Republic
of Ireland
193
241
Closed to new members in 2004 Canada
Closed to new members in 2012 Canada
8
12
377
260
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, the Bord
Gáis Energy Company Defined Benefit Pension Scheme at 1 January 2017 and the Direct Energy Marketing Limited Pension Plan at 1
August 2014. These have been updated to 31 December 2017 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.
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Financial Statements | 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 (which were updated in 2017) 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 long-term
target return of 4% per annum in nominal terms, subject to a maximum level of modelled downside risk exposure.
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
Prices Index (RPI) and the Consumer Prices 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 CPS career average and CPP schemes was implemented. Both the 2011 and 2016 changes result in a reduction in salary risk.
Foreign exchange
Certain 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 policies 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 2017.
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
2017
%
28
6
7
30
29
100
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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
2017
%
2016
%
1.7
2.3
3.1
2.0
3.1
2.6
1.7
3.2
3.2
2.1
3.2
2.7
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
23.0
24.5
2017
Female
Years
24.6
26.1
Male
Years
23.2
25.0
2016
Female
Years
24.9
26.8
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.
Marginal adjustments to the assumptions used to calculate the pension liability, or significant swings in bond yields or stock markets, can
have a large impact in absolute terms on the net assets of the Group. 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
2017
Indicative effect
on scheme
liabilities
%
+/–0
+/–5
–/+6
+/–5
+/–3
Increase/
decrease in
assumption
0.25%
0.25%
0.25%
0.25%
1 year
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
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 liability presented in the Group Balance Sheet as:
Retirement benefit obligations
2017
£m
8,451
(9,337)
(886)
2016
£m
7,938
(9,075)
(1,137)
(886)
(1,137)
The Trust Deed and Rules for the Registered Pension Schemes provide the Group with a right to a refund of surplus assets assuming the
full settlement of scheme liabilities. No asset ceiling restrictions have been applied in the consolidated Financial Statements.
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Financial Statements | Notes to the Financial Statements
22. POST-RETIREMENT BENEFITS
(e) Movements 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 (cost)/credit (ii)
Interest (expense)/income
Items included in the Group Statement of Comprehensive Income:
Returns on plan assets, excluding interest income
Actuarial gain from changes to demographic assumptions
Actuarial loss from changes in financial assumptions
Actuarial (loss)/gain 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 of businesses (iii)
Settlement
Transfers from provisions for other liabilities and charges
31 December
Pension
liabilities
£m
(9,075)
2017
Pension
assets
£m
7,938
Pension
liabilities
£m
(6,761)
2016
Pension
assets
£m
6,642
(125)
(31)
(156)
(7)
(245)
–
70
(120)
(37)
1
–
–
(2)
287
(8)
–
(45)
(9,337)
–
(118)
–
–
–
215
309
–
–
–
–
236
31
2
(287)
7
–
–
8,451
(23)
(141)
80
(265)
–
93
(2,361)
100
(13)
–
–
(1)
202
–
9
(17)
(9,075)
–
–
–
–
258
994
–
–
–
6
225
23
1
(202)
–
(9)
–
7,938
(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.
(ii) A £7 million charge was recognised in the year as a result of the curtailment for certain employees within the Registered Pension Schemes upon the combination of the Group’s Exploration &
Production business with Bayerngas Norge. See note 12(a).
(iii) As part of the combination of the Group’s Exploration & Production business with Bayerngas Norge, a Norwegian defined benefit pension scheme was acquired. The scheme is expected to
close to future accrual during 2018.
In addition to current service cost on the Group’s defined benefit pension schemes, the Group also charged £45 million (2016: £44 million)
to operating profit in respect of defined contribution pension schemes. This included contributions of £13 million (2016: £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
2,121
–
1,303
280
1,663
–
4
5,371
Unquoted
£m
303
–
–
1,451
952
374
–
3,080
2017
Total
£m
2,424
–
1,303
1,731
2,615
374
4
8,451
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
Included within equities are no ordinary shares of Centrica plc (2016: £1 million) via pooled funds that include a benchmark allocation to
UK equities. Included within corporate bonds are £1 million (2016: £1 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 £94 million (2016: £85 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, £63 million
(2016: £62 million) relate to this scheme. More information on the Centrica Unfunded Pension Scheme is included in the Remuneration
Report on pages 78 to 89.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
22. POST-RETIREMENT BENEFITS
(g) Pension scheme contributions
The Group estimates that it will pay £89 million of ordinary employer contributions during 2018, at an average rate of 23% of pensionable
pay, together with £32 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.
During 2016, 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 committed to additional annual cash contributions of £76 million for 14 years
to fund the pension deficit which, on a Technical Provisions basis, had 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 is provided through a new asset-backed
contribution arrangement with the annual contributions commencing in 2017. The existing asset-backed contribution arrangements,
£55 million in 2017, £22 million per annum in 2018-2022 and £5 million per annum in 2023-2026 into the schemes, 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, was agreed in support of these arrangements.
Although the Group established a new funding arrangement during 2016 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 next
UK Registered Pension Schemes triennial review will be based on the position as at 31 March 2018. 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
2017 with further annual contributions of £1 million to be paid in 2018 and 2019.
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 £3.8 billion (included in
‘LNG capacity’ below) between 2019 and 2039. The Group may also make up to £8.0 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.
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Financial Statements | Notes to the Financial Statements
23. COMMITMENTS AND CONTINGENCIES
31 December
Commitments in relation to the acquisition of property, plant and equipment:
Development of Danish Hejre gas and oil field
Development of Norwegian Oda gas and oil field
Development of Norwegian Maria gas and oil field
Other Exploration & Production capital expenditure
Development of King’s Lynn A CCGT
Other capital expenditure
Commitments in relation to the acquisition of intangible assets:
Renewable obligation certificates to be purchased from joint ventures (ii)
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
Other long-term commitments
Operating lease commitments:
Future minimum lease payments under non-cancellable operating leases
2017
£m
219
55
31
162
50
29
–
4,261
372
42,324
4,401
997
119
152
145
23
138
2016
(restated) (i)
£m
–
79
61
107
6
51
700
3,405
299
47,836
4,469
983
111
196
149
68
178
388
381
(i)
(ii)
Commitments as at 31 December 2016 have been re-presented to be consistent with current year disclosures. In addition, £101 million of other long-term commitments have been restated
to commodity purchase contracts to reflect more accurately the underlying nature of these commitments.
Following the disposal of Lincs Wind Farm Limited, the Group no longer purchases renewable obligation certificates from its joint ventures. See note 12(d).
At 31 December the maturity analyses for commodity purchase contract commitments and the total minimum lease payments under non-
cancellable operating leases were:
Total minimum lease payments
under non-cancellable operating
leases
2016
2017
31 December
<1 year
1–2 years
2–3 years
3–4 years
4–5 years
>5 years
2017
Commodity purchase contract
commitments
2016
(restated) (i)
£billion
11.5
6.6
4.6
4.2
3.8
17.1
47.8
£billion
11.2
6.0
4.4
3.7
3.6
13.4
42.3
£m
120
77
46
38
30
77
388
(i) Other long-term commitments of £101 million have been restated to commodity purchase contracts to reflect more accurately the underlying nature of these commitments.
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)
2017
£m
90
73
£m
91
78
49
38
31
94
381
2016
£m
100
68
(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 (2016: nil). Payments made for physical
power are charged to the Group Income Statement as incurred and disclosed as contingent rents.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
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 securities in respect of decommissioning liabilities associated with field developments owned, or
partly owned by Spirit Energy and its subsidiaries. These securities are provided to fellow partners and previous owners of these fields,
who may be liable for Spirit Energy’s share of the decommissioning costs, in the event of default by the Group. The most significant
securities relate to the Morecambe and Statfjord fields. As at 31 December 2017, £694 million of letters of credit and on demand
payment bonds have been issued in respect of decommissioning obligations included in the Group Balance Sheet.
As additional assets are developed or acquired, additional securities may be provided.
(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 net debt and equity as shown in the table below:
31 December
Net debt
Equity
Capital
2017
£m
2,596
2,699
5,295
2016
£m
3,473
2,666
6,139
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.
The level of debt that can be raised by the Group is restricted by the Company’s Articles of Association. Borrowings is limited to the higher
of £10 billion and a gearing ratio of three times adjusted capital and reserves. The Group funds its long-term debt requirements through
issuing bonds in the capital markets and taking bank debt. Short-term debt requirements are met primarily through issuance of
commercial paper. The Group maintains substantial committed facilities and uses these to provide liquidity for general corporate
purposes, including short-term business requirements and back-up for commercial paper.
British Gas Insurance Limited (BGIL) is required under PRA regulations to hold a minimum capital amount and has complied with this
requirement in 2017 (and 2016). BGIL’s capital management policy and plan is subject to review and approval by BGIL’s board. Reporting
processes provide relevant and timely capital information to management and the board. A medium-term capital management plan forms
a part of BGIL’s planning and forecasting process, embedded into approved timelines, management reviews and board approvals.
In the period from 2015-2017, the Group has reduced its overall levels of net debt, in accordance with its strategic objectives and financial
framework. This has resulted in an increase in overall levels of cash held. The Group regularly reviews its cash and gross debt positions
and considers opportunities for early retirement of debt in order to maintain a more efficient balance sheet.
(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 2017, the Group had undrawn committed credit facilities of £3,530 million (2016: £4,497 million) and £2,664 million
(2016: £1,881 million) of unrestricted cash and cash equivalents. 238% (2016: 186%) 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 10.8 years (2016: 11.6 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 the movement in cash posted or received as collateral.
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Financial Statements | Notes to the Financial Statements
24. SOURCES OF FINANCE
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 Governance section –
Other Statutory Information, on page 100.
(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.
Presented in the derivatives and current and non-current borrowings, finance leases and interest accruals, net of related deposits
columns shown below are the assets and liabilities that give rise to financing cash flows.
Cash and
cash equivalents,
net of bank
overdrafts
(restated) (i) (ii) (iii)
£m
860
28
Cash posted/
(received) as
collateral (iv)
£m
535
–
Current and
non-current
securities (v)
£m
244
(28)
(50)
(427)
1,700
–
(204)
–
–
–
53
1,960
(2)
(45)
(226)
1,393
–
(318)
–
–
–
(25)
2,737
–
–
(177)
–
–
–
32
–
106
496
–
–
–
(136)
–
–
–
–
–
(24)
336
–
–
–
8
–
–
–
–
8
232
2
–
–
–
4
–
–
–
–
(2)
236
Current and
non-current
borrowings,
finance leases
and interest
accruals,
net of related
deposits
(restated) (i)
£m
(6,468)
–
50
427
–
(25)
343
(351)
(6)
(32)
(390)
(6,452)
–
45
226
–
36
322
(328)
(66)
(53)
99
(6,171)
Derivatives
(restated) (i)
£m
82
–
Net debt
(restated) (i)
£m
(4,747)
–
–
–
–
199
10
–
–
–
–
291
–
–
–
–
23
(48)
–
–
–
–
266
–
–
1,523
182
149
(351)
26
(32)
(223)
(3,473)
–
–
–
1,257
63
(44)
(328)
(66)
(53)
48
(2,596)
1 January 2016
Net cash inflow from sale of securities (vi)
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 (vii)
Revaluation
Financing interest paid
Increase in interest payable and amortisation of
borrowings
Acquisition of businesses
New finance lease agreements
Exchange adjustments
31 December 2016
Net cash outflow from purchase of securities
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 (vii)
Revaluation
Financing interest paid
Increase in interest payable and amortisation of
borrowings
Acquisition of businesses
New finance lease agreements
Exchange adjustments
31 December 2017
(i)
Comparatives have been re-presented to be consistent with the current year presentation where the cash flow related to financing interest has been separately disclosed in accordance with
the amendment to IAS 7: ‘Statement of cash flows’, which has been adopted this year.
(ii) Cash and cash equivalents includes £200 million (2016: £155 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. This includes cash totalling £65 million (2016: nil) within the Spirit Energy business that is not restricted by regulation but is managed by its own treasury
department.
(iii) Cash and cash equivalents are net of £127 million bank overdrafts (2016: £76 million). This is offset by a corresponding gross up in current borrowings.
(iv) 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 as at 31 December 2017, £29 million (2016:
£21 million) is included within trade and other payables, £253 million (2016: £307 million) within trade and other receivables, and £112 million (2016: £210 million) has been settled 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.
(v) Securities balances include £128 million (2016: £130 million) of index-linked gilts which the Group uses for short-term liquidity management purposes and £108 million (2016: £102 million) of
available-for-sale financial assets. The Group has posted £29 million (2016: £29 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).
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).
(vi)
(vii)
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements (continued)
24. SOURCES OF FINANCE
(d) Borrowings, finance leases and interest accruals summary
31 December
Bank overdrafts
Bank loans (> 5 year maturity)
Bonds (by maturity date):
14 April 2017
19 September 2018 (i)
1 February 2019
25 September 2020
22 February 2022
10 March 2022 (i)
16 October 2023 (i)
4 September 2026 (i)
16 April 2027
13 March 2029 (i)
5 January 2032 (ii)
19 September 2033
16 October 2043
12 September 2044
25 September 2045
10 April 2075 (i) (iii)
10 April 2076 (iv)
Obligations under finance leases (v)
Interest accruals
Coupon rate
%
Principal
m
Current
£m
(127)
–
Non-current
£m
–
(138)
2017
Total
£m
(127)
(138)
Current
£m
(76)
–
Non-current
£m
–
(148)
7.000
3.213
Floating
Floating US$200
£400
€100
US$80
3.680 HK$450
6.375
£500
4.000 US$750
£200
6.400
US$70
5.900
£750
4.375
€50
Zero
7.000
£770
5.375 US$600
£550
4.250
US$50
5.250
£450
5.250
€750
3.000
–
(411)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(411)
(49)
(120)
(707)
–
–
(89)
(59)
(43)
(531)
(563)
(225)
(51)
(751)
(57)
(763)
(437)
(537)
(36)
(455)
(664)
(5,261)
(192)
–
(5,591)
–
(411)
(89)
(59)
(43)
(531)
(563)
(225)
(51)
(751)
(57)
(763)
(437)
(537)
(36)
(455)
(664)
(5,672)
(241)
(120)
(6,298)
(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)
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)
Bonds or portions of bonds maturing in 2018, 2022, 2023, 2026, 2029 and 2075 have been designated in a fair value hedge relationship.
€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) The Group has the right to repay at par on 10 April 2025 and every interest payment date thereafter.
(iv) The Group has the right to repay at par on 10 April 2021 and every interest payment date thereafter.
(v) Contingent rents paid under finance lease obligations during the year were £39 million (2016: £37 million).
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
5,642,344,165 ordinary shares of 614/81 pence each (2016: 5,539,363,372)
2017
£m
348
2016
£m
342
During the year 103 million new ordinary shares were issued at an average price of 191.9 pence for the scrip dividends, total value of
£198 million.
The closing price of one Centrica ordinary share on 31 December 2017 was 137.3 pence (2016: 234.1 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
2017
million
shares
9.0
5.7
1.2
(10.6)
5.3
2016
million
shares
6.0
6.8
1.4
(5.2)
9.0
Treasury shares
2017
million
shares
50.8
–
(1.2)
(7.5)
42.1
2016
million
shares
58.7
–
(1.4)
(6.5)
50.8
(i)
The closing balance in the treasury and own share reserve of own shares was £12 million (2016: £23 million) and treasury shares was £130 million (2016: £157 million).
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Financial Statements | Notes to the Financial Statements
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 2017 and the date of this report.
Centrica Storage
On 15 January 2018, Centrica Storage was granted consent from the Oil and Gas Authority to produce indigenous gas and associated
liquids from Rough, confirming transition from a storage operation into one of production on 17 January 2018.
Dividends
The Directors propose a final dividend of 8.40 pence per ordinary share (totalling £470 million) for the year ended 31 December 2017. The
dividend will be submitted for formal approval at the Annual General Meeting to be held on 14 May 2018 and, subject to approval, will be
paid on 28 June 2018 to those shareholders registered on 11 May 2018.
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Financial Statements | Notes to the Financial Statements
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 (the ‘Company’) is a public company limited by shares, domiciled and incorporated in the UK, and registered in England and
Wales. The address of the registered office is Millstream, Maidenhead Road, Windsor, Berkshire, SL4 5GD. The Company, together with
its subsidiaries comprise the ‘Group’. The nature of the Group’s operations and principal activities are set out in note 4(a) and on pages 2
to 62.
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 (known as unread revenue).
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.
Wholesale energy: revenue in the North America Business segment is presented on a gross basis, reflecting revenue arising from the re-
trading of energy in addition to physical supply.
