Satisfying the
changing needs
of our customers
Enabling the
transition to a lower
carbon future
Annual Report and Accounts 2019
Group Snapshot
Centrica plc is a leading international energy
services and solutions provider focused
on satisfying the changing needs of our
customers and enabling the transition
to a lower carbon future.
The world of energy is changing rapidly and Centrica is now
equipped to help customers transition to a lower carbon future,
with capabilities and technologies to allow them to reduce their
emissions. Therefore, we announced in July 2019 our intention
to complete the shift towards the customer, by exiting oil and
gas production.
The Company’s two customer-facing divisions, Centrica
Consumer and Centrica Business, are focused on their
strengths of energy supply and its optimisation, and on services
and solutions, with a continued strong focus on delivering high
levels of customer service. Centrica is well placed to deliver
for our customers, our shareholders and for society. We aim
to be a good corporate citizen and an employer of choice.
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.
We are targeting significant cost efficiency savings by 2022
to position Centrica as the lowest cost provider in its markets,
consistent with our chosen brand positioning and propositions.
Alongside our distinctive positions and capabilities, this will
be a key enabler as we target delivering growth in adjusted
earnings, cash flow and the dividend over the medium term.
Explore online
Visit our website to find out more:
centrica.com/ar19
@centricaplc
Unless otherwise stated, all references to the Company shall mean Centrica plc; references to the Group shall mean
Centrica plc and all of its subsidiary entities; and 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 29 to 33. See also notes 2, 4 and 10 to the Financial Statements on pages 122,
125 to 128 and 138, for further details of these adjusted performance measures. In addition see pages 223 to 224 for
an explanation and reconciliation of other adjusted performance measures used within this document.
Everything we do is focused on satisfying
the needs of our customers.
Centrica Consumer
Centrica Consumer is focused
on three areas, Energy Supply,
In-Home Servicing and
Home Solutions.
20
Centrica Business
Centrica Business is focused
on three areas, Energy Supply,
Energy Optimisation and Business
Services & Solutions.
24
Upstream
Our Upstream division consists
of our Exploration & Production
(E&P) and Nuclear power
generation businesses.
27
Strategic Report
2 Centrica at a Glance
4 Chairman’s Statement
6 Group Chief Executive’s Statement
12 Our Strategy
14 Our Business Model
16 Stakeholder Engagement
18 Key Performance Indicators
20 Divisional Review:
– Centrica Consumer
– Centrica Business
– Upstream
29 Group Financial Review
34 Our Principal Risks and Uncertainties
46 A Pathway to Net Zero
48
Delivering our Responsible
Business Ambitions
– Non-Financial Reporting Statement
Governance
55
Directors’ and Corporate
Governance Report
69 Committee Reports
82 Remuneration Report
100 Directors’ and Corporate Governance
Report – Other Statutory Information
Independent Auditor’s Report
Financial Statements
104
114 Group Income Statement
Group Statement of
115
Comprehensive Income
116 Group Statement of Changes in Equity
117 Group Balance Sheet
118 Group Cash Flow Statement
119 Notes to the Financial Statements
196 Company Financial Statements
Notes to the Company
198
Financial Statements
208 Gas and Liquids Reserves (Unaudited)
209 Five Year Summary (Unaudited)
210
Ofgem Consolidated Segmental
Statement
Other Information
222 Shareholder Information
223 Additional Information
– Explanatory Notes (Unaudited)
225 Responsible Business
– Performance Measures
IBC Glossary
Centrica plc Annual Report and Accounts 2019
1
Strategic Report
Centrica at a Glance
Our purpose
We are an energy services and
solutions company, focused
on satisfying the changing
needs of our customers,
enabling the transition to
a lower carbon future.
Group highlights
› ‘21st Century Energy Services and Solutions company’
› Delivering long-term shareholder value through returns
and cash flow growth
› Trusted corporate citizen
› Employer of choice
Group Operational Performance
Group Financial Summary (Year ended 31 December 2019)
Total recordable injury frequency rate
(per 200,000 hours worked)
Group revenue
Return on average capital employed
(ROACE)(3)
2019
2018
1.06
DATA TO BE UPDATED
1.02
£22.7bn
2018: £23.3bn(2)
3%
9%
2018: 13%
4ppt
Internal carbon footprint
(tCOe2e)
Adjusted operating profit(3)
Statutory operating loss
2019
2018
55,145†
66,5664
£901m
2018: £1,392m
35%
Centrica Consumer total
customers (‘000)
Adjusted earnings attributable
to shareholders(3)
2019
2018
12,512
DATA TO BE UPDATED
12,518
£419m
2018: £631m
34%
£(849)m
2018: £987m profit
Statutory loss for the year
attributable to shareholders
£(1,023)m
2018: £183m profit
Centrica Business total
customers (‘000)
2019
2018
Total customer energy
consumption (TWh)
2019
2018
Adjusted basic earnings per share (EPS)(3)
Statutory basic earnings per share (EPS)
512
503
508
496
7.3p
2018: 11.2p
35%
Adjusted operating cash flow(3)
£1,830m
2018: £2,245m
18%
(17.8)p
2018: 3.3p
Statutory net cash flow
from operating activities
£1,250m
2018: £1,934m
35%
Direct Group headcount(1)
Group net debt
2019
2018
26,932
30,520
£3,181m
2018: £2,656m
20%
Net exceptional charge after taxation
included in statutory loss
£987m
2018: £235m
320%
(1) Direct Group headcount excludes contractors, agency and outsourced staff.
(2) Restated for presentation of energy derivatives. See note 1 to the Financial Statements.
(3) See notes 2, 4 and 10 to the Financial Statements for definition and reconciliation of these measures.
(4) Restated mainly due to organisational changes which included divestments.
† We engaged PricewaterhouseCoopers (PwC) to undertake a limited assurance engagement over 6
metrics highlighted with the symbol ‘†’ throughout the Annual Report and Accounts 2019. See page 225
or centrica.com/assurance for more details.
2
Centrica plc Annual Report and Accounts 2019
Read more about our Key
Performance Indicators
Pages 18 to 19
The Group has redefined its
operating segments during the
year to reflect the way in which
the business is now organised.
Operating segments are now
defined as Centrica Consumer,
Centrica Business and Upstream.
The revised operating segments incorporate similar products and
services, as well as the major factors that influence the performance
of these products and services, such as regulatory environments within
Centrica Consumer, and access to commodity markets and trading
counterparties within Centrica Business, across different geographical
locations in which the Group operates. Further information on the
operating segments of the Group is shown at note 4 on page 125.
Centrica
Consumer
Centrica
Business
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 competitive and reliable energy
and energy services to residential and
business customers across Ireland.
North America Home
Supplying competitive and reliable energy
and providing home services to customers
in North America.
Centrica Home Solutions
Providing smart home products and
end-to-end solutions centred around
energy for households in the UK & Ireland,
including offers around Home Energy
Management and Electric Vehicle
Integration.
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Read more about
Centrica Consumer on
Pages 20 to 23
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.
Centrica Business Solutions
Providing end-to-end design, installation,
maintenance and service solutions
including optimisation and covering
a wide and expanding range of energy
technologies helping our customers
transition to a lower carbon future.
North America Business
Supplying competitive and reliable electricity
and natural gas 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.
Upstream
Spirit Energy
Producing around 50 million BOE (barrels of
oil equivalent) a year, focused on the North
Sea (the UK, the Netherlands, Norway and
Denmark). We intend to exit our interests
in Spirit Energy by the end of 2020.
Read more about
Centrica Business on
Pages 24 to 26
Centrica Storage
Operating the Rough gas field in the UK
North Sea, which has been converted
from a storage asset to a producing asset
before decommissioning.
Nuclear
Generating power from our 20% interest in
eight nuclear power stations in the UK.
Read more about Upstream on
Pages 27 to 28
Centrica plc Annual Report and Accounts 2019
3
Strategic Report
Chairman’s Statement
It is no coincidence
that the primary focus
of businesses that are
successful in adapting to
change lies in responding
promptly to the demands
of their markets and,
specifically, serving the
needs of their customers.
Centrica is increasingly well
positioned to help people in
their homes and businesses
to do what they need to
tackle the climate change
challenge and contribute
to a lower carbon future.”
Charles Berry
Chairman
4
Centrica plc Annual Report and Accounts 2019
In my statement last year, I described taking
on the Chairmanship of Centrica as a special
privilege, given my interest in the Company
from my long career in the energy industry.
I recognise that Centrica has faced very
challenging external circumstances in recent
years and that this has been reflected in the
shareholder experience. I also realise that
I have stepped into the chair at a time of
extraordinary and unprecedented structural
change in the energy industry, with the global
challenge of climate change facing us. But that
is one of the reasons I am confident about
Centrica’s future and in the underlying strength
of our business.
The external environment is constantly evolving and businesses
must be prepared to respond. It is no coincidence that the primary
focus of businesses that are successful in adapting to change lies
in responding promptly to the demands of their markets and,
specifically, serving the needs of their customers. Centrica is
increasingly well positioned to help people in their homes and
businesses to do what they need to tackle this challenge and
contribute to a lower carbon future.
For homes, we have strong trusted brands in the UK, Ireland and
North America serving approximately 12 million households. In the
UK, British Gas has nearly 8,000 highly trusted engineers and
technicians, a unique asset we can leverage to help our customers
fulfil their energy needs. Their role is also becoming about much
more than servicing boilers, vital though that remains. We now have
the platform which enables us to provide customers with a range of
new offers, such as installing electric vehicle charge points or giving
them more control over the energy systems in their homes.
In serving businesses we have a strong position, supplying energy
to nearly 1.2 million customer sites in the UK and North America.
And Centrica Business Solutions offers services and solutions
which play directly into the demand side of the energy transition.
By offering a range of sustainable energy solutions in addition to
energy supply – from monitoring and analysis of consumption
patterns to on-site solar and combined heat and power generation
– we can help our industrial customers become more cost efficient
while lowering their carbon footprint. We also assist in providing
flexibility services which enable electricity grids to be more
efficient and reduce the requirement for centralised power
generation.
In our customer-facing businesses, we are building upon our
legacy and establishing a strong platform for the long term. Our
long-term purpose is to provide energy and services to satisfy the
changing needs of our customers and enable the transition to a
lower carbon future. We have the potential to achieve that. But, in
order to make sure that there will be a long term, we must secure
the short term.
Creating momentum in 2019
After I took over the chairmanship, faced with some very
challenging external circumstances, we took the opportunity at
our March Board meeting, as a refreshed team, to stand back and
review the business and probe areas where we felt there were
particular challenges. The Board as a whole worked through those
in discussion with the executive team, culminating in our strategic
update in July.
In this we re-affirmed our strategic direction back towards the
customer and our desire to exit nuclear – at the right time and in
the right way. We announced our intention to sell our stake in the
Exploration & Production business, Spirit Energy. This has nothing
to do with the quality of Spirit as a business. But our journey is
back towards the customer. If we want to embrace our strengths
and the challenges of climate change with credibility and rigour, as
well as contributing in areas where we can make a real difference,
we need to focus on the customer and leave behind exploration
and production activities. We also announced ongoing
efficiencies, with an ambition to be right at the efficiency frontier.
This is key to securing the future in the face of intense competition.
The final step, and I am very aware of the impact on shareholders
of this decision, was to reduce the dividend per share from 12p
to 5p. We did this reluctantly. But given the external environment
and where the Company is going it was vital to make that reset, to
achieve a position where we feel the Company will be sustainable
and robust in the future.
Our people
So, as we continue to reposition the Company, I believe we are
beginning to demonstrate the potential for a recovery in our
fortunes. But I recognise that the short term remains painful and
I’m very aware of the impact that has on our colleagues. Many of
those affected by the ongoing reduction in roles have been with
us for a long time and have helped to create the brand and
develop the Company. That’s why as Chairman I wanted the
Board to get closer to our people.
In September we held a Board meeting in Stockport, where our
UK home services operation is based, for the first time. It was
fantastic for us to listen to our colleagues talking about what they
have achieved and what they care about despite the changes
they are facing.
I also visited our contact centre in Greater Manchester and
listened to our team there looking after vulnerable customers.
I continue to marvel at the skill and the professionalism with
which they interact on sensitive issues, such as household
income, and find ways to support our customers and advise
them on government grants and other help available. When I was
there, colleagues had just been told that they would be affected by
changes in the business. But you wouldn’t have noticed it from the
way they spoke and interacted with customers on the phone.
These are the things that make the brand. These are things that we
do which many of our smaller competitors do not. Simply put, in
any business, it always comes down to people in the end. What
makes the real difference is people. A brand is only as good as the
service that people deliver when they’re associated with that name.
Stakeholder engagement
All organisations today must place a much greater emphasis
on their purpose, what they stand for and their impact on all
stakeholders, including shareholders. A responsible company
must think about its impact on the environment, on its employees
and on wider society.
There is an increasing focus from fund managers on
environmental, social and governance performance. In these
areas we are consistently among the top quartile of UK
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companies. We have been identified as a world leader for strategic
action and disclosure on climate change by CDP, an international
NGO reporting to investors, achieving a place on its prestigious
‘A List’, based on our reporting on this area in 2019.
We are also continuing to actively engage with politicians and
regulators in all jurisdictions where we do business, on important
policy issues that will shape the new energy sector. However,
policy makers and regulators also need to play their part by
ensuring a competitive environment that provides an adequate
return on the substantial investments that will be needed to
meet important societal needs, including the challenge of
decarbonisation.
Board changes
There were several Board changes during 2019. Margherita Della
Valle stepped down after eight years as a Non-Executive Director
and I would like to thank her for all she has done. Sarwjit Sambhi
was appointed Chief Executive, Centrica Consumer and joined the
Board in March. Pam Kaur joined the Board as a Non-Executive
Director in February and Kevin O’Byrne joined the Board and
became Chairman of the Audit Committee in May. Heidi Mottram
also joined as a Non-Executive Director in January 2020. It has
been a pleasure getting to know my new fellow Board members
and working with them. We appreciate their refreshing input.
Our Chief Executive Iain Conn will be stepping down in the course
of 2020 after over five years at the helm. It has been a very tough
role to undertake at a particularly challenging time for the
Company and I would like to thank him for everything he has done.
He has led the re-positioning of the Company back towards the
customer and our core strengths, and towards making a major
contribution to a lower carbon future. This has not been easy and
required significant changes to the portfolio, reduction in costs
and the size of the team, as well as strong attention to cash flow
and our debt levels. During this time we have seen material
improvements in safety performance and customer outcomes.
There have been heavy external shocks during his tenure, many
that could not have been anticipated, and he has navigated the
Company through them bravely and we appreciate that highly. As
we address 2020, we are in a much stronger position from which
to build for the future.
Looking forward
Looking ahead, we believe our medium-term prospects remain
bright and the potential long-term growth opportunities are
significant. Our immediate focus on maximising our distinctive
strengths in energy supply and optimisation, and on services and
solutions centred around energy, is we believe correct. Embracing
the challenges of climate change, and being at the forefront in
tackling it, is the right thing to do. The course is set. Now we must
deliver on our promises and seek to make this Company one that
our employees and customers can be proud of. I would like to
conclude by thanking all my colleagues and co-workers at
Centrica for their dedication and hard work in challenging
circumstances. They are our greatest asset.