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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Financial Statements | Notes to the Financial Statements
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.
Financing costs
Financing 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. Financing 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 (2017: 4.55%, 2016: 4.53%). Financing costs
not arising in connection with the acquisition, construction or production of a qualifying asset are expensed.
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.
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 and derivatives 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
2017
1.35
1.70
1.13
11.09
8.39
2016
1.23
1.66
1.17
10.66
8.72
Average rate for the year ended
31 December
2016
1.35
1.79
1.23
11.37
8.58
2017
1.30
1.69
1.15
10.71
8.52
(i)
In 2016, the average rate for the Danish krone is measured over the three month period ended 31 December, being the period of ownership of Neas Energy in that period.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
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 78 to 89, 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 the following schemes. More information is included in the Remuneration
Report on pages 78 to 89.
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.
Annual Incentive Plan (AIP):
● Applicable employees: Senior Executive Group.
● Replaces the previous Annual Incentive Scheme (AIS), Deferred and Matching Share Scheme (DMSS) and Long Term Incentive Scheme
(LTIS).
● Designed to incentivise and reward the achievement of demanding financial and individual strategically aligned performance obligations.
● Half of the award is paid in cash. The other half is paid in shares which vest immediately but are deferred in trust, two thirds of which are
released after three years and the remaining third after four years.
● Dividends payable during restricted periods.
● If performance is not deemed satisfactory, an individual’s payment may be reduced or forfeited.
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Financial Statements | Notes to the Financial Statements S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Sharesave:
● Applicable employees: All UK and Ireland employees.
● Options granted with a fixed exercise price equal to 80% of the average market price of the shares for three days prior to invitation
which is three to four weeks prior to the grant date.
● Employees pay a monthly fixed amount into a savings account and may elect to save over three or five years. At the end of the savings
period, employees have six months to exercise their options or withdraw the saved funds.
For each of the schemes, the fair value is measured using the market value on the date of the grant.
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.
Acquisitions of joint operations that meet the definition of a business as defined in IFRS 3 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 lives 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:
Customer relationships and other contractual assets
Strategic identifiable acquired brands
Application software
Up to 20 years
Indefinite
Up to 15 years
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
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 compared annually 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, which are generally investments in which the Group 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. Adjustments are made to the results and net assets of the joint ventures and associates where necessary to ensure
consistency with the accounting 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.
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 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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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 generation assets
Gas storage assets (i)
Up to 50 years
Five to 20 years
Three to 10 years
Up to 30 years
Up to 40 years
(i)
The depreciation policy for the Group’s UK Storage assets has remained unchanged during 2017. However, following the granting of consent from the Oil and Gas Authority confirming
transition from a storage operation into one of production on 17 January 2018, this policy will change to be consistent with the unit of production method used by production assets in 2018.
Assets held under finance leases are depreciated over their expected useful 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 for five years (except for
Central Power Generation CCGTs). 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:
2017
Growth rate to perpetuity
Pre-tax discount rate
UK Home
%
2.6
7.3
UK Business
%
2.6
7.3
2016
Growth rate to perpetuity
Pre-tax discount rate
UK Home
%
1.9
7.4
UK Business
%
1.9
7.4
North America
Home
(i) (ii)
%
2.1/2.0
7.9/7.5
North America
Business
(i) (ii)
%
2.1/2.0
7.9/7.5
Connected
Home
(ii) (iii)
%
2.1/2.6
10.4/9.5
Distributed
Energy & Power
(ii) (iii)
%
2.1/2.6
10.4/9.5
Energy
Marketing &
Trading
%
2.6
9.0
North America
Home
(i)
%
2.2/2.1
7.9/7.5
North America
Business
(i)
%
2.2/2.1
7.9/7.5
Connected
Home
(iii)
%
2.2/1.9
10.5/9.6
Distributed
Energy & Power
(iii)
%
2.2/1.9
10.5/9.6
Energy Marketing
& Trading
%
1.9
9.6
Ireland
%
1.3
7.2
Ireland
%
1.5
7.2
(i)
(ii)
US/Canada respectively.
The US discount rates used for impairment testing purposes were calculated prior to the reduction in US federal tax rates. The reduction in tax rates would not have changed the impairment
conclusions.
(iii) US/UK respectively.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(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 2.6% (2016: 2.0%); Canada 2.0% (2016:
2.1%); Republic of Ireland 1.5% (2016: 1.5%); and the US 2.3% (2016: 2.2%).
(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:
Gross margin
CGU
UK Home Existing customers: based on
contractual terms.
Losses are forecast based on historic data
and future expectations of the market.
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 cost of goods inflation.
For the Services business, future sales
and related gross margins are based on
planned future product sales and contract
losses based upon past performance
and future expectations of the
competitive environment.
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 cost of goods inflation.
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.
UK
Business
Ireland
North
America
Home
Revenues
Existing customers: based on
contractual terms.
Losses are forecast based on historic data
and future expectations of the market.
Adjusted for: growth forecasts which are
based on sales and marketing activity,
recent customer acquisitions and the
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.
Market share: percentage immediately
prior to business plan.
Adjusted for: growth forecasts which are
based on sales, marketing activity, recent
customer acquisitions and the current
economic environment in the UK.
Gas and electricity revenues based on
forward market prices.
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 UK environment.
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.
North
America
Business
Existing customers: based on
contractual terms.
New customers and renewals: based on
gross margins achieved historically.
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.
Wages: projected headcount in line with
expected activity. Salary increases based on
forecast 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.
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S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
CGU
Connected
Home
Gross margin
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.
Distributed
Energy &
Power
Energy
Marketing &
Trading
Central Power
Generation
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.
Based on forward commodity prices
and forecasts of maintenance, grid
connection and transportation costs,
and balancing system charges for the
station life.
Revenues
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.
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.
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.
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.
Based on forward commodity prices and
agreed contracted capacity rates for the
station life.
Based on latest Board approved forecasts for the
station life.
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,
loans and other borrowings 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 of finished goods are valued at the lower of cost or estimated net realisable value after allowance for redundant and slow-
moving items. The cost of inventories includes the purchase price plus costs of conversion incurred in bringing the inventories to their
present location and condition.
Inventory of gas in storage is valued either on a weighted average cost basis or at fair value less any costs to sell depending on the
business model for holding the inventory. Changes in fair value less costs to sell are recognised in the Group Income Statement.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 financing costs.
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.
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 within 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. See note 9 for further detail on uncertain tax provisions.
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.
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S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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.
(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 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.
Cash and cash equivalents are presented net of outstanding bank overdrafts where there is a legal right of set off and, for the Group’s cash
pooling arrangements, to the extent the Group expects to settle its subsidiaries’ year-end account balances on a net basis.
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 hedged items 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. They 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 year. 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 investment income or financing costs.
(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.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 52 to 62 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.
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 investment income and
financing costs. 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 cost 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 18 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.
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Financial Statements | Notes to the Financial Statements
S2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(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.
(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 52 to 62.
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. 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 energy procurement and supply activities, production, generation and trading operations 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 price exposed business activities
The Group’s price exposed business 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 primarily transacted with the intent of securing gas and
power for the Group’s supply customers, 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 business activities is driven by the cost of procuring gas and electricity to serve its supply
customers and selling gas, oil and electricity from its upstream production and generation, 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 supply 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 production and generation 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 business operations the Group uses a specific set of limits
(including VaR and PaR) established by the Board, and sub-delegated downwards through the delegation lines to the commercial leaders.
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 price exposed business portfolio. Only
certain of the Group’s energy contracts constitute financial instruments under IAS 39 (note S6).
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
S3. FINANCIAL RISK MANAGEMENT
As a result, while the Group manages the commodity price risk associated with both financial and non-financial energy procurement, sales and
purchase contracts, it is the notional value of energy contracts being carried at fair value that represents the exposure of the Group’s energy price
exposed business 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. Conversely,
energy contracts that are not financial instruments under IAS 39 are accounted for as executory contracts and changes in fair value do not
immediately impact profit, 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 supply 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 2017 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 items that are not financial instruments, such as 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, Danish krone in Denmark and euros in the Netherlands and the Republic of Ireland. 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,
production and generation 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 and 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 2017, there were no material
unhedged non-functional currency monetary assets or liabilities, firm commitments or probable forecast transactions (2016: 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, 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
managed by the Group Treasury function and monitored by the Chief Financial Officer.
(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 2017, assuming that a reasonably possible change in the relevant risk variable had occurred at 31 December 2017, 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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Financial Statements | Notes to the Financial Statements S3. FINANCIAL RISK MANAGEMENT
The sensitivity analysis has been prepared based on 31 December 2017 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 2017 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.
(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 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)
2017
Reasonably
possible
change in variable
(ii)
%
+/–11
+/–7
+/–18
+/–10
+/–4
+/–6
Base price (i)
48
45
8
62
28
32
2016
Reasonably
possible
change in variable
(ii)
%
+/–15
+/–14
+/–23
+/–14
+/–4
+/–6
2016
Impact on
profit (ii)
£m
82/(86)
117/(117)
Base price (i)
49
46
7
58
37
32
2017
Impact on
profit (ii)
£m
68/(72)
238/(238)
(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
based trading and bilateral transactions. This allows for a reasonable balance between counterparty credit risk and potential 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.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
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 (i)
2017
2016
Derivative financial
instruments with
positive fair values
£m
15
687
465
76
82
65
1,390
Receivables from
treasury, trading
and energy
procurement
counterparties
£m
78
379
279
228
59
44
1,067
Cash and cash
equivalents
£m
2,024
799
27
–
–
14
2,864
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
Cash and cash
equivalents
£m
1,118
878
37
3
–
–
2,036
(i)
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.
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Financial Statements | Notes to the Financial Statements
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 2017
Energy and interest derivatives in a loss position
that will be settled on a net basis
Gross energy procurement contracts and other derivative
buy trades 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, overdrafts and interest)
Finance leases: (ii)
Minimum lease payments
Capital elements of leases
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 other derivative
buy trades carried at fair value (i) (iii)
Foreign exchange derivatives that will be settled
on a gross basis:
Outflow
Inflow
Financial liabilities within provisions
Borrowings (bank loans, bonds, overdrafts and interest)
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
(183)
(56)
(46)
(3)
1
>5
years
£m
4
(4,160)
(2,953)
(2,585)
(2,183)
(1,940)
(5,875)
(3,020)
3,004
(99)
(817)
(60)
(49)
<1
year
£m
(143)
(572)
566
(39)
(350)
(64)
(56)
1 to 2
years
£m
(84)
(64)
57
(33)
(317)
(65)
(60)
2 to 3
years
£m
(27)
(564)
688
(23)
(923)
(54)
(52)
3 to 4
years
£m
(46)
43
(25)
(778)
(13)
(12)
4 to 5
years
£m
(19)
(3)
(63)
101
(34)
(6,153)
(12)
(12)
>5
years
£m
3
(5,370)
(3,281)
(2,821)
(2,665)
(2,271)
(7,728)
(6,205)
6,308
(229)
(534)
(52)
(39)
(1,086)
1,150
(50)
(694)
(53)
(43)
(191)
187
(25)
(353)
(54)
(47)
(684)
840
(22)
(328)
(56)
(53)
(928)
1,078
(22)
(913)
(46)
(45)
(113)
146
(58)
(7,123)
(6)
(6)
(i)
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.
(ii)
(iii) The maturity profile of gross energy procurement contracts and related derivatives carried at fair value for 2016 is restated to exclude the effect of proprietary energy trades.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
S4. OTHER EQUITY
This section summarises the Group’s other equity reserve movements.
1 January 2016
Revaluation of available-for-sale securities
Transfer of available-for-sale reserve to Group
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
Recycled to Group Income Statement on disposal
Exchange adjustments
31 December 2016
Revaluation of available-for-sale securities
Actuarial gain
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
of joint ventures and associates, net of taxation
Taxation on above items
Acquisition of business
Recycled to Group Income Statement on disposal
(note 12)
Exchange adjustments
31 December 2017
Cash
flow
hedging
reserve
(restated) (i)
£m
(13)
–
Foreign
currency
translation
reserve
£m
(562)
–
Actuarial
gains and
losses
reserve
£m
(592)
–
–
(1,174)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
513
(49)
–
–
65
194
–
(7)
(1,514)
–
222
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
43
(38)
–
8
(131)
(172)
–
1
(1,286)
Available-
for-sale
reserve
(AFS)
£m
23
9
Treasury
and own
shares
reserve
£m
(198)
–
Share-
based
payments
reserve
£m
93
–
Merger,
capital
redemption
and other
reserves
£m
493
–
(5)
–
–
–
–
–
–
–
–
(1)
–
–
26
6
–
–
–
–
–
–
–
–
(1)
–
–
–
31
–
–
(17)
35
–
–
–
–
–
–
–
–
(180)
–
–
(11)
49
–
–
–
–
–
–
–
–
–
–
(32)
46
–
–
–
–
–
–
–
107
–
–
–
(54)
47
–
–
–
–
–
–
–
–
(142)
–
–
100
–
–
–
–
–
–
–
–
–
–
–
–
493
–
–
–
–
–
–
–
–
–
–
24
–
–
517
Total
(restated) (i)
£m
(756)
9
(5)
(1,174)
(17)
3
46
161
(129)
(4)
56
190
5
506
(1,109)
6
222
(11)
(5)
47
24
(34)
(7)
43
(38)
24
18
(130)
(950)
–
–
–
–
–
161
(129)
(4)
(9)
(3)
5
–
8
–
–
–
–
–
24
(34)
(7)
–
1
–
10
–
2
(i)
Prior year comparatives have been restated to separately show amounts recycled to Group Income Statement on disposal.
Merger, capital redemption and other reserves
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.
On 8 December 2017, the Group’s existing Exploration & Production business was combined with that of Bayerngas Norge AS to form
the Spirit Energy business. The Group acquired 69% of the Spirit Energy business and Bayerngas Norge’s former shareholders acquired
31%. The non-controlling interest established on acquisition has been based on its share of the carrying value of the combined business,
with the other reserve representing the difference between the fair value and this carrying value. See note 12(a).
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Financial Statements | Notes to the Financial Statements
S4. OTHER EQUITY
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 2017 the cumulative nominal value of shares
repurchased and subsequently cancelled was £26 million (2016: £26 million).
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
128
162
2017
Liabilities
£m
(6)
(16)
Assets
£m
158
151
2016
Liabilities
£m
(5)
(3)
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 2017 and 31 December 2016 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; 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.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
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
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 (i)
£m
Level 2
£m
Level 3
£m
2017
Total
£m
1,068
128
194
128
74
34
1,626
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
56
–
–
–
–
3
59
(33)
–
–
(33)
(938)
(34)
(48)
(1,020)
(20)
–
–
(20)
(1,369)
(36)
(105)
(1,510)
(63)
–
–
(63)
(1,452)
(36)
(105)
(1,593)
(2)
–
–
128
74
31
231
(60)
–
–
(60)
1,014
128
194
–
–
–
1,336
(845)
(34)
(48)
(927)
(i)
Included within Level 1 energy derivative assets are liabilities of £6 million, which are presented within derivative assets on the Group Balance Sheet, as a result of being netted off the
associated Level 2 trades with the same commodity/instrument type.
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Financial Statements | Notes to the Financial Statements
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
31 December
Total gains/(losses) for the year for Level 3 financial instruments
held at the end of the reporting year (iii)
Financial
assets
£m
2017
Financial
liabilities
£m
Financial
assets
£m
2016
Financial
liabilities
£m
44
1
18
(3)
(1)
59
19
(63)
9
(9)
30
–
(33)
(15)
(35)
(114)
69
6
4
–
44
89
60
(2)
–
(7)
(63)
(4)
(i)
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 beginning of
2016, as a result of being netted off the associated Level 2 trades with the same counterparty.
Transfers between levels are deemed to occur at the beginning of the reporting period.
(ii)
(iii) £19 million gains (2016: £89 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
(2016: nil) were recognised in other comprehensive income. £15 million losses (2016: £4 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 (2016: 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, with the resulting market value discounted
back to present value using observable yield curves.
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 2017 was 1% (2016: 1%) (Europe) and 3% (2016: 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% (2016: 1%) (UK) and 3% (2016: 7%) (US) per annum for 2017.