Charles Berry
Chairman
12 February 2020
Centrica plc Annual Report and Accounts 2019
5
Group Chief
Executive’s Statement
We remain dedicated
to satisfying the
changing needs of our
customers, but increasingly
those needs are around the
challenge of addressing the
threat of climate change, and
in 2019 we were therefore
ready to make a commitment
to enable our customers
to transition to a lower
carbon future.”
Iain Conn
Group Chief Executive
6
2019 presented a challenging operating
environment for Centrica, with the
implementation of the UK default tariff cap
and very low UK natural gas prices.
These circumstances put significant pressure on our business and
although underlying performance in our customer-facing divisions
improved, including enabling us to deliver better customer
outcomes and growth in account numbers, we were not able to
mitigate the full impact of external factors or the lower
performance volumes delivered from our Exploration & Production
and Nuclear businesses. We did deliver operating cash flow and
net debt within our target range and cost efficiencies were above
target. Adjusted operating profit was down 35% to £901 million
and adjusted operating cash flow was down 18% to £1,830 million.
We also recognised £1,103 million of net pre-tax exceptional
charges in 2019, mainly relating to impairments of our Exploration
and Production and Nuclear assets, reflecting the current low
commodity price environment and restructuring costs associated
with our Group-wide cost efficiency programme.
After adjusting for external factors, including the UK default tariff
cap and lower commodity prices, underlying operating profit was
only marginally down relative to 2018 and the contribution of the
customer-facing divisions was materially up. However, the impact
of the external factors on our forecast cash flows, and the
subsequent decision to cut the dividend following the Strategic
Update we conducted in H1 2019, resulted in a very poor
shareholder experience in 2019, something I greatly regret.
2019 context
2019 was also an extremely difficult year for the Centrica team,
with a significant number of colleagues leaving the Company as
we continued with our transformation, simplification and efficiency
programmes. Despite these pressures, the Centrica team
performed admirably, with improvements in net promoter scores,
reduced customer complaints, the introduction of attractive new
propositions, and the development of new capabilities as we shift
the Company towards enabling a lower carbon future for our
customers. Consumer accounts grew by 722,000 over the year,
and by 451,000 in the UK, with continuing growth in services and
solutions relationships and a further stabilisation of account losses
in energy supply. Many other metrics were excellent, including
continued top-quartile performance in process safety, and the
actions we have underway have created significant momentum
into 2020. Unfortunately, with so much change to the organisation
and with the fall in our share price, our employee engagement
scores were materially impacted. Improving these engagement
scores will be a focus for the Executive team in 2020.
Having summarised the year, let me now return to some
of the major events, milestones and deliverables which
characterised 2019.
Strategic Report Centrica plc Annual Report and Accounts 2019
Strategic update
As we entered 2019, we knew we faced a very challenging set of
circumstances, made worse by the fall in wholesale gas and
power prices towards the end of 2018. We responded in two ways
– first, initiating an acceleration of our transformation activity and
cost efficiency programmes and, second, from March through to
June, the Board conducted a Strategic Update including a review
of our portfolio, performance and strategic choices. In July we
presented our conclusions to shareholders. We announced that
we would be completing our shift back towards the customer,
exiting oil and gas production as well as the already announced
intention to sell our stake in nuclear power generation. We had
signalled since 2015 a lower emphasis on oil and gas production
and, as we deliver this final shift, Centrica will finally become a
leading international energy services and solutions provider,
focused on our distinctive strengths of energy supply and its
optimisation, and services and solutions centred around energy.
This includes growing opportunities in home energy management,
mobility solutions and system optimisation, ensuring the Company
will be well positioned for the future and able to satisfy the
changing needs of our customers, with an emphasis on helping
them transition to a lower carbon future.
The Board’s assessment of our business and the changed
external circumstances in which it currently operates, and the
requirement to meet additional obligations to our pension
schemes, also resulted in us taking the very difficult decision to
reduce the level of the dividend to 5 pence per share. We believe
this was essential in order to create a sustainable basis in which
we can balance distributions to shareholders with the amount that
we need to invest into the business, and continue to support our
other obligations, including to our pension funds and servicing our
debt. With the Company having reduced its net debt by around
40% since the start of 2015 and with our planned exits from
exploration, production and nuclear reducing our exposure to
natural gas prices, we believe that the smaller company will be
resilient to the environment in which we are operating while able to
maintain strong investment grade credit metrics.
Whilst I am convinced that the difficult decisions we took were the
right ones, and absolutely necessary to complete the re-
positioning of the Company for the future, I recognise that the
shareholder experience over a number of years has been very
poor. Although in 2018 we were in the top quartile of total
shareholder return in the FTSE 100 as we regained momentum
relative to 2017, in 2019 we were near the bottom on this measure.
However, our performance was much improved during the second
half of the year compared to the first half, with adjusted earnings
per share of 7.3p for the year as a whole, relative to 2.4p in the first
half, driven by strong momentum in our customer-facing divisions.
We expect to benefit from this momentum into 2020.
External environment
Turning to the external environment, we are now beginning to see
some of the adverse consequences of the temporary UK default
tariff that we had predicted, including job losses, company failures,
and other suppliers exiting the market. The price cap has reduced
margins and put huge pressure on costs for many participants.
Despite the high level of competition, very few UK energy suppliers
are making money and, for those who are, pre-tax margins make it
difficult to invest in the skills or technology required for the future.
We are responding by broadening the propositions we offer to
move away from just energy supply, while reducing our costs still
further to allow us to price as competitively as possible. We remain
committed to working with the government and the regulator
to help determine the right conditions for the temporary cap to
be lifted.
Natural gas prices have fallen further, and are currently under
$2/mmbtu in North America and under 30p/therm in the UK,
below our own ‘low case’ scenario. Forward prices for 2020
remain weak and, while our proposed exit from exploration,
production and nuclear will reduce our exposure to commodity
volatility, these low prices continue to have a significant impact
on Centrica.
Operational progress
Despite the very difficult context I have outlined, 2019 was a year
where we made good progress in our core objective – to satisfy
the changing needs of our customers. Focusing on improving our
operational effectiveness has made us more cost-efficient and
able to offer better value for money to our customers. We have
continued to build the capabilities that we believe our customers
will want and need in the future and exited areas where our
offering was relatively undifferentiated. Overall Consumer account
holdings were up 722,000 in 2019, the first full year of growth in my
time with Centrica, and Business customer accounts were broadly
stable. Brand net promoter scores (NPS) improved in UK Home
from +9 to +12, in UK Business from -12 to +1, in North America
Business from +28 to +32 and remained high in the other business
units.
I am pleased to say that customer relationships and customer
numbers are beginning to move in the right direction. I recognise
that we have lost a significant number of energy supply customers
in the UK in recent years, although a large proportion of the
reductions we saw in 2017 and 2018 stemmed from a deliberate
choice on our part to exit from certain channels that were
loss-making. In 2019 the rate of UK energy supply net losses was
less than half the rate of losses in 2018, and less than a quarter the
rate of losses in 2017 against a backdrop of continued high levels
of price competition and market switching. This reflects our efforts
on both cost efficiency and proposition development. We will
continue to focus on improving in both these areas and delighting
our customers as a result.
722,000
Consumer accounts grew
by 722,000 over the year
+12
Brand net promoter scores
(NPS) improved in UK Home
from +9 to +12
7
Strategic ReportCentrica plc Annual Report and Accounts 2019 Strategic Report | Group Chief Executive’s Statement continued
We are also redesigning our core operations in the UK,
reorganising around customer end-to-end journeys rather
than traditional industry processes. The trend for customers
to increasingly want to deal with us digitally will continue; for
example, the proportion of transactions completed online in
UK Home has increased to 55% compared to 50% at the end
of 2018. We are consolidating our call centres in the UK as a
result and focusing our efforts on improving our digital journeys.