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, subject to adjustments to ensure they are compliant
with IFRS 13: ‘Fair value measurement’. 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.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
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
(138)
(5,573)
(99)
(241)
Fair value
£m
(203)
(6,311)
(126)
(250)
2017
Fair value
hierarchy
Level 2
Level 1
Level 2
Level 2
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
Financial liabilities
The fair values of bonds classified as Level 1 within the fair value hierarchy are calculated using 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 2017
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 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
Gross amounts
of recognised
financial instruments
£m
8,656
(8,286)
Gross amounts of
recognised financial
instruments offset
in the Group
Balance Sheet
£m
(7,266)
7,266
Net amounts
presented
in the Group
Balance Sheet
£m
1,390
(1,020)
370
Related amounts not offset in
the Group Balance Sheet (i)
Financial
instruments
£m
(234)
234
Collateral
£m
(29)
282
6,028
(5,529)
2,880
(281)
236
(3,753)
3,753
2,275
(1,776)
(16)
16
–
2,864
(265)
236
(92)
92
(127)
127
–
–
–
–
–
(29)
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
Related amounts not offset in the
Group Balance Sheet (i)
Financial
instruments
£m
(513)
513
Collateral
£m
(21)
336
5,452
(4,605)
2,063
(251)
232
(3,058)
3,058
(27)
27
–
2,394
(1,547)
2,036
(224)
232
(80)
80
(76)
76
–
–
–
–
–
(29)
Net amount
£m
1,127
(504)
623
2,183
(1,684)
2,737
(138)
207
Net amount
£m
1,339
(744)
595
2,314
(1,467)
1,960
(148)
203
(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.
178 | Centrica plc Annual Report and Accounts 2017
178 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Notes to the Financial Statements
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 North
America Home.
FFS contracts in North America are entered into with home and business services customers. Insurance contracts in North America are
entered into with home 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 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 the 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 the Group 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 £44 million (2016: £48 million) and £389 million (2016: £391
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 (2016: nil).
Total revenue
Expenses relating to FFS and insurance contracts
Deferred income
Accrued income
2017
£m
974
(992)
(88)
31
2016
£m
1,177
(1,013)
(97)
29
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 Financials_Back-End.indd 179
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Centrica plc Annual Report and Accounts 2017 | 179
Centrica plc Annual Report and Accounts 2017 | 179
Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
S8. RELATED PARTY TRANSACTIONS
The Group’s principal related party is its investment in Lake Acquisitions Limited, which owns the existing EDF UK nuclear fleet.
The disclosures below, including comparatives, only refer to related parties that were related in the current reporting period.
During the year, the Group entered into the following arm’s length transactions with related parties who are not members of the Group,
and had the following associated balances:
Joint ventures:
Wind farms (i)
Associates:
Nuclear
Other
Sale
of goods
and services
£m
Purchase
of goods
and services
£m
Amounts
owed from
£m
2017
Amounts
owed to
£m
Sale
of goods
and services
£m
Purchase
of goods
and services
£m
Amounts
owed from (i)
£m
2016
Amounts
owed to
£m
1
–
–
1
(10)
(527)
–
(537)
–
–
–
–
–
(40)
–
(40)
7
–
4
11
(80)
120
(43)
(617)
(5)
(702)
–
–
120
(57)
–
(100)
(i)
Disposed on 17 February 2017. See note 12(d) for further details. Transactions have only been included above up to this disposal date.
During the year, there were no material changes to commitments in relation to joint ventures and associates. During the year a provision
against a receivable from one of the Group’s joint ventures was charged to the Group Income Statement amounting to £1 million. No
other provision for bad or doubtful debts relating to amounts owed from related parties was recognised during the year through the Group
Income Statement (2016: nil). The balance of the provision at 31 December 2017 was nil (2016: nil).
At the balance sheet date, the Group committed facilities to the Lake Acquisition Group totalling £120 million, although nothing has been
drawn at 31 December 2017.
Key management personnel comprise members of the Board and Executive Committee, a total of 18 individuals at 31 December 2017
(2016: 18).
Remuneration of key management personnel
Year ended 31 December
Short-term benefits
Post-employment benefits
Share-based payments
Remuneration of the Directors of Centrica plc
Year ended 31 December
Total emoluments (i)
Amounts receivable under long-term incentive schemes
Contributions into pension schemes
2017
£m
9.8
1.3
4.8
15.9
2017
£m
4.0
1.9
0.8
2016
£m
15.8
1.1
7.8
24.7
2016
(restated)
£m
9.7
–
0.8
(i)
These emoluments were paid for services performed on behalf of the Group. No emoluments related specifically to services performed for the Company. 2016 comparatives have been
restated. Further detail is provided in the Remuneration Report on pages 78 to 89.
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
All other services
Fees in respect of pension scheme audits (ii)
(i)
(ii)
Including £0.3 million (2016: £0.3 million) for the audit of the Ofgem Consolidated Segmental Statement.
The pension scheme audit continues to be performed by PricewaterhouseCoopers LLP.
2017
£m
2016
£m
5.5
1.7
7.2
1.2
–
0.8
9.2
0.1
5.6
1.7
7.3
1.0
0.4
0.8
9.5
0.1
180 | Centrica plc Annual Report and Accounts 2017
180 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Notes to the Financial Statements
S9. AUDITORS’ REMUNERATION
During 2017, PricewaterhouseCoopers LLP (‘PwC’) ceased to hold office as auditor and following a rigorous and competitive tender
process, Deloitte LLP were appointed auditors of the Group. Deloitte had been engaged to perform certain activities for the Group prior to
their appointment as auditors, and before this the Group undertook a thorough review of all pre-existing arrangements. As a result of this,
certain arrangements were terminated during 2016 and whilst others were permissible under all relevant regulatory requirements, the
decision was taken to wind them down during the first half of 2017. The majority of fees noted in the caption ‘All other services’ above,
relate to such transitional arrangements, which have now ceased.
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 2017
Centrica Beta Holdings Limited
Centrica Holdings Limited
Centrica Trading Limited
Principal activity
Holding company
Country of incorporation/
registered address key (i)
United Kingdom / A
Holding company
United Kingdom / A
Dormant
United Kingdom / A
Class of shares held
Ordinary shares
Ordinary shares
Ordinary shares
Investments held indirectly by Centrica plc with 100% voting rights
31 December 2017
1773648 Alberta Ltd.
Accord Energy (Trading) Limited
Accord Energy Limited
Airtron Inc.
Alertme.com GmbH
Alertme.com Inc.
Astrum Solar Inc.
Atform Limited
Principal activity
Gas and/or oil exploration and production and/
or trading
Country of incorporation/
registered address key (i)
Canada / B
Class of shares held
Ordinary shares
Dormant
Dormant
United Kingdom / A
United Kingdom / A
Home and/or commercial services
United States / C
Non-trading
Germany / D
Energy management products and services
Home and/or commercial services
United States / E
United States / F
Dormant
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
AWHR America's Water Heater Rentals LLC
Home and/or commercial services
United States / C
Membership interest
Home and/or commercial services
United States / G
Membership interest
British Gas Services (Commercial) Limited
Servicing and installation of heating systems
United Kingdom / A
Benjamin Franklin Franchising LLC
Bord Gáis Energy Limited
Bounce Energy Inc.
Brae Canada Ltd.
British Gas Energy Procurement Limited
British Gas Finance Limited
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
Caythorpe Gas Storage Limited
Centrica (IOM) Limited
Centrica (Lincs) Wind Farm Limited
Centrica Alpha Finance Limited
Centrica America Limited
Centrica Barry Limited
Centrica Brigg Limited
Energy supply and power generation
Republic of Ireland / H
Energy supply
United States / C
Gas and/or oil exploration and production
Canada / B
Energy supply
United Kingdom / A
Vehicle leasing
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 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
Home and/or commercial services
United States / G
Membership interest
Gas storage
United Kingdom / I
Dormant
Isle of Man / J
Holding company
United Kingdom / A
Dormant
Dormant
United Kingdom / A
United Kingdom / A
Power generation
United Kingdom / A
Power generation
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Centrica plc Annual Report and Accounts 2017 | 181
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
S10. RELATED UNDERTAKINGS
31 December 2017
Centrica Combined Common Investment Fund
Limited
Centrica Connected Home Canada Inc. (ii)
Centrica Connected Home Italy Srl (ii) (iii)
Centrica Connected Home Limited (ii)
Centrica Connected Home US Inc. (ii)
Centrica Delta Limited
Centrica Directors Limited
Centrica Distributed Generation Limited
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 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 Limited
Centrica Innovations UK Limited (iii)
Centrica Innovations US Inc. (iii)
Centrica Insurance Company Limited
Centrica International BV
Centrica International C BV
Centrica Jersey Limited
Centrica KL Limited
Centrica KPS Limited
Centrica Lake Limited
Centrica Leasing (KL) Limited
Centrica LNG Company Limited
Centrica LNG UK Limited
Centrica Nederland BV
Centrica NewCo 123 Limited (iii) (iv)
Centrica Nigeria Limited
Centrica No.12 Limited
Centrica Nominees No.1 Limited
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 Limited
Centrica Renewable Energy Limited
Centrica Resources (Nigeria) Limited
Centrica Resources (UK) Limited
Centrica Resources Petroleum UK Limited
182 | Centrica plc Annual Report and Accounts 2017
182 | Centrica plc Annual Report and Accounts 2017
Principal activity
Dormant
Country of incorporation/
registered address key (i)
United Kingdom / A
Class of shares held
Ordinary shares
Energy management products and services
Energy management products and services
Canada / B
Italy / K
Energy management products and services
United Kingdom / A
Energy management products and services
United States / C
In liquidation
Isle of Man / L
Dormant
United Kingdom / A
Power generation
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
Non-trading
Netherlands / M
Dormant
United Kingdom / A
Holding company
United Kingdom / A
Holding company
United Kingdom / N
Holding company
United Kingdom / A
Dormant
United Kingdom / A
Group financing
Jersey / O
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
Ordinary shares
Ordinary shares
Holding company
United States / C
Membership interest
Investment company
United Kingdom / A
Investment company
United Kingdom / A
Business services
India / P
Dormant
United Kingdom / N
Investment company
United Kingdom / A
Investment company
United States / C
Insurance provision
Isle of Man / J
Group financing
Holding company
In liquidation
Netherlands / M
Netherlands / M
Jersey / Q
Power generation
United Kingdom / A
Power generation
United Kingdom / A
Holding company
United Kingdom / A
Dormant
United Kingdom / A
LNG trading
LNG trading
United Kingdom / A
United Kingdom / A
Holding company
Netherlands / M
Dormant
United Kingdom / A
Holding company
United Kingdom / A
Dormant
Dormant
United Kingdom / A
United Kingdom / A
Gas and/or oil exploration and production
United Kingdom / I
Dormant
United Kingdom / I
Holding company
United Kingdom / A
Power generation
United Kingdom / A
Dormant
United Kingdom / A
Dormant
Dormant
United Kingdom / A
United Kingdom / N
Holding company
United Kingdom / A
Non-trading
Dormant
Dormant
Nigeria / R
United Kingdom / A
United Kingdom / A
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
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Limited by
guarantee
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Centrica Financials_Back-End.indd 182
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Financial Statements | Notes to the Financial Statements S10. RELATED UNDERTAKINGS
31 December 2017
Centrica Retail Holdings Netherlands BV
Centrica Secretaries Limited
Centrica Services Limited (iii)
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
CID1 Limited
CIU1 Limited
Clockwork Acquisition II Inc.
Clockwork Inc.
Clockwork IP LLC
Combined Power (South) Limited
CSA Offshore Services (Proprietary) Limited
DEML Investments Limited
DER Development No.10 Ltd.
Direct Energy (B.C.) Limited
Direct Energy Business LLC
Principal activity
Holding company
Country of incorporation/
registered address key (i)
Netherlands / M
Class of shares held
Ordinary shares
Dormant
United Kingdom / A
Business services
United Kingdom / A
Holding company
United Kingdom / I
Gas storage
United Kingdom / I
Business services
Trinidad and
Tobago /
S
Dormant
Dormant
United Kingdom / A
United Kingdom / N
Holding company
United States / C
Dormant
Dormant
Dormant
Home and/or commercial services
Home and/or commercial services
United Kingdom / A
United Kingdom / A
United Kingdom / A
United States / C
United States / C
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
Holding company
United States / C
Membership interest
Power generation
United Kingdom / A
Business services
Holding company
Holding company
Energy supply and/or services
South Africa / T
Canada / U
Canada / B
Canada / V
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Energy supply and/or services
United States / C
Membership interest
Direct Energy Business Marketing LLC
Energy supply and/or services
United States / C
Membership interest
Direct Energy GP LLC
Direct Energy Holdings (Alberta) Inc.
Direct Energy HVAC Services Ltd.
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.
Distributed Energy Asset Solutions Limited (v)
Distributed Energy Canada Inc. (iii) (vi)
Distributed Energy Customer Solutions Limited (v)
Distributed Energy US Inc. (iii) (vi)
Drips Limited
Dyno Developments Limited
Dyno-Plumbing Limited
Dyno-Rod Limited
Dyno-Security Services Limited
Dyno-Services Limited
ECL Contracts Limited
ECL Investments Limited
Electricity Direct (UK) Limited
ENER-G Cogen International Limited
ENER-G Combined Power Limited
ENER-G Energia Technologia Zrt.
ENER-G Italia Srl
ENER-G Nagykanizsa Kft
ENER-G Nedalo BV
ENER-G Power2 Limited
ENER-G Rudox Inc.
ENER-G Rudox LLC (iii)
Holding company
United States / C
Membership interest
Home and/or commercial services
Home and/or commercial services
Canada / B
Canada / B
Ordinary shares
Ordinary shares
Home and/or commercial services
United States / C
Membership interest
Wholesale energy trading
United States / C
Ordinary and
preference shares
Energy supply and/or services
Canada / U
Ordinary shares
Energy supply and/or services
United States / C
Membership interest
Energy supply and/or services
United States / C
Membership interest
Home and/or commercial services
Home and/or commercial services
United States / C
United States / C
Dormant
United Kingdom / A
Energy Management products and services
Canada / B
Energy Management products and services
United Kingdom / A
Energy Management products and services
United States / C
Dormant
Dormant
Dormant
United Kingdom / A
United Kingdom / A
United Kingdom / A
Operation of a franchise network
United Kingdom / A
Dormant
Dormant
Dormant
Dormant
Dormant
United Kingdom / A
United Kingdom / A
United Kingdom / A
United Kingdom / A
United Kingdom / A
Holding company
United Kingdom / A
Energy management products and services
United Kingdom / A
Energy management products and services
Energy management products and services
Energy management products and services
Hungary / W
Italy / X
Hungary / W
Energy management products and services
Netherlands / Y
Energy management products and services
United States / Z
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
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Energy management products and services
United States / C
Membership interest
Centrica plc Annual Report and Accounts 2017 | 183
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
S10. RELATED UNDERTAKINGS
31 December 2017
ENER-G Technologii Energetice Srl
Energy For Tomorrow
First Choice Power LLC
Flowgem Limited
Gateway Energy Services Corporation
GB Gas Holdings Limited
Generation Green Solar Limited
GF One Limited (vii)
GF Two Limited (vii)
GLID Limited
Goldbrand Development Limited
Hillserve Limited
Home Assistance UK Limited
Home Warranty Holdings Corp.
Home Warranty of America Inc. (viii)
Home Warranty of America Inc. (viii)
Io-Tahoe LLC (iii)
Io-Tahoe UK Limited (iii)
Io Tahoe Ukraine LLC (iii) (ix)
Masters Inc.