In North America and Ireland we are pursuing a similar agenda.
In addition to sourcing and optimising energy supply for our
customers, our Energy Marketing & Trading business has grown
its customer-facing route-to-market services in Europe and
delivered excellent optimisation results. In February we signed a
landmark LNG agreement under which Tokyo Gas and Centrica
will jointly purchase 2.6 million tonnes per annum, delivered
ex-ship, from the Mozambique LNG Project. We will jointly market
and optimise this gas between our respective home markets
of Japan and Europe.
In our asset businesses, Spirit Energy production was 45.8 million
barrels of oil equivalent (mmboe), our operated Morecambe Bay
delivered excellent plant availability and production efficiency,
but there were shortfalls in non-operated fields in Norway.
We have also been working with our joint venture partner,
Stadtwerke München, in preparing Spirit Energy for a joint sales
process which is now underway. Centrica’s Rough gas asset
delivered 6.5mmboe of production, and continued to demonstrate
strong performance in process safety. The Nuclear business had
a very challenging year, with reactors at two sites, Hunterston
and Dungeness, shut down for most of the year for regulatory
inspections. As a result, our share of electricity generated from the
Nuclear fleet was 10.2 TWh, down from 11.8 TWh in 2018. We are
awaiting regulatory approvals to bring the reactors back online.
Read more about our
Divisional Review on
Page 20
We continue to unlock new opportunities for future growth.
We are developing a set of capabilities to deliver propositions
beyond those of energy supply and boiler servicing, from demand
response for businesses to bundled energy supply and home
energy management solutions for residential customers. This
includes remote diagnostics, smart energy control and electric
vehicle integration. We are set to provide electric vehicle
charging installation points and related services in the UK
for Ford, VW Citygate and NCP.
We are shifting the centre of gravity of our relationships with our
customers away from commoditised energy supply towards a new
suite of propositions that we know many will value. Many of these
differentiated propositions do not require us to offer energy supply
to the same customer, and as a result we are able to expand into
new markets in Continental Europe and countries such as Mexico,
while cross-selling to existing energy customers in the UK, Ireland,
Canada and the United States. North America remains the biggest
energy market in the world and the fastest-growing market for
energy services and solutions. We have added significant new
capabilities to Centrica Business Solutions, including in energy
efficiency, lighting retrofits, HVAC, building automation, and water
conservation through the acquisition of the North American energy
services and solutions company SmartWatt.
Key events in 2019
Direct Energy partners with
Budweiser Canada to provide
renewable energy
Centrica introduces
Responsible
Business Ambitions
out to 2030
Centrica Business
Solutions expands
US operations
with agreement to
purchase SmartWatt
January
February
March
April
May
June
Centrica signs contract with
Alcoa to support a Power
Purchase Agreement with
197MW Norwegian wind farm
Centrica Business Solutions
and Tokyo Electric Power
Company join forces to support
decarbonisation of Japanese grid
Direct Energy completes sale
of franchise home services
business, Clockwork, Inc.
Centrica Business Solutions
launches global Electric Vehicle
(EV) offer and joins UK-wide Go
Ultra Low campaign
Centrica’s Local Energy Market
trial completes battery installation
in over 100 Cornish homes in
addition to over 100 businesses
Centrica launch
Mobility Ventures
Centrica Business Solutions and
WSP develop integrated energy
solutions as part of the Modern
Energy Partners project
8
Centrica plc Annual Report and Accounts 2019 Transformation and efficiency
Operationally, we have made a lot of progress in 2019 and delivered
encouraging results in many areas. However, we still have much
work to do as we adapt to very changed circumstances. We
must finish the job of becoming the most competitive provider,
particularly in the UK energy supply market, and not give our
customers a reason to leave us. This requires becoming structurally
even more efficient. In some cases we are dealing with legacy
systems and processes that need to change in order to get there
but there is also significant progress we can make in simplifying
and improving customer journeys, and streamlining our internal
processes. In 2019 we delivered £315 million of cost efficiencies,
ahead of our target, with the associated exceptional restructuring
costs to deliver these savings also £356 million. Cumulative
efficiencies delivered since 2015 are now £1.26 billion per annum on
a like-for-like basis. This has allowed us to offset inflation, invest for
growth, and still have a nominal like-for-like controllable cost base
of £4.6 billion at the end of 2019 relative to £5.0 billion in 2015. We
are targeting a further £350 million of efficiencies in 2020 in our core
programme, most of which is underpinned, which is expected to
result in exceptional cash restructuring costs of around £300 million.
We remain on track to have delivered £2 billion of cumulative
efficiencies over the period 2015-22.
We know however that we can’t just cost cut our way to success.
While there will still be continuous improvement activities
undertaken every year, 2020 is expected to be the last major year
of change, transformation and efficiency delivery which will also
underpin much of what we need to see come through in 2021.
We therefore have an imperative to improve gross margin capture
and to use our new capabilities to grow our customer relationships
so that we can stabilise and then grow Centrica. While we are
encouraged by the progress we have made, our customer
journeys are still not as good as we would like and we have to keep
focusing relentlessly on improving the experience we offer our
customers and driving up NPS as the key measure of our success.
£315m
In 2019 we delivered
£315 million of cost
efficiencies
£1.26bn
Cumulative efficiencies
delivered since 2015 are now
£1.26 billion per annum on a
like-for-like-basis
Centrica Energy Trading and Enovos
Germany sign a Power Purchase
Agreement that enables a German
photovoltaic installation to operate
without subsidy
Centrica wins judicial review
relating to the treatment of
wholesale cost transitional
arrangements
Centrica agrees to
sell its 382MW King’s
Lynn gas-fired power
station
July
August
September
October
November
December
Centrica announces it
plans to exit oil and
gas production
Centrica announces partnership
with Ford to offer EV solutions in
UK and Ireland
Centrica loads its first liquified
natural gas cargo at the
Sabine Pass liquefaction plant
in Louisiana
2019
Direct Energy
Business signs long-term
agreement to take power
from solar project in
California
9
Strategic ReportCentrica plc Annual Report and Accounts 2019 Strategic Report | Group Chief Executive’s Statement continued
To ensure we complete our transformation journey successfully,
we must continue to live our values of care, delivery, collaboration,
agility and courage which we have established group-wide over
the last few years. I’m delighted with the way our organisation has
embraced our values and, along with Our Code, these help guide
us when the going gets tough and we have to face difficult choices
and decisions. We have continued to pay attention to other
foundational areas including safety, compliance and conduct.
In safety, we strive for an incident-free workplace and aim to
continuously improve performance through our focus on targeted
safety interventions alongside improved controls and monitoring.
While there were no significant (Tier 1) process safety events in
2019, we had two Tier 2 process safety events. Our total
recordable injury frequency rate also increased by 4% to 1.06 per
200,000 hours worked, although outside of the UK we saw
significant improvements in many businesses.
Despite all the change, we have continued to develop and invest in
our people, the core strength of our Company, developing new
ways to help them to build their skills and improve the consistency
with which we approach our work. We also continue to work on
the three pillars of our diversity and inclusion agenda: a diverse
workforce, an inclusive environment, and meritocratic processes.
We have seen significant improvements since I joined the
Company – the Board is now 23% female and 23% ethnic minority
members. Five of my twelve direct executive reports are women
and we have very active affinity groups including our LGBTQ+
community, Spectrum. I recognise there is more to do across all
areas of diversity and inclusion. Only by having a diverse and
inclusive workforce will we be successful and harness the full
range of talent that we need.
A lower carbon future
During 2019 we also reflected on Centrica’s purpose. We remain
dedicated to satisfying the changing needs of our customers, but
increasingly those needs are around the challenge of addressing
the threat of climate change, and in 2019 we were therefore ready
to make a commitment enabling our customers to transition to
a lower carbon future at the core of Centrica’s purpose. We have
owned the obligation to reduce the emissions of our customers
(Scope 3 emissions) and, in addition, we are focused on enabling
an energy system which is more efficient and lower carbon whilst
continuing to reduce our own carbon footprint. I am pleased that
Centrica regained the coveted CDP ‘A’ rating in early 2020, has
signed up to the Taskforce on Climate-related Financial
Disclosures (TCFD), and has engaged constructively with
representatives of the Climate Action 100+ group of investors.
Centrica is a company now much more in tune with the transition
to a lower carbon future. However, our origins and much of our
business still revolves around natural gas. While the world will
probably use more natural gas before it uses less, as gas
displaces coal in the global energy system, we must play our part
in helping our customers to use less energy in everything they do,
and over time to decarbonise heating through the adoption of new
technologies including partial use of hydrogen in the gas system,
solar, batteries and heat pumps. Centrica is committed to
developing a plan to be net zero by 2050 and playing a major
role in helping our customers to do the same.
Read about our Responsible
Business Ambitions to
tackle climate change on
Pages 50 to 51
Our colleagues
As a business, the changes we have been making to set ourselves
up for success in the challenging new operating environment have
resulted in a lot of upheaval for our colleagues in the Centrica
team. I recognise how difficult this has been for many of them and
am humbled by how hard they have worked. I want to thank them
for having remained committed to doing the best for our
customers and to delivering excellent operations across the
Company. They have upheld and lived our values throughout.
Over the last four years our direct workforce has fallen by over one
third, from 39,000 at the end of 2015 to just under 27,000 at the
end of 2019. This has had a very big impact on morale and the
changing business environment and energy transition has created
uncertainty about our future. I take very seriously the calls for
better communications, making our strategy and vision more
accessible, and enabling leaders to empower the wider team,
so that we can pull together as a team to deliver the business
outcomes we need for our customers. We also need to begin to
re-establish a winning mentality as our business stabilises and
we shape new opportunities. It is particularly important when
we consider that 2020 is going to be another year of significant
change for the Company but, as the last year of major
transformation, it is the gateway to a new future as a smaller and
more sustainable energy services and solutions company.
10
Centrica plc Annual Report and Accounts 2019 CEO succession
Finally, I will be stepping down as Chief Executive in the course
of 2020 after five fascinating, but extremely tough years which
have been very difficult for our shareholders and our Centrica
colleagues in particular. We determined in 2015 that it was urgent
the Company repositioned back towards the customer, and built
skills and capabilities more in tune with where the energy markets
were going, and in line with the demands to address climate
change. During that time, as well as the usual challenges of
commodity price movements and economic fluctuations, Centrica
has faced unprecedented political uncertainty and regulatory
intervention. Climate change has risen up the agenda as the
major challenge facing our world and, as we predicted in 2015,
a new decentralised, more digital and increasingly decarbonised
energy system has begun to develop.
Centrica is having to make some huge changes to reposition
itself for the future, and much of the burden of this has fallen on
the shoulders of our team. I am deeply grateful for the hard work
and dedication of the talented people I have worked with in this
company, their commitment and caring attitude are what makes
it great. As we have done over the last 208 years, Centrica needs
to adapt while staying true to our values and to our core of energy,
and services and solutions built around it.
Conclusion
In summary, 2019 has been a very difficult year in terms of the
external environment and our key outputs. Our strategy remains
clear and our direction towards the customer is unchanged. We
are beginning to see success in doing what we said we would do
and performance stabilise. We have significant momentum as we
enter 2020, and I see 2020 as a gateway to the future of Centrica
as a leading international energy services and solutions company,
in tune with where the world is going.
Iain Conn
Group Chief Executive
12 February 2020
Despite all the change, we have
continued to develop and invest
in our people, the core strength of
our Company, developing new ways
to help them to build their skills and
improve the consistency with which
we approach our work.”
Regulatory and political landscape
I fully recognise we are a business that operates at the behest of
policymakers and regulators and the space that we are allowed
to occupy is significantly determined by them. We continue to be
committed to full engagement with whoever is in power politically,
and to collaborate and partner with our regulators in all of our
geographies. In November it was announced that we had been
successful in the judicial review which challenged the UK energy
regulator Ofgem’s treatment of wholesale energy costs in the initial
period of the UK default tariff cap, and Ofgem announced in
January 2020 that they were launching a consultation on the
appropriate recovery mechanism. The decision to challenge the
regulator in this area was not taken lightly but reflected how
important I believe it is that regulatory processes are transparent
and rigorous. It is in the long-term interests of customers that we
have well designed regulation that supports an effectively
functioning energy market.
Over the last few years the continued layering on of new
regulation in the energy market in the UK has left it in a very
challenging situation. I would encourage further reflection on
this and some changes, including the lifting of the price cap,
if we’re going to create a sustainable market which facilitates
much needed future investment. In North America, similarly,
I believe in well regulated, competitive markets because these
are in the best interests of the customer. We have a range of
market designs across our geographies and it is clear that some
are more effective than others.
Brexit provided significant uncertainty through 2019. The UK’s
departure on 31 January 2020 was certainly a milestone, but
much remains to be addressed in the negotiation on the future
relationship that is to come. Provided policymakers are pragmatic
and thoughtful, there should not be material impact of Brexit on
the energy markets other than the general impacts of foreign
exchange movements on the price of energy and the potential
impact of changes in economic growth on demand for energy and
our services. Centrica operates in multiple jurisdictions, including
Continental Europe, and we will continue to develop our
capabilities to serve customers in all these geographies.
11
Strategic ReportCentrica plc Annual Report and Accounts 2019
Strategic Report
Our Strategy
Our purpose, as set out in 2015, has been
refreshed, but its essence remains unchanged.
We are an energy services and solutions
company, focused on satisfying the changing
needs of our customers and enabling the
transition to a lower carbon future.
› ‘21st Century energy services and
solutions company’
› Delivering long-term shareholder value
through returns and cash flow growth
› Trusted corporate citizen
› Employer of choice
Section 172(1) Statement
Section 172(1) of the Companies Act 2006 provides that a director of
a company must act in a way that he considers, in good faith, would be most
likely to promote the success of the Company for the benefit of its members as
a whole, and in doing so have regard (amongst other matters) to various other
stakeholder interests – below are the six key factors:
• the likely consequences of any
decision in the long term;
• the interests of the Company’s
employees;
• the need to foster the Company’s
business relationships with
suppliers, customers and others;
• the impact of the Company’s
operations on the community and
the environment;
• the desirability of the Company
maintaining a reputation for
high standards of business
conduct; and
• the need to act fairly as between
members of the Company.
Read more about our
Stakeholder Engagement on
Pages 16 to 17
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Centrica plc Annual Report and Accounts 2019
Strategic context
Our strategic update in 2019 confirmed that the
trends we identified in 2015 continue to play out:
• the energy system is becoming more decentralised
as advances in distributed technologies support
decarbonisation;
• choice, power and influence are moving
to the customer; and
• digitalisation is accelerating proposition
development, increasing choice and driving
efficiency across our sector.
We are now equipped and committed
to help our customers transition to
a lower carbon future
• we have developed capabilities to help
customers reduce their emissions;
• we will exit hydrocarbon production, creating
a leading international energy services and
solutions provider;
• we supply natural gas and believe in its near-term
role in replacing coal. But we also embrace the
ultimate need to decarbonise heating; and
• we have targets to reduce the emissions of our
customers, the energy system and our own
operations and have made a commitment to be net
zero by 2050 and communicate our pathway to it
by 2030.