Mister Sparky Franchising LLC
Neas Energy A/S
Neas Energy GmbH
Neas Energy Limited
Neas Energy Singapore Pte. Ltd
Neas Fondsmæglerselskab A/S
Neas Invest A/S
Newco One Limited
Principal activity
Energy management products and services
Country of incorporation/
registered address key (i)
Romania / AA
Class of shares held
Ordinary shares
Not-for-profit energy services
United Kingdom / A
Limited by
guarantee
Energy supply and/or services
United States / AB Membership interest
Dormant
United Kingdom / A
Ordinary shares
Energy supply
United States / AC
Ordinary shares
Holding company
United Kingdom / A
Dormant community benefit society
United Kingdom / A
Ordinary shares
Ordinary shares
In liquidation
In liquidation
United Kingdom / AD
Ordinary shares
United Kingdom / AD
Ordinary shares
Holding company
United Kingdom / A
Intermediary services, including claims handling and
administration services
Dormant
Dormant
United Kingdom / A
United Kingdom / A
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Insurance provision
United States / C
Ordinary shares
Home and/or commercial services
United States / AE
Ordinary shares
Home and/or commercial services
United States / AF
Ordinary shares
Data management
United States / C
Membership interest
Data management
United Kingdom / A
Ordinary shares
Data management
Ukraine / AG
Ordinary shares
Home and/or commercial services
United States / F
Ordinary shares
Home and/or commercial services
United States / AH Membership interest
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
Dormant
Denmark / AI
Denmark / AI
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
New Millennium Academy LLC
North Sea Infrastructure Partners Limited
NSIP (Holdings) Limited
Home and/or commercial services
United States / G
Membership interest
Dormant
Dormant
United Kingdom / N
United Kingdom / N
Ordinary shares
Ordinary shares
One Hour Air Conditioning Franchising LLC
Home and/or commercial services
United States / AH Membership interest
P.H. Jones Facilities Management Ltd
Servicing and maintenance of heating systems
United Kingdom / A
Holding company
United Kingdom / A
Ordinary shares
Ordinary shares
Energy management products and services
Israel / AL
Ordinary shares
Sea freight water transport
United Kingdom / A
Ordinary Shares
Home and/or commercial services
United States / AM Membership interest
Dormant
United Kingdom / A
Ordinary shares
Demand response aggregation
Germany / AN
Ordinary shares
Demand response aggregation
United Kingdom / AO
Ordinary shares
Demand response aggregation
France / AP
Ordinary shares
Demand response aggregation
United States / AQ Membership interest
Demand response aggregation
Belgium / AR
Ordinary shares
Holding company
United States / C
Dormant
Dormant
Dormant
United Kingdom / A
United Kingdom / A
United Kingdom / A
Home and/or commercial services
United States / G
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Home and/or commercial services
United States / AH Membership interest
P.H Jones Group Limited
Panoramic Power Ltd.
Pioneer Shipping Limited
Quality A/C Service LLC
Repair and Care Limited
REstore Deutschland GmbH (iii)
REstore Flexpond UK Limited (iii)
REstore France SAS (iii)
REstore North America LLC (iii)
REstore NV (iii)
RSG Holding Corp.
Solar Technologies Group Limited
Solar Technologies Limited
Soren Limited
SuccessWare Inc.
UWIN LLC
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Financial Statements | Notes to the Financial Statements
S10. RELATED UNDERTAKINGS
Investments held indirectly by Centrica plc with 69% voting rights
31 December 2017
Bayerngas Norge AS (iii)
Bayerngas Produksjon Norge AS (iii)
Bowland Resources (No.2) Limited
Bowland Resources Limited
Elswick Energy Limited
NSGP (Ensign) Limited
Spirit Energy Danmark ApS (iii) (x)
Spirit Energy Hedging Holding Limited (iii)
Spirit Energy Hedging Limited (iii)
Spirit Energy Limited (iii) (iv)
Spirit Energy Nederland BV (x)
Spirit Energy Norge AS (x)
Spirit Energy North Sea Limited (x)
Spirit Energy North Sea Oil Limited (x)
Spirit Energy Petroleum Danmark AS (iii) (x) (xi)
Spirit Energy Production UK Limited (x)
Spirit Energy Resources Limited (x)
Spirit Energy Southern North Sea Limited (iii) (x)
Spirit Energy Treasury Limited (iii) (x)
Spirit Europe Ltd (iii) (x)
Spirit Infrastructure BV (x)
Spirit North Sea Gas Limited (x)
Spirit Norway Limited (x) (xii)
Spirit Production (Services) Limited (x)
Spirit Resources (Armada) Limited (x)
Principal activity
Gas and/or oil exploration and production
Finance company
Country of incorporation/
registered address key (i)
Norway / AS
Norway / AS
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
United Kingdom / A
Class of shares held
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Gas and/or oil exploration and production
Jersey / AT
Ordinary shares
Gas and/or oil exploration and production
Denmark / AU
Ordinary shares
Dormant
Dormant
United Kingdom / A
United Kingdom / A
Holding company
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary and
preference shares
Gas and/or oil exploration and production
Netherlands / M
Ordinary shares
Gas and/or oil exploration and production
Norway / AV
Ordinary shares
Gas and/or oil exploration and production
United Kingdom / A
Gas and/or oil exploration and production
United Kingdom / N
Ordinary shares
Ordinary shares
Gas and/or oil exploration and production
Norway / AS
Ordinary shares
Gas and/or oil exploration and production
United Kingdom / A
Gas and/or oil exploration and production
United Kingdom / A
Ordinary shares
Ordinary shares
Gas and/or oil exploration and production
United Kingdom / AW
Ordinary shares
Finance company
United Kingdom / A
Ordinary shares
Holding company
United Kingdom / AW
Ordinary shares
Construction, ownership and exploitation of
infrastructure
Netherlands / M
Ordinary shares
Gas and/or oil exploration and production
United Kingdom / N
Gas and/or oil exploration and production
United Kingdom / A
Business services
United Kingdom / N
Gas and/or oil exploration and production
United Kingdom / A
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
For list of registered addresses, refer to note S10(d).
(i)
(ii) Centrica Connected Home Canada Inc., Centrica Connected Home Italy Srl, Centrica Connected Home Limited and Centrica Connected Home US Inc. were renamed in February 2018 to
Centrica Hive Limited Canada Inc., Centrica Hive Italy Srl, Centrica Hive Limited and Centrica Hive Limited US Inc. respectively.
(iii) Acquired or established in 2017.
(iv) Centrica NewCo 123 Limited and Spirit Energy Limited performed a name exchange during the year (previously Spirit Energy Limited and Centrica NewCo 123 Limited respectively).
(v) Distributed Energy Asset Solutions Limited and Distributed Energy Customer Solutions Limited were renamed during the year (previously Centrica (BOW) Limited and Centrica (DSW)
Limited respectively).
(vi) Distributed Energy Canada Inc. and Distributed Energy US Inc. were renamed in February 2018 to Centrica Business Solutions Canada Inc. and Centrica Business Solutions
US Inc. respectively.
(vii) GF One Limited and GF Two Limited are 75% indirectly owned by Centrica plc.
(viii) Home Warranty of America Inc. is registered as separate entities in the states of California and Illinois.
(ix)
(x)
Io Tahoe Ukraine LLC was renamed during the year (previously Rokitt Ukraine LLC).
The following name changes were made during the year: Bayerngas Danmark ApS to Spirit Energy Danmark ApS; Centrica Production Nederland BV to Spirit Energy Nederland BV; Centrica
Resources (Norge) AS to Spirit Energy Norge AS; Centrica North Sea Limited to Spirit Energy North Sea Limited; Centrica North Sea Oil Limited to Spirit Energy North Sea Oil Limited;
Bayerngas Petroleum Danmark AS to Spirit Energy Petroleum Danmark AS; Hydrocarbon Resources Limited to Spirit Energy Production UK Limited; Centrica Resources Limited to Spirit
Energy Resources Limited; Bayerngas Europe Limited to Spirit Energy Southern North Sea Limited; Magpie Treasury Co Limited to Spirit Energy Treasury Limited; Bayerngas UK Limited to
Spirit Europe Ltd; Centrica Infrastructure BV to Spirit Infrastructure BV; Centrica North Sea Gas Limited to Spirit North Sea Gas Limited; Centrica Norway Limited to Spirit Norway Limited;
Centrica Production (Services) Limited to Spirit Production (Services) Limited; and Centrica Resources (Armada) Limited to Spirit Resources (Armada) Limited.
(xi) Spirit Energy Petroleum Danmark AS principally operates in Denmark.
(xii) Spirit Norway Limited operated in Norway as Centrica Energi NUF until 10 December 2017. From 11 December 2017 it operated as Spirit Energy NUF.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
S10. RELATED UNDERTAKINGS
(b) Subsidiary undertakings – partnerships held indirectly by Centrica plc with 100% voting rights
31 December 2017
CF 2016 LLP
CFCEPS LLP
CFCPP LLP
CFCPS LLP (ii)
CPL Retail Energy LP
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 (ii)
Ignite Social Enterprise LP
WTU Retail Energy LP
Principal activity
Group financing
Group financing
Group financing
Group financing
Energy supply
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 / C
United States / AB
Canada / B
Canada / B
United Kingdom / N
United Kingdom / N
United Kingdom / N
United Kingdom / N
United Kingdom / A
United States / C
Class of shares held
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
Membership interest
For list of registered addresses, refer to note S10(d).
(i)
(ii) CFCPS LLP and Finance Scotland CPS Limited Partnership were dissolved on 7 February 2018.
The following partnerships are fully consolidated into the Group Financial Statements 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; and
● Ignite Social Enterprise LP.
(c) Joint arrangements and associates
31 December 2017
Joint ventures (ii)
Allegheny Solar 1 LLC
Celtic Array Limited
Eurowind Polska VI Sp z.o.o.
Greener Ideas Limited
Rhiannon Wind Farm Limited
Three Rivers Solar 1 LLC
Three Rivers Solar 2 LLC
Three Rivers Solar 3 LLC (iii)
Vindpark Keblowo ApS
Associates (ii)
Lake Acquisitions Limited
Veolia CHP Ireland Limited
Principal activity
Country of incorporation/
registered address key (i)
Class of shares held
Indirect
interest and
voting
rights (%)
Energy supply and/or services
United States / AX
Membership interest
Development of an offshore windfarm
United Kingdom / A
Operation of an onshore windfarm
Development of flexible power
generation sites
Poland / AY
Republic of Ireland / AZ
Ordinary shares
Ordinary shares
Ordinary shares
Dormant
United Kingdom / A
Ordinary shares
Energy supply and/or services
Energy supply and/or services
Energy supply and/or services
Operation of an onshore windfarm
United States / AX
United States / AX
United States / AX
Denmark / BA
Membership interest
Membership interest
Membership interest
Ordinary shares
40.0%
50.0%
50.0%
50.0%
50.0%
40.0%
40.0%
40.0%
50.0%
United Kingdom / BB
Energy supply and power generation Republic of Ireland / BC
Holding company
Ordinary shares
Ordinary shares
20.0%
20.0%
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.
(i)
(ii)
(iii) Acquired in 2017.
All Group companies principally operate within their country of incorporation unless noted otherwise.
186 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Notes to the Financial Statements
S10. RELATED UNDERTAKINGS
(d) List of registered addresses
Registered
address key Address
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
AX
AY
AZ
BA
BB
BC
Millstream, Maidenhead Road, Windsor, SL4 5GD, United Kingdom
2323 32nd Avenue N.E., Suite 260, Calgary, AB T2E 6Z3, Canada
3411 Silverside Road, Suite 104, Tatnall Building, 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, Jefferson City, MO 63141, United States
1 Warrington Place, Dublin, 2, Republic of Ireland
Woodland House, Woodland Park, Hessle, HU13 0FA, United Kingdom
St George's Court, Upper Church Street, Douglas, IM1 1EE, Isle of Man
Via Paleocapa Pietro 4, 20121, Milano, Italy
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
48-50 Sackville Street, 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, Suite 400, Toronto ON M5H 2R2, Canada
1185 West Georgia Street, Suite 1700, Vancouver BC, V6E 4E6, Canada
H-1106 Budapest Jászberényi út 24-36, Hungary
Milan (MI), Via Emilio Cornalia 26, Italy
Wiegerbruinlaan 2A, 1422 CB Uithoorn, Netherlands
811 Church Road #105, Cherry Hill NJ 08002, United States
15-23 Bucuresti Nord Street, Windsor Building, Ground Floor, Office No.1 Voluntari, Ilfov County, Romania
2425 W. Loop South, #200, 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, 5th floor, Bakersfield, CA 93301, United States
350 S. Northwest Highway #300, Park Ridge, IL 60068, United States
20 A Heroiev Stalingrada Avenue, Kyiv 04210, Ukraine
11380 Prosperity Farms Road #221E, Palm Beach Gardens, FL 33410, United States
Skelagervej 1, DK 9000 Aalborg, Denmark
Schillerstr.7, 40721 Hilden (bei Düsseldorf), Germany
220 Orchard Road, #05-01 Midpoint Orchard, Singapore 238852, Republic of Singapore
15 Atir Yeda Street, Kfar Saba, 44643, Israel
8275 South Eastern Avenue #200, Las Vegas, NV 89123, United States
Graf-Adolf-Platz 12, 40213 Düsseldorf, Germany
1 Glass Wharf, Bristol, BS2 0ZX, United Kingdom
Place de la Défense 12, Maison de la Défense, 92974 Paris, France
WTS LLC, 67 East Park Place, Morristown, New Jersey 07960, United States
Posthofbrug 12, 2600 Antwerp, Belgium
Lilleakerveien 8, 0283 Oslo, Norway
13 Castle Street, St Helier, JE4 5UT, Jersey
Rådhuspladsen 16, 1550 Københaven V, Denmark
Veritasvien 25, 4007 Stavanger, Norway
160 London Road, Suite 4a London Road, Sevenoaks, Kent, TN13 1BT, United Kingdom
1209 Orange Street, Wilmington, New Castle County, DE 19801, United States
Ul. Wysogotowska 23, 62-081 Przezmierowo, Wielkpolskie, Poland
Webworks, Eglinton Street, Cork, Republic of Ireland
Mariagervej 58B, DK 9500 Hobro, Denmark
90 Whitfield Street, London, W1T 4EZ, United Kingdom (i)
Innovation House, DCU Innovation Campus, 11 Old Finglas Road, Glasnevin, Dublin, 11, Republic of Ireland
(i)
Lake Acquisitions Limited changed its registered office on 9 January 2018 from 40 Grosvenor Place, London, SW1X 7EN, United Kingdom to the address listed above.
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Financial Statements | Notes to the Financial Statements
Notes to the Financial Statements Supplementary information (continued)
S10. RELATED UNDERTAKINGS
(e) Summarised financial information
Material associates and joint ventures
Management has determined that the investment in Lake Acquisitions Limited is 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 this investee.
Lake Acquisitions Limited
Summarised statement of total comprehensive income
Year ended 31 December
Revenue
Operating profit before interest and tax
Profit for the year
Other comprehensive income
Total comprehensive income
Summarised balance sheet
31 December
Non-current assets
Current assets
Current liabilities
Non-current liabilities
Net assets
Associate
information
reported to
Group
£m
2,690
482
Unadjusted
20% share
£m
538
96
Fair value
and other
adjustments
£m
–
(67)
347
213
560
69
43
112
(46)
–
(46)
Associate
information
reported to
Group
£m
14,282
3,452
(695)
(9,141)
7,898
Fair value
and other
adjustments
(i)
£m
822
1
–
(133)
690
Unadjusted
20% share
£m
2,856
691
(139)
(1,828)
1,580
2017
Group
share
£m
538
29
23
43
66
2017
Group
share
£m
3,678
692
(139)
(1,961)
2,270
Associate
information
reported to
Group
£m
3,116
1,011
778
318
1,096
Associate
information
reported to
Group
£m
13,957
3,157
(746)
(8,743)
7,625
Unadjusted
20% share
£m
623
202
Fair value
and other
adjustments
£m
–
(65)
156
64
220
(43)
–
(43)
Fair value
and other
adjustments
(i)
£m
879
7
–
(148)
738
Unadjusted
20% share
£m
2,791
631
(149)
(1,749)
1,524
2016
Group
share
£m
623
137
113
64
177
2016
Group
share
£m
3,670
638
(149)
(1,897)
2,262
(i)
Before cumulative impairments of £586 million (2016: £586 million) of the Group’s associate investment.
During the year, dividends of £57 million (2016: £110 million) were paid by the associate to the Group.
Joint operations – fields/assets
31 December 2017
Cygnus
Location
UK North Sea
Percentage holding
in ordinary shares and
net assets
61%
Material non-controlling interests
The Group has one subsidiary undertaking with a non-controlling interest: Spirit Energy Limited, which is the parent company of the
combined business that comprises the acquired Bayerngas Norge exploration and production business and the Group’s existing
Exploration & Production business.
Non-
controlling
interests
%
Profit for
the year
£m
Total
comprehensive
income
£m
2017
Distributions
to non-
controlling
interests
£m
Total
equity
£m
Non-
controlling
interests
%
Profit for
the year
£m
Total
comprehensive
income
£m
31%
5
8
729
–
–
–
–
2016
Distributions
to non-
controlling
interests
£m
–
Total
equity
£m
–
31 December
Spirit Energy
Limited
Summarised financial information
The summarised financial information disclosed is shown on a 100% basis. It represents the consolidated position of Spirit Energy Limited
and its subsidiaries 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
Profit for the year
Other comprehensive income
Total comprehensive income
188 | Centrica plc Annual Report and Accounts 2017
188 | Centrica plc Annual Report and Accounts 2017
2017
£m
160
17
10
27
2016
£m
–
–
–
–
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Financial Statements | Notes to the Financial Statements
S10. RELATED UNDERTAKINGS
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
2017
£m
4,768
756
(799)
(2,373)
2,352
2017
£m
(71)
2016
£m
–
–
–
–
–
2016
£m
–
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Financial Statements | Company Financial Statements
Financial Statements | Company Financial Statements
Company Statement of Changes in Equity
1 January 2016
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
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 gain
Taxation on above items
Other equity movements:
Employee share schemes
Scrip dividend
Dividends paid to equity holders
31 December 2017
Share
capital
£m
317
–
Share
premium
£m
1,135
–
Capital
redemption
reserve
£m
26
–
Retained
earnings
£m
1,423
1,540
Other
equity
(note II)
£m
(138)
–
Total
equity
£m
2,763
1,540
–
–
–
–
–
–
4
–
21
342
–
–
–
–
–
–
–
–
–
–
–
–
121
–
673
1,929
–
–
–
–
–
–
–
6
–
348
–
192
–
2,121
–
–
–
–
–
–
–
–
–
26
–
–
–
–
–
–
–
–
–
26
–
–
–
–
–
1
–
(651)
–
2,313
1,089
–
–
–
–
–
7
135
(124)
(60)
8
32
–
–
–
(140)
–
6
28
(29)
16
(4)
7
135
(124)
(60)
8
33
125
(651)
694
4,470
1,089
6
28
(29)
16
(4)
4
–
(661)
2,745
31
–
–
35
198
(661)
(92) 5,148
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 £470 million) for the year ended 31 December 2017. 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 | Centrica plc Annual Report and Accounts 2017
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Company Balance Sheet
31 December
Non-current assets
Property, plant and equipment
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
Current tax assets
Cash and cash equivalents
Total assets
Current liabilities
Derivative financial instruments
Trade and other payables
Provisions for other liabilities and charges
Bank overdrafts, loans and other borrowings
Non-current liabilities
Derivative financial instruments
Trade and other payables
Provisions for other liabilities and charges
Retirement benefit liabilities
Bank loans and other borrowings
Total liabilities
Net assets
Share capital
Share premium
Capital redemption reserve
Retained earnings (ii)
Other equity
Total shareholders’ equity
Notes
2017
£m
2016
(restated) (i)
£m
IV
V
VI
VII
VIII
IX
XVI
XI
VIII
IX
XII
IX
XIII
XIV
XV
IX
XIII
XIV
XVI
XV
II
4
69
2,286
–
1,075
300
33
222
3,989
11,481
90
11
2,300
13,882
17,871
(43)
(6,522)
(4)
(543)
(7,112)
(57)
(89)
(3)
(63)
(5,399)
(5,611)
(12,723)
5,148
348
2,121
26
2,745
(92)
5,148
–
46
2,305
13
1,704
464
–
215
4,747
12,407
315
21
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
Current tax assets of £21 million as at 31 December 2016 have been reclassified from trade and other receivables.
(i)
(ii) Retained earnings includes a net profit after taxation of £1,089 million (2016: £1,540 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 21 February 2018 and were signed on
its behalf by:
Iain Conn
Group Chief Executive
Jeff Bell
Group Chief Financial Officer
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Financial Statements | Notes to the Company Financial Statements
Notes to the Company Financial Statements
I. GENERAL INFORMATION AND PRINCIPAL ACCOUNTING POLICIES OF THE COMPANY
General information
The Company is a public company limited by shares, incorporated and domiciled in the UK, and registered in England and Wales. The
registered office is Millstream, Maidenhead Road, Windsor, Berkshire, SL4 5GD.
The Company Financial Statements are presented in pounds sterling with all values rounded to the nearest million pounds. Pounds
sterling is the functional currency 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.
From 1 January 2017, the following amendments are effective in the Company's Financial Statements. Their first time adoption did not
have a material impact on the Financial Statements.
● Amendments to IAS 12: ‘Income taxes’ related to the recognition of deferred tax assets for unrealised losses.
In these Financial Statements, the Company has applied the exemptions available under FRS 101 in respect of the following disclosures:
● the requirements of IAS 7: ‘Statement of cash flows’;
● the statement of compliance with Adopted IFRSs;
● the effects of new but not yet effective IFRSs;
● prior year reconciliations for property, plant and equipment and intangible assets;
● the prior year reconciliation in the number of shares outstanding at the beginning and at the end of the year for share capital;
● disclosures in respect of related party transactions with wholly-owned subsidiaries in a group;
● disclosures in respect of the compensation of key management personnel; and
● disclosures in respect of capital management.
As the consolidated 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’ have not been provided apart from those which are relevant for the financial instruments which are held at fair value.
Measurement convention
The Company Financial Statements have been prepared on the historical cost basis except for: investments in subsidiaries that have been
recognised at deemed cost on transition to FRS 101; 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 defined benefit pension schemes that
have been measured at fair value; the liabilities of the defined benefit pension schemes that have been measured using the projected unit
credit valuation method; and the carrying values of recognised assets and liabilities qualifying as hedged items in fair value hedges that
have been adjusted from cost by the changes in the fair values attributable to the risks that are being hedged.
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 an increase in the bad debt provision of £17 million (2016: £87 million)
was recognised against receivables during the year and impairments of £709 million (2016: £404 million) made in previous years
were reversed.
Key sources of estimation uncertainty include 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, and also in note XVI.
192 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Notes to the Company Financial Statements
I. GENERAL INFORMATION AND PRINCIPAL ACCOUNTING POLICIES OF THE COMPANY
Principal accounting policies
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 78 to 89 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.
Property, plant and equipment
PP&E is included in the Balance Sheet at cost, less accumulated depreciation and any provisions for impairment. The initial cost of an
asset comprises purchase price and 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.
Depreciation is charged so as to write off the cost of assets over their estimated useful lives, on a straight-line basis, over a period of
3 to 10 years.
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 deemed cost on transition to FRS 101 and at cost in accordance with IAS 27:
‘Separate financial statements’, less any provision for impairment as necessary for any subsequent investments.
Impairment
The Company’s accounting policies in respect of impairment of property, plant and equipment, 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.
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Financial Statements | Notes to the Company Financial Statements
Notes to the Company Financial Statements (continued)
I. GENERAL INFORMATION AND PRINCIPAL ACCOUNTING POLICIES OF THE COMPANY
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.
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 52 to 62 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 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Notes to the Company Financial Statements
Cash
flow
hedging
reserve
£m
(9)
–
–
Actuarial
gains and
losses
reserve
£m
(46)
–
(60)
Available-
for-sale
reserve
(AFS)
£m
22
7
–
Treasury
and own
shares
reserve
£m
(198)
–
–
Share-
based
payments
reserve
£m
93
–
–
–
–
–
135
(124)
(2)
–
–
–
–
–
–
28
(29)
–
(1)
–
–
–
–
–
11
(95)
–
16
–
–
–
–
–
(3)
(82)
–
–
–
–
–
(1)
28
6
–
–
–
–
–
–
(1)
33
(17)
35
–
–
–
–
(180)
–
–
(11)
49
–
–
–
–
(142)
–
(32)
46
–
–
–
107
–
–
–
(54)
47
–
–
–
100
2017
£m
(58)
(6)
(20)
(5)
1
(88)
2017
Number
368
121
489
II. OTHER EQUITY
1 January 2016
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
Taxation on above items
31 December 2016
Revaluation of available-for-sale securities
Actuarial gain
Employee share schemes:
Increase in own shares
Exercise of awards
Value of services provided
Cash flow hedges:
Net gains
Transferred to income and expense
Taxation on above items
31 December 2017
III. DIRECTORS AND EMPLOYEES
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
IV. PROPERTY, PLANT AND EQUIPMENT
Cost
1 January
Additions
31 December
Accumulated depreciation 1 January and 31 December
NBV at 31 December
Total
£m
(138)
7
(60)
(17)
3
46
135
(124)
8
(140)
6
16
(11)
(5)
47
28
(29)
(4)
(92)
2016
£m
(78)
(8)
(5)
(4)
2
(93)
2016
Number
493
184
677
2017
£m
–
4
4
–
4
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Financial Statements | Notes to the Company Financial Statements
Notes to the Company Financial Statements (continued)
V. OTHER INTANGIBLE ASSETS
Cost
1 January
Additions
31 December
Accumulated amortisation
1 January
Charge for the year
31 December
NBV at 31 December
VI. INVESTMENTS IN SUBSIDIARIES
Cost
1 January
Disposals
31 December
2017
£m
49
31
80
3
8
11
69
2016
(i)
£m
2,306
(1)
2,305
2017
(i)
£m
2,305
(19)
2,286
(i)
Disposals 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.
VII. DEFERRED TAX
1 January 2016
Charge to income
Reserves credit/(charge)
31 December 2016
Charge to income
Reserves charge
31 December 2017
Retirement benefit
obligation
£m
8
(1)
11
18
(8)
(3)
7
Other
£m
(2)
–
(3)
(5)
(1)
(1)
(7)
Total
£m
6
(1)
8
13
(9)
(4)
–
Other deferred corporation tax assets primarily relate to other temporary differences. All deferred tax crystallises in over one year.
VIII. TRADE AND OTHER RECEIVABLES
31 December
Amounts owed by Group undertakings
Prepayments
Current (ii)
£m
11,476
5
11,481
2017
Non-current (iii)
£m
1,067
8
1,075
Current (ii)
£m
12,404
3
12,407
2016 (restated) (i)
Non-current (iii)
£m
1,696
8
1,704
(i)
(ii)
Current tax assets of £21 million as at 31 December 2016 have been reclassified from trade and other receivables to its own category in the Balance Sheet.
The amounts receivable by the Company include £10,381 million (2016: £10,339 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 3.0% and 4.7% per annum during 2017 (2016: 2.4% and 4.7%). 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 £73 million (2016: £765 million).
(iii) The amounts receivable by the Company due after more than one year include £1,028 million (2016: £1,663 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 4.6% and 7.4% per annum during 2017 (2016: 4.4% and 7.1%). 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.
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Financial Statements | Notes to the Company Financial Statements
IX. DERIVATIVE FINANCIAL INSTRUMENTS
31 December
Derivative financial assets
Derivative financial liabilities
X. FINANCIAL INSTRUMENTS
Current
£m
90
(43)
Non-current
£m
300
(57)
2017
Total
£m
390
(100)
Current
£m
315
(196)
Non-current
£m
464
(60)
2016
Total
£m
779
(256)
(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
XI. SECURITIES
31 December
Treasury gilts designated at fair value through profit or loss
Debt instrument
Equity instrument
Level 1
£m
Level 2
£m
Level 3
£m
2017
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
128
–
–
102
–
–
128
69
25
222
–
–
–
–
–
222
128
160
390
–
–
390
(28)
(51)
(6)
(15)
(100)
290
–
–
–
–
–
–
–
–
–
–
–
–
–
–
128
130
–
102
128
160
518
69
25
612
(28)
(51)
(6)
(15)
(100)
512
–
480
–
–
130
64
21
215
–
–
–
–
–
215
158
141
779
–
–
779
(30)
(220)
(6)
–
(256)
523
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2017
£m
128
69
25
222
£94 million (2016: £85 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 XVI).
2016
Total
£m
130
480
158
141
909
64
21
994
(30)
(220)
(6)
–
(256)
738
2016
£m
130
64
21
215
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Financial Statements | Notes to the Company Financial Statements
Notes to the Company Financial Statements (continued)
XII. 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.
XIII. TRADE AND OTHER PAYABLES
31 December
Amounts owed to Group undertakings
Other taxation and social security
Accruals and other creditors
2017
£m
22
2,278
2,300
2016
£m
2
1,478
1,480
Current (i)
£m
(6,458)
(1)
(63)
(6,522)
2017
Non-current (ii)
£m
(89)
–
–
(89)
Current (i)
£m
(7,740)
(2)
(66)
(7,808)
2016
Non-current (ii)
£m
(84)
–
–
(84)
(i)
(ii)
The amounts payable by the Company include £5,838 million (2016: £7,239 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 3.0% and 4.7% per annum during 2017 (2016: 2.4% and 4.7%). Other amounts payable by the Company are interest free.
The amounts payable by the Company due after more than one year include £80 million (2016: £60 million) that bears interest at the prevailing LIBOR rate less 0.05%. These amounts
payable are due in over five years. Other amounts payable by the Company are interest free.
XIV. PROVISIONS FOR OTHER LIABILITIES AND CHARGES
Current
Restructuring
Other
Non-current
Other
1 January
2017
£m
(3)
(3)
(6)
1 January
2017
£m
(3)
(3)
Charged in
the year
£m
(2)
–
(2)
Charged in
the year
£m
(1)
(1)
Utilised
£m
2
1
3
Utilised
£m
–
–
Transfers (i)
£m
2
(1)
1
31 December
2017
£m
(1)
(3)
(4)
Transfers (i)
£m
1
1
31 December
2017
£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 137.3 pence at 31 December 2017 (2016: 234.1 pence).
XV. BANK OVERDRAFTS, LOANS AND OTHER BORROWINGS
31 December
Bank loans and overdrafts
Bonds
Interest accruals
Current
£m
(12)
(411)
(120)
(543)
2017
Non-current
£m
(138)
(5,261)
–
(5,399)
Current
£m
(38)
(162)
(121)
(321)
2016
Non-current
£m
(148)
(5,788)
–
(5,936)
Disclosures in respect of the Group’s financial liabilities are provided in note 24 to the consolidated Group Financial Statements.
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Financial Statements | Notes to the Company Financial Statements
XVI. 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’.
The Company is the principal employer for the Registered Pension Schemes. For further information of critical accounting judgements
and key sources of estimation uncertainty in relation to pensions please refer to notes 3 and 22 in the Group Financial Statements.
(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 (cost)/credit
Interest on scheme liabilities
Expected return on scheme assets
Other movements:
Actuarial (loss)/gain
Employer contributions
Benefits paid from schemes
Transfers (i)
31 December
Pension liabilities
£m
(549)
2017
Pension assets
£m
463
Pension liabilities
£m
(368)
2016
Pension assets
£m
327
(10)
(7)
(15)
–
(513)
–
18
(6)
(1,082)
–
–
–
14
529
64
(18)
–
1,052
(i)
Transfers include £2 million (2016: £2 million) transferred from provisions for other liabilities and charges.
Presented in the Company Balance Sheet as:
31 December
Defined benefit pension assets
Defined benefit pension liabilities
Of the pension schemes liabilities, £63 million (2016: £62 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 (actual return less expected return on pension scheme assets)
Experience gain arising on the scheme liabilities
Changes in assumptions underlying the present value of the schemes’ liabilities
Actuarial gain/(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
(5)
4
(14)
–
(175)
–
11
(2)
(549)
2017
£m
33
(63)
(30)
2017
£m
529
(2)
(511)
16
(117)
(101)
–
–
–
12
115
20
(11)
–
463
2016
£m
–
(86)
(86)
2016
£m
115
8
(183)
(60)
(57)
(117)
(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 £9 million of employer contributions during 2018 at an average rate of 26% of pensionable pay
together with contributions via the salary sacrifice arrangement of £3 million.
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Financial Statements | Notes to the Company Financial Statements
Financial Statements | Notes to the Company Financial Statements
Financial Statements | Gas and Liquids Reserves (Unaudited)
Notes to the Company Financial Statements (continued)
Gas and Liquids Reserves (Unaudited)
XVI. 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.
XVII. COMMITMENTS
Quoted
£m
2,089
–
1,276
280
1,663
–
3
–
5,311
Unquoted
£m
303
–
–
1,450
952
369
–
864
3,938
2017
Total
£m
2,392
–
1,276
1,730
2,615
369
3
864
9,249
2017
£m
1,052
Quoted
£m
1,970
50
1,274
309
1,241
–
276
–
5,120
Unquoted
£m
307
–
–
1,296
844
319
–
406
3,172
2016
Total
£m
2,277
50
1,274
1,605
2,085
319
276
406
8,292
2016
£m
463
At 31 December 2017, the Company had commitments of £49 million (2016: £56 million) relating to contracts for outsourced services
and £3 million (2016: £1 million) of total non-cancellable minimum lease payments in respect of land and buildings. The Company has
guaranteed annual minimum lease payments of £6 million (2016: £6 million) in respect of operating commitments of a subsidiary
undertaking, expiring in more than 5 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
During the year the Company accepted cash deposits and entered into foreign currency derivatives on behalf of the Spirit Energy group of
companies as follows:
Trade and other payables
Derivative financial assets – mark to market movement and
year-end balance
Derivative financial liabilities – mark to market movement and
year-end balance
Spirit Energy
Treasury Limited
£m
(121)
2017
Spirit Energy
Resources Limited
£m
–
Spirit Energy
Treasury Limited
£m
–
2016
Spirit Energy
Resources Limited
£m
–
1
(1)
1
–
–
–
–
–
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 Gaffney,
Cline & Associates for the Group’s global reserves. Reserves are estimated in accordance with a formal policy and procedure standard.