Read more about Delivering
our Responsible Business
Ambitions
Pages 48 to 54
Our divisions
In 2017, we reorganised the Group around the customer, creating
two new, customer-facing divisions: Centrica Consumer and Centrica
Business. These businesses will continue to focus on the areas
of energy services and solutions in which we have distinctive
capabilities – energy supply and its optimisation, services and
solutions centred around energy. We now have sufficient capability
in the customer-facing businesses to allow us to focus completely
on the customer. The Upstream division includes our Nuclear, and
Exploration & Production assets.
Centrica Consumer
Market trends
• Demographic change
• Ubiquitous technology
• Self-service
• Data analytics,
Artificial Intelligence and
automation
• Increased regulator and
consumer activism
• Growing progress
and support for
decarbonisation
• Increased competitive
intensity
Customer needs
• Value for money
• Easy, empathetic and
personalised service
• Trusted, expert support
• Solutions, not just products
• Simple, clear choices
• Responsible options
(including green tariffs)
Read more about
Centrica Consumer on
Pages 20 to 23
Centrica Business
Market trends
• Volumes per customer
reducing
• Margins under pressure
• Gas becoming global
• Mega-trends impacting
energy sector
• Electricity system
Customer needs
• Reduced cost and increased
productivity
• Supply security and resilience
• An expert partner to guide
them through complexity
• A trusted and credible
counterparty
becoming more local
• Not to be distracted from
their main activity
Read more about
Centrica Business on
Pages 24 to 26
Read more about
Upstream on
Pages 27 to 28
Upstream
Upstream includes our
Nuclear and Exploration
& Production assets. Our
Exploration & Production
activity is focused on North
West Europe and consists
of a 69% stake in the Spirit
Energy business and the
Rough field. We announced
our intention to sell Spirit
Energy and Nuclear.
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Strategic approach
To deliver the strategy we announced in
July 2015, and reviewed in 2019, we set
ourselves a number of medium-term
objectives to 2020 and focus areas of
long-term growth.
Our medium-term strategic
objectives
• Demonstrating customer-led gross
margin growth
• Driving cost efficiency towards being
‘most efficient price setter’
• Improving organisational effectiveness
• Securing the capabilities we need for
2020 and beyond
• Maintaining capital discipline and balance
sheet strength
Our focus areas for long-term growth
• Energy Supply
• In-home Servicing
• Home Solutions
• Energy Optimisation
• Business Services & Solutions
Centrica plc Annual Report and Accounts 2019
13
Strategic Report
Our Business Model
Our business model is designed to deliver
returns and growth focusing on energy
services and solutions, enabling the transition
to a lower carbon future.
services and solutions, in addition to providing energy supply,
while putting emphasis on helping our customers transition to
a lower carbon future.
Centrica Consumer is focused on energy supply, in-home
servicing and home solutions centred around energy, including
Home Energy Management and Electric Vehicle Integration.
Our Energy Supply, Services, Home Solutions, Business Solutions
and Energy Marketing & Trading businesses are organised into two
global customer-facing divisions; Centrica Consumer and Centrica
Business. Our strategic framework shifts our focus towards energy
Centrica Business is structured to deliver the full range of energy
products and services solutions – from energy supply, to on-site
generation and data-driven optimisation, to electricity wholesale
market access.
Our Group priorities
In 2019, we evolved our focus on five key priorities
to deliver our strategy and we align performance and
risk management processes around these, including
our Key Performance Indicators. Our Group Priorities
are underpinned by safety, compliance and conduct.
Read more about our Key
Performance Indicators on
Pages 18 to 19
Our Responsible Business Ambitions
Our 2030 Ambitions set out 15 global goals to help
our customers run their world in ever more
sustainable ways. The goals are focused around
four areas which includes tackling climate change,
innovating to make our customers’ lives easier,
building a more skilled and inclusive workforce and
making our communities stronger. Our Ambitions
are underpinned by Responsible Business
Foundations to ensure we operate with integrity.
Read more about Delivering our
Responsible Business Ambitions on
Pages 48 to 54
Group financial framework to 2022
Our 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 34 to 45.
Our Group 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.
Customer
Obsession
Operational
Excellence
Most
Competitive
Provider
Cash flow
Growth
Empowered
Colleagues
Safety, compliance and conduct foundation
We are focused on:
Delivering
for our
customers
Enabling the
transition to
a lower
carbon future
Building the
workforce of
the future
Creating
stronger
communities
Metrics
Targets
Adjusted operating
cash flow(3)
Dividend(2)
• Growth over the medium term
• Progressive dividend from 2019 rebased
level linked to growth in adjusted earnings
and operating cash flow
• Dividend cover from adjusted earnings of
1.5-2.0
Controllable costs(1)
• £1bn of annualised efficiency delivery
over 2019-22
Capital re-discipline
• Annual capital expenditure of around £500m
post Spirit Energy and Nuclear disposals
Credit rating
ROACE(3)
• Strong investment grade ratings
• At least 10-12%
(1) Further information on controllable costs can be found in Additional Information – Explanatory notes on page 223.
(2) Dividend Policy – the Group has a progressive dividend policy (based off the 2019 dividend level), linked to long-term growth in adjusted earnings and adjusted
operating cash flow, and we will target dividend cover from adjusted earnings in the range 1.5-2.0. See note 11 to the Financial Statements for further details on
current year dividends.
(3) See note 2 to the Financial Statements for definition and reconciliation of these measures.
14
Centrica plc Annual Report and Accounts 2019
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.
The Upstream division includes our Nuclear and Exploration &
Production businesses, Spirit Energy and Centrica Storage. We
have announced our intention to divest Spirit Energy and Nuclear.
Our strategic frameworks
Centrica
Consumer
Energy supply
• Gas supply
• Electricity supply
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 manage risk effectively and ensure
a strong system of internal control.
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Home solutions
• Home security and monitoring
• Remote diagnostics
• Home control
• Appliances control
• Home energy management
In-home servicing
• Cover products (protection plans,
warranties)
• On demand repair and maintenance
• Electric vehicles charging point
installations
Centrica
Business
Energy supply
• Gas supply
• Electricity supply
Energy optimisation
• Asset optimisation
• Aggregation and optimisation of
distributed energy resources
• Access to energy, capacity and
flexible markets
• Trading partner
• Energy commodities and risk
products
Business services
and solutions
• Multi-technology solutions
• Design, install, maintain
and service
• Energy resource management
and monitoring
• Operational insights
from energy data
• Preventive maintenance
Upstream
• Focus on safety
• Operational excellence
Centrica plc Annual Report and Accounts 2019
15
Strategic Report
Stakeholder Engagement
Engaging with stakeholders delivers better
outcomes for society, and our business.
It’s fundamental to our long-term success.
The world of energy is evolving, customer needs are changing,
and the social and environmental pressures we operate under are
increasing. Against this backdrop, it’s vital that we understand and
collaborate with stakeholders so that we can grow our business
in a way that delivers for our customers and society over the
long term. These pages highlight some of the ways we engaged
stakeholders on material issues in 2019.
Customers
Colleagues
Shareholders
Government and regulators
Suppliers
Communities and NGOs
Listening to customers helps us to satisfy their
changing needs and reduce costs. We seek
feedback on a range of issues such as customer
service, new products and pricing. This is done
through various methods such as focus groups,
listening sessions and surveys, as well as
proposition and usability testing.
We use employee feedback to help develop a
workplace where everyone is motivated and able
to deliver for our customers. Issues discussed
typically include reward, development and culture,
with feedback shared via various channels such
as events, surveys and performance reviews.