The Group has estimated 2P gas and liquids reserves in Europe.
The principal fields in Europe are Kvitebjørn, Statfjord, Hejre, Ivar Aasen, Cygnus, Maria, South and North Morecambe, Rhyl and Chiswick.
The principal field in Centrica Storage is the Rough field. The European 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.
Estimated net 2P reserves of gas
(billion cubic feet)
1 January 2017
Revisions of previous estimates (iv)
Disposals of reserves in place (v)
Extensions, discoveries and other additions
Spirit Energy transaction (vi) :
Acquisition of 69% share of Bayerngas Norge
Disposal of 31% share of reserves in place
Production (vii)
31 December 2017
Estimated net 2P reserves of liquids
(million barrels)
1 January 2017
Revisions of previous estimates (iv)
Disposals of reserves in place (v)
Extensions, discoveries and other additions
Spirit Energy transaction (vi) :
Acquisition of 69% share of Bayerngas Norge
Disposal of 31% share of reserves in place
Production (vii)
31 December 2017
Estimated net 2P reserves
(million barrels of oil equivalent)
31 December 2017 (viii)
Europe
(i)
1,225
(8)
–
49
129
(341)
(175)
879
Europe
(i)
106
3
–
7
33
(32)
(12)
105
Europe
(i)
251
Canada
(ii)
821
(773)
–
–
–
–
–
–
–
–
–
Canada
(ii)
18
(17)
(1)
–
Canada
(ii)
–
Trinidad and
Tobago
Exploration &
Production
Centrica
Storage
167
(48)
(10)
(25)
142
Trinidad and
Tobago
(iii)
Exploration &
Production
Centrica
Storage
(iii)
52
(42)
–
–
–
–
–
–
–
–
–
–
–
–
–
2,098
(8)
(815)
49
129
(341)
(233)
879
124
(17)
3
7
33
(32)
(13)
105
Trinidad and
Tobago
Exploration &
Production
251
(iii)
–
Centrica
Storage
24
–
–
–
–
–
–
–
–
–
–
–
–
–
Total
2,265
(8)
(815)
49
129
(341)
(258)
1,021
Total
124
(17)
3
7
33
(32)
(13)
105
Total
275
(i)
Spirit Energy is a newly formed business combining the Group’s existing Exploration & Production business with that of Bayerngas Norge AS. This transaction was completed on 8 December
2017, with the Group owning 69% of Spirit Energy. Europe reserves movements represent Centrica’s 100% ownership in Exploration & Production business up to the transaction date. From
8 December 2017 to 31 December 2017 the movements represent Centrica’s 69% interest.
(ii) On 29 September 2017, the Group disposed of its 60% interest in the natural gas and liquid assets owned by the CQ Energy Canada Partnership.
(iii) On 27 May 2017, the Group disposed of its Trinidad and Tobago gas assets.
(iv) Revision of previous estimates include those associated with North and South Morecambe, Galleon, York, West Brae and Alba areas in Europe.
(v) Reflects the disposal of interests in the CQ Energy Canada Partnership and Trinidad and Tobago gas and liquid assets.
(vi) Represents Centrica's change in reserves following the Spirit Energy transaction detailed in (i) above.
(vii) Represents total sales volumes of gas and oil produced from the Group’s reserves.
(viii)
Includes the total of estimated gas and liquids reserves at 31 December 2017 in million barrels of oil equivalent.
Liquids reserves include oil, condensate and natural gas liquids.
200 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Notes to the Company Financial Statements
Financial Statements | Gas and Liquids Reserves (Unaudited)
Financial Statements | Gas and Liquids Reserves (Unaudited)
Notes to the Company Financial Statements (continued)
Gas and Liquids Reserves (Unaudited)
XVI. 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.
XVII. COMMITMENTS
Quoted
£m
2,089
1,276
280
1,663
–
–
3
–
Unquoted
1,450
£m
303
–
–
952
369
–
864
Quoted
£m
1,970
50
1,274
309
1,241
276
–
–
Unquoted
£m
307
–
–
1,296
844
319
–
406
5,311
3,938
9,249
5,120
3,172
8,292
2017
Total
£m
2,392
–
1,276
1,730
2,615
369
3
864
2017
£m
1,052
2016
Total
£m
2,277
50
1,274
1,605
2,085
319
276
406
2016
£m
463
At 31 December 2017, the Company had commitments of £49 million (2016: £56 million) relating to contracts for outsourced services
and £3 million (2016: £1 million) of total non-cancellable minimum lease payments in respect of land and buildings. The Company has
guaranteed annual minimum lease payments of £6 million (2016: £6 million) in respect of operating commitments of a subsidiary
undertaking, expiring in more than 5 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
companies as follows:
During the year the Company accepted cash deposits and entered into foreign currency derivatives on behalf of the Spirit Energy group of
Trade and other payables
Derivative financial assets – mark to market movement and
year-end balance
year-end balance
Derivative financial liabilities – mark to market movement and
Spirit Energy
Spirit Energy
Spirit Energy
Spirit Energy
Treasury Limited
Resources Limited
Treasury Limited
Resources Limited
£m
(121)
1
(1)
2017
£m
–
1
–
2016
£m
–
–
–
£m
–
–
–
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 Gaffney,
Cline & Associates for the Group’s global reserves. Reserves are estimated in accordance with a formal policy and procedure standard.
The Group has estimated 2P gas and liquids reserves in Europe.
The principal fields in Europe are Kvitebjørn, Statfjord, Hejre, Ivar Aasen, Cygnus, Maria, South and North Morecambe, Rhyl and Chiswick.
The principal field in Centrica Storage is the Rough field. The European 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.
Estimated net 2P reserves of gas
(billion cubic feet)
1 January 2017
Revisions of previous estimates (iv)
Disposals of reserves in place (v)
Extensions, discoveries and other additions
Spirit Energy transaction (vi) :
Acquisition of 69% share of Bayerngas Norge
Disposal of 31% share of reserves in place
Production (vii)
31 December 2017
Estimated net 2P reserves of liquids
(million barrels)
1 January 2017
Revisions of previous estimates (iv)
Disposals of reserves in place (v)
Extensions, discoveries and other additions
Spirit Energy transaction (vi) :
Acquisition of 69% share of Bayerngas Norge
Disposal of 31% share of reserves in place
Production (vii)
31 December 2017
Estimated net 2P reserves
(million barrels of oil equivalent)
31 December 2017 (viii)
Europe
(i)
1,225
(8)
–
49
129
(341)
(175)
879
Europe
(i)
106
3
–
7
33
(32)
(12)
105
Europe
(i)
251
Canada
(ii)
821
–
(773)
–
–
–
(48)
–
Canada
(ii)
18
–
(17)
–
–
–
(1)
–
Trinidad and
Tobago
(iii)
52
–
(42)
–
Exploration &
Production
2,098
(8)
(815)
49
–
–
(10)
–
129
(341)
(233)
879
Trinidad and
Tobago
(iii)
–
–
–
–
Exploration &
Production
124
3
(17)
7
–
–
–
–
33
(32)
(13)
105
Centrica
Storage
167
–
–
–
–
–
(25)
142
Centrica
Storage
–
–
–
–
–
–
–
–
Canada
(ii)
–
Trinidad and
Tobago
(iii)
–
Exploration &
Production
251
Centrica
Storage
24
Total
2,265
(8)
(815)
49
129
(341)
(258)
1,021
Total
124
3
(17)
7
33
(32)
(13)
105
Total
275
(i)
Spirit Energy is a newly formed business combining the Group’s existing Exploration & Production business with that of Bayerngas Norge AS. This transaction was completed on 8 December
2017, with the Group owning 69% of Spirit Energy. Europe reserves movements represent Centrica’s 100% ownership in Exploration & Production business up to the transaction date. From
8 December 2017 to 31 December 2017 the movements represent Centrica’s 69% interest.
(ii) On 29 September 2017, the Group disposed of its 60% interest in the natural gas and liquid assets owned by the CQ Energy Canada Partnership.
(iii) On 27 May 2017, the Group disposed of its Trinidad and Tobago gas assets.
(iv) Revision of previous estimates include those associated with North and South Morecambe, Galleon, York, West Brae and Alba areas in Europe.
(v) Reflects the disposal of interests in the CQ Energy Canada Partnership and Trinidad and Tobago gas and liquid assets.
(vi) Represents Centrica's change in reserves following the Spirit Energy transaction detailed in (i) above.
(vii) Represents total sales volumes of gas and oil produced from the Group’s reserves.
(viii)
Includes the total of estimated gas and liquids reserves at 31 December 2017 in million barrels of oil equivalent.
Liquids reserves include oil, condensate and natural gas liquids.
200 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Five Year Summary (Unaudited)
Financial Statements | Five Year Summary (Unaudited)
Financial Statements | Ofgem Consolidated Segmental Statement
Five Year Summary (Unaudited)
Ofgem Consolidated Segmental Statement
Year ended 31 December
Group revenue
Operating profit before exceptional items and certain re-measurements:
2013
£m
26,571
2014
£m
29,408
2015
£m
27,971
2016
£m
27,102
2017
£m
28,023
UK Home
Ireland
North America Home
Connected Home
UK Business
North America Business
Distributed Energy & Power
Energy Marketing & Trading
Central Power Generation
Exploration & Production
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
920
–
199
(27)
137
77
(30)
117
111
1,019
63
2,586
(68)
2,518
(383)
950
Pence
18.4
25.9
17.0
2013
£m
4,724
10,993
(470)
(10,192)
202
5,257
737
7
118
(23)
114
20
(17)
136
81
455
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
880
30
77
(49)
(19)
246
(32)
66
128
95
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
810
46
93
(50)
50
221
(26)
161
75
187
(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
819
47
119
(95)
4
71
(53)
104
35
184
17
1,252
(7)
1,245
(407)
333
Pence
6.0
12.6
12.0
2017
£m
4,326
7,180
1,710
(9,788)
–
3,428
(4,942)
(5,196)
(4,747)
(3,473)
(2,596)
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
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
2017
£m
2,016
(176)
32
1,872
INDEPENDENT AUDITOR’S REPORT TO THE DIRECTORS OF CENTRICA PLC AND ITS LICENSEES
In our opinion, the accompanying statement (the ‘Consolidated Segmental Statement’ or ‘CSS’) of Centrica plc and its Licensees for the
year ended 31 December 2017 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 Ofgem; and
● the basis of preparation on pages 210 to 212.
We have audited the Consolidated Segmental Statement of Centrica plc and its Licensees (as listed in footnote (i)) (the Group) for the year
ended 31 December 2017 in accordance with the terms of our engagement letter dated 19 January 2018. The Consolidated Segmental
Statement 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 Standard Condition 16B of the Electricity Generation Licences (together, the
‘Licences’) and the basis of preparation on pages 210 to 212.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)). 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 the Company in accordance with the ethical requirements that are relevant to our audit of the CSS in the United
Kingdom, including the FRC’s Ethical Standard, 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
We draw attention to pages 210 to 212 of the CSS which describes the basis of accounting. The CSS is prepared to assist the Company
in complying 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 Ofgem. The basis of preparation is not the same as
segmental reporting under IFRS and/or statutory reporting. As a result, the CSS may not be suitable for another purpose. Our opinion is
not modified in respect of this matter.
Conclusions relating to going concern
We are required by ISAs (UK) to report in respect of the following matters where:
● the Directors’ use of the going concern basis of accounting in preparation of the CSS is not appropriate; or
● the Directors have not disclosed in the CSS any identified material uncertainties that may cast significant doubt about the Group’s ability
to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the CSS is
We have nothing to report in respect of these matters.
authorised for issue.
Other information
The Directors are responsible for other information. The other information comprises the information included in the annual report, other
than the Financial Statements and CSS and our auditor’s reports thereon. Our opinion on the Financial Statements does not cover the
other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the CSS, our responsibility is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the CSS or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material
misstatement in the CSS or a material misstatement of the other information. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in respect of these matters.
Responsibilities of the Directors
The Directors are responsible for the preparation of the CSS in accordance with the Licences and the basis of preparation on pages 210
to 212 and for such internal control as the Directors 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 the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as
applicable, matters relating to going concern and using the going concern basis of accounting unless the Directors either intend to
liquidate the Group or to cease operations, or has no realistic alternative but to do so.
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 (UK) 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.
A further description of our responsibilities for the audit of the CSS is located on the Financial Reporting Council’s website at:
frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
202 | Centrica plc Annual Report and Accounts 2017
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Financial Statements | Five Year Summary (Unaudited)
Financial Statements | Ofgem Consolidated Segmental Statement
Financial Statements | Ofgem Consolidated Segmental Statement
Five Year Summary (Unaudited)
Ofgem Consolidated Segmental Statement
Operating profit before exceptional items and certain re-measurements:
Year ended 31 December
Group revenue
UK Home
Ireland
North America Home
Connected Home
UK Business
North America Business
Distributed Energy & Power
Energy Marketing & Trading
Central Power Generation
Exploration & Production
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
Debt, net of cash, cash equivalents and securities:
Net assets
Net debt
Cash flows
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
2013
£m
2014
£m
2015
£m
2016
£m
2017
£m
26,571
29,408
27,971
27,102
28,023
920
–
199
(27)
137
77
(30)
117
111
1,019
63
2,586
(68)
2,518
(383)
950
Pence
18.4
25.9
17.0
2013
£m
4,724
10,993
(470)
(10,192)
202
5,257
737
7
118
(23)
114
20
(17)
136
81
455
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
2013
£m
3,164
(224)
(2,351)
589
2014
£m
1,342
(125)
(651)
566
880
30
77
(49)
(19)
246
(32)
66
128
95
37
1,459
(61)
1,398
(1,717)
(747)
Pence
(14.9)
17.2
12.0
2015
£m
3,824
7,790
(521)
(33)
1,342
2015
£m
2,278
(81)
(611)
1,586
810
46
93
(50)
50
221
(26)
161
75
187
(52)
1,515
(48)
1,467
777
1,672
Pence
31.4
16.8
12.0
2016
£m
4,383
8,218
1,220
196
2,844
2016
£m
2,669
(273)
(803)
1,593
(9,718)
(11,173)
(9,788)
(4,942)
(5,196)
(4,747)
(3,473)
(2,596)
819
47
119
(95)
4
71
(53)
104
35
184
17
1,252
(7)
1,245
(407)
333
Pence
6.0
12.6
12.0
2017
£m
4,326
7,180
1,710
–
3,428
2017
£m
2,016
(176)
32
1,872
INDEPENDENT AUDITOR’S REPORT TO THE DIRECTORS OF CENTRICA PLC AND ITS LICENSEES
In our opinion, the accompanying statement (the ‘Consolidated Segmental Statement’ or ‘CSS’) of Centrica plc and its Licensees for the
year ended 31 December 2017 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 Ofgem; and
● the basis of preparation on pages 210 to 212.
We have audited the Consolidated Segmental Statement of Centrica plc and its Licensees (as listed in footnote (i)) (the Group) for the year
ended 31 December 2017 in accordance with the terms of our engagement letter dated 19 January 2018. The Consolidated Segmental
Statement 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 Standard Condition 16B of the Electricity Generation Licences (together, the
‘Licences’) and the basis of preparation on pages 210 to 212.
Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)). 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 the Company in accordance with the ethical requirements that are relevant to our audit of the CSS in the United
Kingdom, including the FRC’s Ethical Standard, 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
We draw attention to pages 210 to 212 of the CSS which describes the basis of accounting. The CSS is prepared to assist the Company
in complying 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 Ofgem. The basis of preparation is not the same as
segmental reporting under IFRS and/or statutory reporting. As a result, the CSS may not be suitable for another purpose. Our opinion is
not modified in respect of this matter.
Conclusions relating to going concern
We are required by ISAs (UK) to report in respect of the following matters where:
● the Directors’ use of the going concern basis of accounting in preparation of the CSS is not appropriate; or
● the Directors have not disclosed in the CSS any identified material uncertainties that may cast significant doubt about the Group’s ability
to continue to adopt the going concern basis of accounting for a period of at least twelve months from the date when the CSS is
authorised for issue.
We have nothing to report in respect of these matters.
Other information
The Directors are responsible for other information. The other information comprises the information included in the annual report, other
than the Financial Statements and CSS and our auditor’s reports thereon. Our opinion on the Financial Statements does not cover the
other information and we do not express any form of assurance conclusion thereon.