Shareholders provide funds that help us run and
grow our business and they expect a sustainable
return. When meeting shareholders and being
involved in or responding to information requests,
the Directors are conscious that they need to act
fairly for all of our shareholders. Such views are
particularly important to ensure that when we
update on strategy, financial and operational
performance, alongside Environmental, Social and
Governance (ESG) issues, that it’s relevant and
beneficial to all our shareholders.
Annual General Meeting (AGM)
All shareholders are invited to the AGM where
they have the opportunity to hear about our
performance and put questions to the Board.
Members of the Board, Investor Relations and
customer service, are available to speak with
shareholders before and after the meeting on
issues that matter to them. All resolutions put to
shareholders passed in 2019, with percentages
ranging from 85.27% to 99.91%.
Employee Champion
Joan Gillman, Non-Executive Director, completed
her first full year as Employee Champion. Having
held listening sessions to hear about some of the
cultural ‘blockers’ and ‘pain points’ employees
were experiencing, she has since acted as the
voice of the employee on the Board across
discussions relating to talent and resource among
other areas. Joan has also worked to improve the
Board’s understanding of employee concerns,
including their desire to feel more connected to
the Company’s strategy.
Action from insight
We track feedback from customer journeys and
run customer experience surveys. The Board
receives a quarterly customer dashboard with key
performance and plans, and uses this insight to
make decisions that serve our customers for the
long term as well as foster stronger relationships
with them. Feedback, for example, informed the
Board that customers wanted a cost-competitive
provider with market-leading customer service.
The Board has consequently been involved in
transforming our customers’ experience which
includes oversight of the digital transformation.
Voice of the customer
The Board wanted to empower customer-facing
teams with real-time customer service insights,
to help them understand the root causes of
issues and shape improvements. This led to the
‘Discover’ platform launching in UK Home and
UK Business, which hosts survey feedback from
over 20,000 customers a month. Insights from the
platform have stimulated Board approval on new
ways of working and key customer journeys, such
as easier-to-understand bills and pricing renewal
policies.
Diversity and inclusion
Having a diverse and inclusive workforce is key
for our business and people to thrive. Leaders
champion inclusion and participate in employee
discussions on issues such as gender, ethnicity,
sexuality and caring responsibilities, to explore
how we can build a more inclusive workplace.
With increased insight, the Board took into
account the needs of employees by introducing
2030 Responsible Business Ambitions to
accelerate progress, signed up to The Valuable
500 to drive disability inclusion and enhanced
policies to support carers and parents.
Responsible business
Following the introduction of our 2030
Responsible Business Ambitions, we hosted
a webinar for investors and analysts to explore
our commitments. Our Group Chief Executive
also met Climate Action 100+ (CA100+), which
represents over 370 investors managing
USD$35 trillion in assets. Engagement helped
shape our Ambition to tackle climate change,
spurred the publication of our net zero policy
position and supported our decision to
sign-up to the Task Force on Climate-related
Financial Disclosures.
Read more about the benefits
of the digital transformation on
Page 21
Read more about our customer
service experience on
Pages 22 and 25
Read more from Joan about
her role as Employee
Champion on
Page 67
Read more about building a
more diverse and inclusive
workforce on
Page 52
Read more about our AGM
engagement on
Page 68
Read more about our
response to climate change on
Pages 46 to 47 and 50 to 51
16
Centrica plc Annual Report and Accounts 2019
The Directors understand the value of fostering
The Directors fully support collaboration with
By sharing our expertise and working alongside
our relationship with government and regulators
suppliers as it reduces risk in our supply chain and
charities, NGOs and community groups, we not
to ensure policies are developed in the interests
ensures we maintain high standards of business
only collaborate to create stronger communities
of our customers, while enabling them to better
conduct which benefits our communities. We
but gain insights that enable the Board to have full
understand our impact on the community and
interact with suppliers through the tender process,
regard of our impact on the community and the
the environment. We provide expertise to support
surveys and site inspections. Engagement covers
environment, which helps them better understand
policy development around topics like market
topics including payment practices and
the likely consequences of decisions in the long
competition, employment and the environment.
strengthening social, ethical and environmental
term. In doing so, we can tackle enduring societal
Engagement includes face-to-face meetings
compliance.
and written responses to consultations.
challenges together – from tackling climate
change to creating carer-friendly communities.
Decarbonising heat
Risk management
Transition from fossil fuels
We engaged the UK Government and the
We conducted nine on-the-ground ethical site
We announced our intention to exit oil and gas
Committee on Climate Change (CCC) on how to
inspections on higher risk suppliers located in
production by the end of 2020 which will complete
decarbonise heat in a cost-effective way. We
the UK, China, Italy and Turkey. While no modern
our shift towards being a customer-facing
shared insight into our trial of new Home Energy
slavery risk was detected, we worked with
company. This allows us to focus on our
Management solutions, the role hybrid heat
suppliers to create tailored action plans to raise
distinctive strengths and respond to the growing
pumps could play and the opportunity of green
labour and safety standards while providing
call from customers, NGOs and wider society, to
gas. The CCC has since become more supportive
workers with a confidential modern slavery
of hybrid heat pumps in domestic heating and we
helpline. The Board reviews our strategy and
enable the lower carbon future. We believe gas
has an important role as a transition fuel which
remain committed to working together to deliver
performance in upholding the Modern Slavery Act
does not always align with the expectations of
customer-friendly policies and products that
each year.
enable society’s transition to net zero.
some stakeholders. We continue to engage with
them on this.
Opening new markets
Sharing solutions
Supporting carers
In collaboration with business trade groups and
We hosted Responsible Sourcing Council’s
We provide best-in-class support to help carers
environmental NGOs, we pursued political and
first meeting of 2019 to share our responsible
stay in work by better balancing work with caring
regulatory engagement to open up competition in
procurement achievements so that others can
responsibilities. With the Board having extended
Virginia’s electricity market, so that our customers
learn from our experience, as well as collaborate
carers’ leave allowance to up to six weeks
can access zero carbon power. Due to our efforts,
to find solutions to some of our challenges.
following consultation with our people, we wanted
100% renewable tariffs totalling over 100TWh
A supplier day was also hosted by one of our
communities to receive these same benefits. Our
of annual demand are now available to residential,
Board members, which brought together
Group Chief Executive wrote to the UK’s largest
commercial and industrial customers. This helps
14 strategic suppliers to explore innovative ideas
employers and, together with our charity partner
customers, such as Bernstein Management
to deliver our digital technology strategy. We are
Carers UK, we hosted peer learning forums and
Corporation, fulfil their low carbon commitments
following up with suppliers to further scope ideas
campaigned for the UK Government to introduce
at a competitive price.
and hope to run similar sessions going forward.
statutory carers leave which is now part of its
legislative programme.
Read more about our net zero
policy recommendations on
Pages 46 to 47
Read more about reducing
risk with suppliers on
Page 54
Read more about our transition
to a lower carbon future on
Pages 50 to 51
Read more about the positive
impact of market reform on
Bernstein Management
Corporation on
Page 26
Read more about modern
slavery governance in the
Safety, Health, Environment
and Security Committee on
Pages 80 to 81
Read more about how we
are helping carers thrive on
Page 52
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Section 172(1) Directors’ Duty
As a result of being responsible for overseeing Our Strategy,
described on pages 12 to 13, and Our Business Model, described
on pages 14 to 15, both of which centre around the interests
of key stakeholders, the Directors remain conscious of the
impact their decisions can have on employees, communities
and the environment.