In connection with our audit of the CSS, our responsibility is to read the other information and, in doing so, consider whether the other
information is materially inconsistent with the CSS or our knowledge obtained in the audit or otherwise appears to be materially misstated.
If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether there is a material
misstatement in the CSS or a material misstatement of the other information. If, based on the work we have performed, we conclude that
there is a material misstatement of this other information, we are required to report that fact.
We have nothing to report in respect of these matters.
Responsibilities of the Directors
The Directors are responsible for the preparation of the CSS in accordance with the Licences and the basis of preparation on pages 210
to 212 and for such internal control as the Directors 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 the Directors are responsible for assessing the Group’s ability to continue as a going concern, disclosing, as
applicable, matters relating to going concern and using the going concern basis of accounting unless the Directors either intend to
liquidate the Group or to cease operations, or has no realistic alternative but to do so.
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 (UK) 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.
A further description of our responsibilities for the audit of the CSS is located on the Financial Reporting Council’s website at:
frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.
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Financial Statements | Ofgem Consolidated Segmental Statement
Ofgem Consolidated Segmental Statement (continued)
INDEPENDENT AUDITOR’S REPORT TO THE DIRECTORS OF CENTRICA PLC AND ITS LICENSEES
INTRODUCTION
Use of this report
This report is made solely to the Company’s Directors, as a body, 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 displayed on the Centrica plc website centrica.com (ii), 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 Directors as a
body and Centrica plc for our work or this report except where terms are expressly agreed between us in writing. The materiality level we
used in planning and performing our audit was £30 million.
The engagement partner on the audit resulting in this Independent Auditor’s Report is Dean Cook.
Deloitte LLP
21 February 2018
London
(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.
The Ofgem Consolidated Segmental Statement (CSS) and required regulatory information on pages 205 to 214 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 2017, which 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 those parts of the Companies Act 2006
applicable to companies reporting under IFRS.
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 2017 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 2017 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.
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Financial Statements | Ofgem Consolidated Segmental Statement
INTRODUCTION
The Ofgem Consolidated Segmental Statement (CSS) and required regulatory information on pages 205 to 214 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 2017, which 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 those parts of the Companies Act 2006
applicable to companies reporting under IFRS.
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 2017 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 2017 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.
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Financial Statements | Ofgem Consolidated Segmental Statement
Ofgem Consolidated Segmental Statement (continued)
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 2017 within the operating segments
shown above. The individual supply and generation licences held in subsidiaries, joint ventures or associates of Centrica plc during 2017
are detailed below:
Licensee
British Gas Trading Limited
Neas Energy Limited (i)
Centrica Langage Limited (ii)
Centrica SHB Limited (ii)
Centrica Brigg Limited
Centrica Barry Limited
Centrica KPS Limited
Centrica RPS Limited
Centrica PB Limited
Centrica KL Limited
Lincs Wind Farm Limited (iii)
EDF Energy Nuclear Generation Limited (iv)
Licence
Supply
Supply
Generation
Generation
Exempt
Generation
Generation
Exempt
Generation
Generation
Generation
Generation
Ownership
100%
100%
100%
100%
100%
100%
100%
100%
100%
100%
50% Joint venture
20% Associate
Neas Energy holds a supply licence but currently does not supply any UK customers.
(i)
(ii) Centrica plc Group disposed of Centrica Langage Limited and Centrica SHB Limited on 31 August 2017.
(iii) Centrica plc Group disposed of its 50% share of Lincs Wind Farm Limited on 17 February 2017. As our investment in Lincs Wind Farm Limited was classified as held for sale during 2017 up
to date of disposal, its results had no impact on the CSS.
(iv) The Group holds a 20% investment in Lake Acquisitions Limited which indirectly owns 100% of EDF Energy Nuclear Generation Limited.
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Financial Statements | Ofgem Consolidated Segmental Statement
OFGEM CONSOLIDATED SEGMENTAL STATEMENT
Year ended 31 December 2017
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
Electricity Generation
£m
£m
£m
548.1
537.1
11.0
Unit Nuclear (i) Thermal (i)
367.2
340.4
26.8
(343.5) (394.9)
(208.0)
(101.5)
(153.0)
(216.7)
(29.8)
(43.7)
£m
£m
£m
£m
Renewables
–
–
–
–
–
–
–
Aggregate
Generation
Business
915.3
877.5
37.8
(738.4)
(309.5)
(369.7)
(73.5)
Electricity Supply
90.8
Non-
Domestic
Domestic
3,100.5 1,379.6
3,009.7 1,379.6
–
(3,095.7) (1,386.0)
(574.3)
(1,065.8)
(662.4)
(1,472.0)
(349.9)
(871.2)
£m
£m
£m
£/MWh, P/th
£m
£m
£m
TWh, MThms
–
(173.0)
(25.3)
(7.9)
204.6
(142.5)
62.1
12.8
(66.0)
(57.2)
(33.9)
(36.5)
(27.7)
(10.5)
(38.2)
7.5
–
–
–
–
–
–
–
–
(66.0)
(230.2)
(59.2)
N/A
176.9
(153.0)
23.9
N/A
(559.1)
(41.7)
(557.9)
(51.5)
4.8
(51.4)
(46.6)
20.7
(286.3)
(26.2)
(149.3)
(50.8)
(6.4)
(9.7)
(16.1)
11.3
Gas Supply
Domestic
3,972.8
3,891.8
81.0
(3,296.0)
(1,448.7)
(1,117.1)
(1,027.8)
(48.8)
(40.5)
(730.2)
(45.3)
676.8
(63.8)
613.0
3,200.5
Non-
Domestic
419.5
419.5
–
(393.5)
(209.4)
(113.7)
(88.7)
–
(25.0)
(70.4)
(48.0)
26.0
(4.4)
21.6
436.6
Aggregate
Supply
Business
8,872.4
8,700.6
171.8
(8,171.2)
(3,298.2)
(3,365.2)
(2,337.6)
(894.2)
(133.4)
(1,507.8)
N/A
701.2
(129.3)
571.9
N/A
‘000s
N/A
N/A
N/A
N/A
6,113.2
474.7
7,588.3
211.9
N/A
Supply EBIT
Supply PAT
Supply PAT
margin
£m
margin
(1.5)% (1.2)%
(12.0)
(38.5)
(1.2)% (0.9)%
15.4%
503.9
12.7%
5.1%
18.5
4.4%
6.4%
471.9
5.3%
2016 Summarised CSS
Year ended 31 December 2016
Total revenue
EBIT
Unit
£m
£m
Electricity Generation
Thermal
(i)
532.0
(50.6)
Nuclear
(i)
576.1
112.2
Aggregate
Generation
Business
72.2 1,180.3
71.8
10.2
Renewables
Supply EBIT
Supply PAT
Supply PAT
margin
£m
margin
(3.9)%
(105.3)
(3.3)%
0.1%
1.6
0.1%
(i)
The Nuclear and Thermal segments represent conventional electricity generation.
Electricity Supply
Gas Supply
Domestic
3,208.7
(125.9)
Non-
Domestic
1,459.1
1.9
Domestic
4,498.5
678.9
15.1%
567.7
12.6%
Non-
Domestic
538.8
47.9
8.9%
40.5
7.5%
Aggregate
Supply
Business
9,705.1
602.8
6.2%
504.5
5.2%
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Financial Statements | Ofgem Consolidated Segmental Statement
Ofgem Consolidated Segmental Statement (continued)
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 (i.e. net of losses); Generation volume is the volume of power that can
actually be sold in the wholesale market (i.e. 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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Financial Statements | Ofgem Consolidated Segmental Statement
BUSINESS FUNCTIONS TABLE
Year ended 31 December 2017 – 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)
(bilateral) (market and
bilateral)
–
–
–
(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).
‘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.
(iii)
(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.
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Financial Statements | Ofgem Consolidated Segmental Statement
Ofgem Consolidated Segmental Statement (continued)
BASIS OF PREPARATION
The following notes provide a summary of the basis of preparation of the 2017 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 2017, included in the Centrica plc Annual Report and Accounts 2017 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 2017.
For the Generation segment, we have included the financial results from all activities that relate to our generation licences with the
exception of held for sale activities in relation to renewables up to disposal in February 2017. For clarity the following judgements have
been made:
● where a sub-segment (for example Nuclear or Thermal) 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 Lake Acquisitions Limited, which owns 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; and
● 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 2016 CSS with margins has been included within the report.
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 2017, 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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Financial Statements | Ofgem Consolidated Segmental Statement
BASIS OF PREPARATION
● 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:
– £90.8 million (2016: £81.0 million) in Domestic Electricity Supply and £81.0 million (2016: £77.6 million) in Domestic Gas Supply
primarily relating to New Housing Connections and smart meter installations;
– £26.8 million (2016: £24.7 million) in Thermal principally relating to Supplementary Balancing Reserve (SBR), Short Term Operating
Reserve (STOR) and Triad revenue; and
– £11.0 million (2016: £6.0 million) revenue in Nuclear not directly related to energy sales, such as capacity market income and
provision of miscellaneous services to other nuclear facilities.
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. 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
Exchange
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.
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.
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 £38.4 million incurred by Gas Domestic Supply in 2017, which
enables the segment to secure supply by giving the ability to bring gas into the UK from overseas (2016: £40.8 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.
Centrica plc Annual Report and Accounts 2017 | 211
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Financial Statements | Ofgem Consolidated Segmental Statement
Ofgem Consolidated Segmental Statement (continued)
BASIS OF PREPARATION
● 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).
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 2017 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.
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 2018 to give comfort over compliance with the
Ofgem guidelines.
Treatment of joint ventures and associates
The share of results of joint ventures and associates for the year ended 31 December 2017 principally arises from the Group’s interests in
the entities listed on page 206, with the exception of our investment in Lincs Wind Farm Limited, which was classified as held for sale in
the period to disposal.
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 £0.1 million (2016: £0.7 million), EBIT loss of £0.1 million (2016: £0.5 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, impairment charges and impairment write-backs that have
been identified in the Centrica plc Annual Report and Accounts 2017 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 2017.
The Nuclear sub-segment result includes a £17.0 million (2016: £20.9 million) profit from the revaluation of contingent valuation rights,
related to the original acquisition of the Nuclear investment.
The Domestic Supply segment includes a charge of £3.9 million for the impairment of an associate. This item has been included in the
Supply segment as it is not exceptional in size, nature or incidence and does not materially change the Domestic Supply result.
In 2016, the Non-Domestic Supply segment included 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). There were no transactions of this nature in 2017.
A reconciliation of the Segmental Statement revenue, EBIT, depreciation and Supply PAT to the 2017 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.
212 | Centrica plc Annual Report and Accounts 2017
212 | Centrica plc Annual Report and Accounts 2017
Centrica Financials_Back-End.indd 212
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Financial Statements | Ofgem Consolidated Segmental Statement
RECONCILIATION TO CENTRICA PLC ANNUAL REPORT AND ACCOUNTS
The reconciliation refers to the segmental analysis of the 2017 Centrica plc Annual Report and Accounts in note 4.
Generation
segment
2017
Domestic
Non-Domestic
Electricity
2017
Gas
2017
Electricity
2017
Gas
2017
Notes
Supply segment
)
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
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
Less Non-UK provision
Ofgem Consolidated Segmental Statement
–
622.2
170.9
–
793.1
–
538.0
(597.1)
(151.3)
332.6
915.3
–
34.8
(52.8)
–
(18.0)
–
55.8
(13.9)
–
23.9
1
2
3
4
5
6
1
2
5
6
7
8,535.6
–
–
(1,462.3)
7,073.3
1,829.5
–
–
(30.4)
1,799.1
3,100.5 3,972.8 1,379.6
–
–
–
–
–
–
–
–
–
–
–
–
419.5
–
–
–
–
3,100.5 3,972.8
1,379.6
419.5
819.4
–
–
(247.1)
572.3
3.9
–
–
1.6
5.5
(44.0)
–
616.3
–
–
(2.6)
(46.6)
–
(3.3)
613.0
(16.1)
–
–
–
(16.1)
21.6
–
–
–
21.6
Centrica Financials_Back-End.indd 213
16/03/2018 15:50
Centrica plc Annual Report and Accounts 2017 | 213
Centrica plc Annual Report and Accounts 2017 | 213
Financial Statements | Ofgem Consolidated Segmental Statement
Ofgem Consolidated Segmental Statement (continued)
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
Less Non UK provision
Ofgem Consolidated Segmental Statement
Generation
segment
2017
Domestic
Non-Domestic
Electricity
2017
Gas
2017
Electricity
2017
Gas
2017
Notes
Supply segment
–
(9.6)
(16.4)
(26.0)
(142.5)
15.5
(153.0)
(158.7)
–
–
43.5
(115.2)
(14.3)
–
–
0.2
(14.1)
(51.4)
–
–
(51.4)
(63.8)
–
–
(63.8)
(9.7)
–
–
(9.7)
(4.4)
–
–
(4.4)
674.0
(203.9)
470.1
5.3
1.2
6.5
(36.4)
(2.1)
(38.5)
506.5
(2.6)
503.9
(12.0)
–
(12.0)
18.5
–
18.5
1
2
3
5
1
2
7
(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 2017 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. 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 2017, has been split between Gas
and Electricity.
3. £538.0 million of revenues relating to the Group’s share of joint ventures and associates in Generation are included in the CSS for
Nuclear revenues. £58.0 million of EBIT in the Generation segment relates to profit from joint ventures for Nuclear. Additionally, costs
relating to the Group’s share of joint ventures and associates: £101.5 million direct fuel costs, £216.7 million direct costs, £19.3 million
indirect costs and £142.5 million depreciation and amortisation are included. The results of joint ventures and associates are shown
separately in the Centrica plc Annual Report and Accounts 2017 in notes 6 and 14.
4. £597.1 million of intra-segment revenues, split £534.3 million between the joint ventures and associates and the Generation segment
(included in the £538.0 million of joint venture and associate revenues) and £62.8 million between the CPG and EM&T segment (related
to power station tolls), are excluded from the CSS.
5. DE&P includes operations outside the UK. Revenues of £151.3 million, EBIT loss of £55.8 million and depreciation of £15.5 million have
consequently been excluded from the Generation segment of the CSS.
6. £332.6 million of revenues and an EBIT loss of £13.9 million relating to Centrica’s EM&T optimisation are included in the Generation
segment of the CSS.
7. EBIT of £5.9 million and a post-tax gain of £4.7 million in Domestic costs arises from a provision release related to a non-UK disposal in
a prior period.
214 | Centrica plc Annual Report and Accounts 2017
214 | Centrica plc Annual Report and Accounts 2017
Centrica Financials_Back-End.indd 214
16/03/2018 15:50
Financial Statements | Ofgem Consolidated Segmental Statement
Other Information | Shareholder Information
Shareholder Information
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
Contact: help.shareview.co.uk
Website: equiniti.com
* 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
American Depositary Receipt (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:
Address: BNY Mellon Shareowner Services, PO Box 505000,
Louisville, KY 40233-5000, 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
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 gives you:
•
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 contains a wide range of
information including a dedicated investors section where you can
find further information about shareholder services including:
• share price information;
• dividend history;
• ownership profile;
• the Scrip Dividend Programme;
• telephone and internet share dealing;
• downloadable shareholder forms; and
• taxation.
This Annual Report and Accounts can also be viewed online by
visiting centrica.com/ar17
Dividends
Centrica dividends can be paid directly into your bank or building
society account instead of being despatched to you by cheque. More
information about the benefits of having dividends paid directly into
your bank or building society account, and the mandate form to set
this up, can be found in the Investors section of our website.
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.
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.
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
Annual General Meeting (AGM) vote online. You can manage your
shareholding online by registering at shareview.co.uk, a free online
platform provided by Equiniti, which allows you to:
• view information about your shareholding;
• have your dividend paid into your bank account;
• update your personal details; and
• appoint a proxy for the AGM.
2018 calendar
10 May 2018
11 May 2018
14 May 2018
17 May 2018
7 June 2018
28 June 2018
31 July 2018
11 October 2018
12 October 2018
17 October 2018
1 November 2018
22 November 2018
Ex-dividend date for 2017 final dividend
Record date for 2017 final dividend
Trading Update
AGM
Scrip reference share price set
Deadline for the receipt of scrip election
forms from shareholders
Payment date for 2017 final dividend
Half-year results announcement
Ex-dividend date for 2018 interim dividend
Record date for 2018 interim dividend
Scrip reference share price set
Deadline for the receipt of scrip election
forms from shareholders
Payment date for 2018 interim dividend
Centrica plc Annual Report and Accounts 2017 | 215
Other Information | Additional Information – Explanatory Notes (Unaudited)
Additional Information – Explanatory Notes (Unaudited)
Definitions and reconciliation of adjusted performance measures
Centrica’s 2017 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 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 within this announcement to help explain the performance of the Group and these are defined and reconciled below.
EBITDA
EBITDA is the profit measure that provides the bridge between the Income Statement and the Group’s key cash metrics.
Year ended 31 December
Group operating profit
Exceptional items and certain re-measurements before taxation
Share of profits of joint ventures and associates, net of interest and taxation
Depreciation and impairments of property, plant and equipment
Amortisation, write-downs and impairments of intangibles
Impairment of joint ventures and associates
EBITDA
I/S
I/S
I/S
4(d)
4(d)
14(a)
2017
£m
486
759
(51)
673
271
4
2,142
2016
£m
2,486
(1,019)
(130)
737
288
3
2,365
Change
(9%)
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.
The calculation has been amended to make adjustments to rebase adjusted operating cash flow to reflect the prevailing foreign exchange
and commodity prices in 2015 rather than those in the current reporting period. This provides a fixed reference point and prevents the need
to continually recalculate the comparative periods and allows management to measure underlying adjusted operating cash flow growth since
2015, the announcement of the Strategic Review.
Year ended 31 December
Adjusted operating cash flow
Commodity price – E&P and Nuclear (i)
Foreign exchange movements (ii)
UK Business working capital impact
Underlying adjusted operating cash flow
4(f)
2017
£m
2,069
(100)
27
–
1,996
2016 (restated)
£m
Change
2015 (restated)
£m
2,686
(46)
11
(357)
2,294
2,253
(331)
–
102
2,024
(13%)
(i) The commodity price adjustment has been calculated by applying the average commodity price in 2015 to production and generation volumes for 2017 and 2016 net of
taxation. In 2015, the commodity price has been adjusted to exclude the impacts of hedging prior to 2015 to ensure the operating cash flow reflects the prevailing average
commodity price in 2015.
(ii) The foreign exchange movement has been calculated by applying the average 2015 rate to the 2017 and 2016 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 Exploration & Production (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.
216 | Centrica plc Annual Report and Accounts 2017
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)
Cash acquired through Spirit Energy transaction
Net disposals (i)
Free cash flow
4(f)
2017
£m
448
(439)
78
289
376
2016
£m
655
(518)
–
29
166
Change
127%
(i) 2017 net disposals include Trinidad and Tobago, Canada and NSIP (ETS) Limited (see note 12(d)) and other small E&P asset disposals. 2016 net disposals include Skene
and Buckland, Trinidad and Tobago Blocks 1a and 1b, and 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. 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, disposals
of interests in joint ventures and associates, net of investments in joint ventures and associates. Cash acquired through the Spirit Energy
transaction has been excluded since this is an unusual acquisition whereby there was no cash consideration and hence this has been
separately highlighted in the calculation.
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
2017
£m
1,252
(7)
(191)
(81)
(7)
966
3,428
(729)
886
2,862
(370)
18
780
6,875
14%
2016
£m
1,515
(48)
(282)
(120)
5
1,070
2,844
(178)
1,137
3,764
(280)
23
(582)
6,728
16%
Change
(2ppt)
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.
Centrica plc Annual Report and Accounts 2017 | 217
Other Information | Responsible Business – Performance Measures
Responsible Business – Performance Measures
Non-financial key performance indicators (KPIs)
Assurance
We engaged PricewaterhouseCoopers LLP (‘PwC’) to undertake a limited assurance engagement, reporting to Centrica plc only, using
International Standard on Assurance Engagements (‘ISAE’) 3000 (Revised): ‘Assurance Engagements Other Than Audits or Reviews of
Historical Financial Information’ and ISAE 3410: ‘Assurance Engagements on Greenhouse Gas Statements’ over the KPIs on pages 31, 36,
41, 43, 70-71, 76, 85, 89 and below, that have been highlighted with the symbol ‘†’. They have provided an unqualified opinion in relation
to the relevant KPIs and data and their full assurance opinion is available at centrica.com/assurance
A limited assurance engagement is substantially less in scope than a reasonable assurance engagement in relation to both the risk
assessment procedures, including an understanding of internal control, and the procedures performed in response to the assessed risks.
Non-financial performance information, including greenhouse gas quantification in particular, is subject to more inherent limitations than
financial information. It is important to read the selected responsible business information contained in the Annual Report and Accounts 2017
in the context of PwC’s full limited assurance opinion and Centrica’s Basis of Reporting, which is also available in the assurance section of the
website set out above.
To explore our wider non-financial performance
view centrica.com/datacentre
Safety
Metric
Lost time injury frequency rate
Total recordable injury frequency rate
Significant process safety events
(Tier 1)
Unit
Per 200,000
hours worked
Per 200,000
hours worked
Number
Process safety incident frequency rate
(Tier 1 and Tier 2)
Per 200,000
hours worked
Road safety incident frequency rate
Fatalities
Customer safety incidents
Per one million
kilometres driven (ii)
Number
Number
2017
0.36†
0.98†
0†
0.14†
0.32
0†
27
2016
0.30 (i)
0.98 (i)
2 (i)
0.33
0.76
1 (i)
35
What’s next
Grow our safety culture to deliver an incident-free
workplace, enabled through targeted safety
interventions in key performance areas and an
improved management system
Strengthen our understanding, monitoring and
controls related to process safety
Deliver proactive driver safety programmes, based
on behavioural insight and performance analysis
Maintain zero fatalities by continuing to promote
safety as our highest priority
Continue to deliver a strong customer safety
performance by focusing on training, tools and
work practices
Included in PwC’s limited assurance scope referred to above.
†
(i) Assured by Deloitte LLP for the Annual Report and Accounts 2016. See centrica.com/responsibilitydownloads to view Deloitte’s assurance statement and Basis of Reporting.
(ii) Where actual distance travelled is not available, distance is calculated using fuel consumption and business expense claims.
218 | Centrica plc Annual Report and Accounts 2017
Customers
Metric
Consumer net promoter score (NPS): (i)
• UK Home
• North America Home
• Ireland
• Connected Home
Business NPS: (i)
• UK Business
• North America Business
Vulnerable households helped by
UK Home initiatives (iii)
Smart meter installations
(UK Home and UK Business)
Unit
Number
Number
2017
+1†
+33†
+17†
+39†
-11†
+33†
2016
+3 (ii)
+32 (ii)
+20
+45
-8 (ii)
+31 (ii)
What’s next
Continue to deliver new products and services that
satisfy the changing needs of our customers while
delivering a strong customer service
Number
741,721
964,670
Number
(cumulative since
2009)
4,703,566
3,851,990
Continue to ensure customers in vulnerable
circumstances receive the help they need to stay
warm, safe and debt-free
Maintain industry leadership in smart meter
installation and transition to an enduring delivery
infrastructure to meet the mandated roll-out by 2020
Included in PwC’s limited assurance scope referred to on page 218.
†
(i) NPS measures customer satisfaction and in 2017, the methodology was implemented consistently across the UK, Ireland and North America. Prior year figures have been
restated where applicable.
(ii) Values previously reported were assured by Deloitte LLP for the Annual Report and Accounts 2016 – UK & Ireland Home: +4 and UK & Ireland Business: -16 while North
America Home and North America Business are as previously reported. Data relating to Ireland was not assured by Deloitte LLP.
(iii) Methodology was improved in 2017 to no longer include customers on the Priority Services Register; a list including potentially vulnerable customers who may require extra
support but may not have needed to receive help with their energy during the period. Prior year figure has been restated.
Employees
Metric
Employee engagement (i)
Unit
Percentage
favourable
2017
52†
2016
–
Diversity
• Female and male employees
Percentage
• Female senior management
• Gender pay gap (ii)
29 female†
71 male†
28†
12 mean
30 median
Percentage
85.8†
29 female
71 male
26
–
–
81.4
Days per full time
employee (iii)
14.8†
11.6
Total employee volunteering hours (iv)
Number
57,340
53,513
Retention
Absence
What’s next
Take action to improve engagement and strive
towards exceeding the IBM external global
benchmark
Continue to improve gender balance and our
female talent pipeline across the business,
including at a senior leadership and Board level
Improve retention levels following the restructuring
of our business through effective management
and monitoring
Focus on driving down absence through good
management practices, including proactive
intervention and preventative action
Grow the skills of our people and make a strong
impact in local communities through volunteering
Included in PwC’s limited assurance scope referred to on page 218.
†
(i) Measurement in 2017 moved to a new provider to enable best practice external benchmarking. Due to changes in methodology, the 2017 target is no longer applicable and
providing a direct prior year comparative is not possible. However, based on a comparison of employee responses to like-for-like engagement questions, our performance
improved 6% in 2017 from 2016 (see page 85). Performance in 2016 was previously assured by Deloitte LLP for the Annual Report and Accounts 2016 – 4.31 out of 6.
(ii) Data based on 5 April 2017 snapshot for UK employees and constitutes our first year of reporting. Read our Gender Pay Statement to find out more at centrica.com/genderpay
(iii) Relates to absence from sickness rather than wider forms of absence such as bereavement.
(iv) Includes volunteering during and outside business hours when enabled by Centrica.
Centrica plc Annual Report and Accounts 2017 | 219
Other Information | Responsible Business – Performance Measures
Responsible Business – Performance Measures (continued)
Carbon emissions
Metric
Total carbon emissions (i)
Unit
tCO2e
2017
2016
What’s next
4,103,348†
5,073,320 (ii)
Scope 1 emissions
tCO2e
4,044,754†
4,986,299 (ii)
Scope 2 emissions
tCO2e
58,594†
87,022 (ii)
Total carbon intensity by revenue
tCO2e /£
146
187 (iii)
Internal carbon footprint
(core property, fleet and travel)
tCO2e
75,706†
(18% reduction
against target)
84,989 (iv)
(8% reduction
against target)
Carbon intensity of
Central Power Generation
gCO2/kWh
125
137 (v)
Total customer carbon savings
from measures installed
tCO2e
(cumulative
since 2008)
30,853,738 (vi)
26,509,236 (vii)
Continue to adopt best practice in monitoring and
reporting our global carbon emissions, while
analysing the long-term impact of our strategy
Continue to take proactive steps to reduce our
carbon emissions through innovation, technology
and cultural change
Maintain the reduction of emissions associated
with our use of electricity, particularly as part of our
internal carbon footprint target
Continue to analyse the impact of our strategic
plans on our carbon intensity
Review our 2025 target, following the restructuring
of our business
Our target is to reduce our core internal carbon
footprint by 20% to 73,547tCO2e by the end of 2025
(baseline: 2015)
Review the metric, target and long-term
environmental goals in our Central and Distributed
Energy & Power businesses
Our target was to reduce our Central Power
Generation carbon intensity by 55% to
200gCO2/kWh by the end of 2020 (baseline: 2008)
Continue to gain insights from the metric in order to
better understand how our energy generation and
efficiency products can help our customers reduce
their environmental impact
Included in PwC’s limited assurance scope referred to on page 218.
†
(i) Comprises of Scope 1 and Scope 2 emissions as defined by the Greenhouse Gas Protocol.
(ii) Restated due to availability of improved data. Values previously reported were assured by Deloitte LLP for the Annual Report and Accounts 2016 – Total carbon emissions:
5,119,709tCO2e, Scope 1 emissions: 5,032,493tCO2e and Scope 2 emissions: 87,216tCO2e.
(iii) Restated due to availability of improved data.
(iv) Restated due to availability of improved data and divestments.
(v) Assured by Deloitte LLP for the Annual Report and Accounts 2016.
(vi) Comprising of 93% mandatory and 7% voluntary initiatives. A growing share of carbon savings are generated from voluntary initiatives in recent years, reflected by over a third
of savings arising from voluntary products and services in 2017.
(vii) Restated due to availability of improved data. Comprising of 94% mandatory and 6% voluntary initiatives. UK value previously reported was assured by Deloitte LLP for the
Annual Report and Accounts 2016 – 26,786,285tCO2e.
Community
Metric
Total community contributions
Unit
£ million
2017
155.5 (i)
2016
201.4 (ii)
Average sustainability risk rating
of assessed suppliers
Risk score
out of 100 (iii)
56 (low risk)
57 (low risk)
What’s next
Make a meaningful difference in the communities
where we live and work
Continue to assess sustainability risks among our
strategic and higher risk suppliers
(i) Comprising of £141.9 million in mandatory and £9.3 million in voluntary contributions which largely support vulnerable customers, £3.6 million in charitable donations calculated
using the London Benchmarking Group methodology (LBG) alongside £0.7 million in leverage which encompasses employee fundraising. The reduction in mandated
contributions is predominantly due to phasing of the Energy Company Obligation.
(ii) Comprising of £188.2 million in mandatory and £7.4 million in voluntary contributions which largely support vulnerable customers, £5.0 million in charitable donations calculated
using the LBG methodology alongside £0.8 million in leverage which encompasses employee fundraising.
(iii) A score near 100 is low risk. High risk companies have limited or no tangible actions on sustainability, medium risk companies take partial tangible action on selected
sustainability issues, low risk companies have a structured sustainability approach with policies and action to manage major sustainability issues while lowest risk companies
have strong sustainability credentials and reporting embedded across their business.
220 | Centrica plc Annual Report and Accounts 2017
CENTRICA PLC
Registered office:
Millstream
Maidenhead Road
Windsor
Berkshire
SL4 5GD
Company registered
in England and Wales
No. 3033654
centrica.com
Glossary
$
Refers to US dollars unless specified otherwise
2P reserves
Proven and probable reserves
AGR
AIP
AOCF
bbl
bcf
BSUoS
CCGT
CGU
CHP
CO2e
CPI
CSS
CUPS DB
CUPS DC
Data analytics
DEEPAC
EBITDA
EBT
ECO
EP
EPS
Advanced gas-cooled reactor
Annual Incentive Plan
Adjusted operating cash flow
Barrels of oil
Billion cubic feet
Balancing services use of system
Combined cycle gas turbine
Cash generating unit
Combined heat and power
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
Consolidated Segmental Statement
Centrica Unfunded Pension Scheme defined benefit
Centrica Unfunded Pension Scheme defined contribution
The process of examining data sets to draw conclusions and insights
about the information they contain
Direct Energy Employee Political Action Committee
Earnings before interest, tax, depreciation and amortisation
Employee Benefit Trust
Energy Company Obligation
Economic profit
Earnings per share
EU ETS
European Union Emissions Trading Scheme
FCA
FFS
FIT
FRS
Financial Conduct Authority
Fixed-fee service
Feed-in tariff
Financial Reporting Standards
FVLCD
Fair value less costs of disposal
gCO2/kWh
GDPR
Grammes of carbon dioxide per kilowatt hour
General Data Protection Regulation
GW
GWh
HVAC
IAS
IFRS
IPIECA
ISA
KPI
kW
kWh
LNG
LTIFR
Gigawatt
Gigawatt hours
Heating, ventilation and air conditioning
International Accounting Standards
International Financial Reporting Standards
International Petroleum Industry Environmental
Conservation Association
International Standards in Auditing
Key performance indicators
Kilowatt
Kilowatt hour
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
mtCO2e
MW
MWh
MWp
NBV
NGO
NLF
nm
NPS
Million barrels of oil equivalent
Million therms
Million tonnes of carbon dioxide equivalent
Megawatt
Megawatt hour
Megawatt peak
Net book value
Non-governmental organisation
Nuclear Liabilities Fund
Not measured
Net promoter score
OECD
Organisation for Economic Cooperation and Development
OTC
PAC
PIE
PPA
PP&E
ppt
PRA
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
Petroleum Revenue Tax
Pressurised water reactor
Qatar Petroleum International
Reconciliation by difference
ROACE
Return on average capital employed
ROC
RPI
RRJ
RRS
SBR
SBU
Renewable Obligation Certificate
Retail Price Index
Risk Requiring Judgement
Risk Requiring Standards
Supplementary Balancing Reserve
Standard bundled unit
SHESEC
Safety, Health, Environment, Security and Ethics Committee
STOR
SVT
tCO2e
the Code
Short Term Operating Reserve
Standard variable tariff
Tonnes of carbon dioxide equivalent
The UK Corporate Governance Code set of principles and provisions
issued by the Financial Reporting Council
TRIFR
Total Recordable Injury Frequency Rate
TSR
TWh
VAT
VIU
Total shareholder return
Terawatt hour
Value added tax
Value in use
WBCSD
World Business Council for Sustainable Development
WRI
World Resources Institute
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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.