Proactive engagement remains a central focus for the Board,
which ensures the Directors have regard to the matters set out
in S.172(1) (a) to (f) of the Company Act. They receive regular
stakeholder insights and feedback, which enables them to place
stakeholder considerations at the very heart of the Board’s
decisions. Examples of such decision making is further described
on pages 16 to 17 Stakeholder Engagement, on page 57 S.172
table and page 64 Board activity. In doing so, we are better able
to operate in a way that is mutually beneficial to society – from
developing strategy and introducing new products, to advocating
for policy change and managing our social and environmental
impact. Examples are further described on pages 48 to 54
Delivering our Responsible Business Ambitions.
Sometimes the Directors have to take decisions that adversely
affect one or more of our stakeholder groups. In these cases,
we endeavour to treat those impacted fairly.
Read more about our Section
172(1) Directors’ Duty on
Page 57
Customers
Colleagues
Shareholders
Government and regulators
Suppliers
Communities and NGOs
Listening to customers helps us to satisfy their
We use employee feedback to help develop a
Shareholders provide funds that help us run and
changing needs and reduce costs. We seek
workplace where everyone is motivated and able
grow our business and they expect a sustainable
feedback on a range of issues such as customer
to deliver for our customers. Issues discussed
return. When meeting shareholders and being
service, new products and pricing. This is done
typically include reward, development and culture,
involved in or responding to information requests,
through various methods such as focus groups,
with feedback shared via various channels such
the Directors are conscious that they need to act
listening sessions and surveys, as well as
as events, surveys and performance reviews.
fairly for all of our shareholders. Such views are
proposition and usability testing.
particularly important to ensure that when we
update on strategy, financial and operational
performance, alongside Environmental, Social and
Governance (ESG) issues, that it’s relevant and
beneficial to all our shareholders.
Action from insight
Employee Champion
Annual General Meeting (AGM)
We track feedback from customer journeys and
Joan Gillman, Non-Executive Director, completed
All shareholders are invited to the AGM where
run customer experience surveys. The Board
her first full year as Employee Champion. Having
they have the opportunity to hear about our
receives a quarterly customer dashboard with key
held listening sessions to hear about some of the
performance and put questions to the Board.
performance and plans, and uses this insight to
cultural ‘blockers’ and ‘pain points’ employees
Members of the Board, Investor Relations and
make decisions that serve our customers for the
were experiencing, she has since acted as the
customer service, are available to speak with
long term as well as foster stronger relationships
voice of the employee on the Board across
shareholders before and after the meeting on
with them. Feedback, for example, informed the
discussions relating to talent and resource among
issues that matter to them. All resolutions put to
Board that customers wanted a cost-competitive
other areas. Joan has also worked to improve the
shareholders passed in 2019, with percentages
provider with market-leading customer service.
Board’s understanding of employee concerns,
ranging from 85.27% to 99.91%.
The Board has consequently been involved in
including their desire to feel more connected to
transforming our customers’ experience which
the Company’s strategy.
includes oversight of the digital transformation.
Voice of the customer
Diversity and inclusion
Responsible business
The Board wanted to empower customer-facing
Having a diverse and inclusive workforce is key
Following the introduction of our 2030
teams with real-time customer service insights,
for our business and people to thrive. Leaders
Responsible Business Ambitions, we hosted
to help them understand the root causes of
champion inclusion and participate in employee
a webinar for investors and analysts to explore
issues and shape improvements. This led to the
discussions on issues such as gender, ethnicity,
our commitments. Our Group Chief Executive
‘Discover’ platform launching in UK Home and
sexuality and caring responsibilities, to explore
also met Climate Action 100+ (CA100+), which
UK Business, which hosts survey feedback from
how we can build a more inclusive workplace.
represents over 370 investors managing
over 20,000 customers a month. Insights from the
With increased insight, the Board took into
USD$35 trillion in assets. Engagement helped
platform have stimulated Board approval on new
account the needs of employees by introducing
shape our Ambition to tackle climate change,
ways of working and key customer journeys, such
2030 Responsible Business Ambitions to
spurred the publication of our net zero policy
as easier-to-understand bills and pricing renewal
accelerate progress, signed up to The Valuable
position and supported our decision to
policies.
500 to drive disability inclusion and enhanced
sign-up to the Task Force on Climate-related
policies to support carers and parents.
Financial Disclosures.
Read more about the benefits
of the digital transformation on
Page 21
Read more about our customer
service experience on
Pages 22 and 25
Read more from Joan about
her role as Employee
Champion on
Page 67
Read more about building a
more diverse and inclusive
workforce on
Page 52
Read more about our AGM
engagement on
Page 68
Read more about our
response to climate change on
Pages 46 to 47 and 50 to 51
The Directors understand the value of fostering
our relationship with government and regulators
to ensure policies are developed in the interests
of our customers, while enabling them to better
understand our impact on the community and
the environment. We provide expertise to support
policy development around topics like market
competition, employment and the environment.
Engagement includes face-to-face meetings
and written responses to consultations.
The Directors fully support collaboration with
suppliers as it reduces risk in our supply chain and
ensures we maintain high standards of business
conduct which benefits our communities. We
interact with suppliers through the tender process,
surveys and site inspections. Engagement covers
topics including payment practices and
strengthening social, ethical and environmental
compliance.
By sharing our expertise and working alongside
charities, NGOs and community groups, we not
only collaborate to create stronger communities
but gain insights that enable the Board to have full
regard of our impact on the community and the
environment, which helps them better understand
the likely consequences of decisions in the long
term. In doing so, we can tackle enduring societal
challenges together – from tackling climate
change to creating carer-friendly communities.
Decarbonising heat
We engaged the UK Government and the
Committee on Climate Change (CCC) on how to
decarbonise heat in a cost-effective way. We
shared insight into our trial of new Home Energy
Management solutions, the role hybrid heat
pumps could play and the opportunity of green
gas. The CCC has since become more supportive
of hybrid heat pumps in domestic heating and we
remain committed to working together to deliver
customer-friendly policies and products that
enable society’s transition to net zero.
Risk management
We conducted nine on-the-ground ethical site
inspections on higher risk suppliers located in
the UK, China, Italy and Turkey. While no modern
slavery risk was detected, we worked with
suppliers to create tailored action plans to raise
labour and safety standards while providing
workers with a confidential modern slavery
helpline. The Board reviews our strategy and
performance in upholding the Modern Slavery Act
each year.
Opening new markets
In collaboration with business trade groups and
environmental NGOs, we pursued political and
regulatory engagement to open up competition in
Virginia’s electricity market, so that our customers
can access zero carbon power. Due to our efforts,
100% renewable tariffs totalling over 100TWh
of annual demand are now available to residential,
commercial and industrial customers. This helps
customers, such as Bernstein Management
Corporation, fulfil their low carbon commitments
at a competitive price.
Sharing solutions
We hosted Responsible Sourcing Council’s
first meeting of 2019 to share our responsible
procurement achievements so that others can
learn from our experience, as well as collaborate
to find solutions to some of our challenges.
A supplier day was also hosted by one of our
Board members, which brought together
14 strategic suppliers to explore innovative ideas
to deliver our digital technology strategy. We are
following up with suppliers to further scope ideas
and hope to run similar sessions going forward.
Transition from fossil fuels
We announced our intention to exit oil and gas
production by the end of 2020 which will complete
our shift towards being a customer-facing
company. This allows us to focus on our
distinctive strengths and respond to the growing
call from customers, NGOs and wider society, to
enable the lower carbon future. We believe gas
has an important role as a transition fuel which
does not always align with the expectations of
some stakeholders. We continue to engage with
them on this.
Supporting carers
We provide best-in-class support to help carers
stay in work by better balancing work with caring
responsibilities. With the Board having extended
carers’ leave allowance to up to six weeks
following consultation with our people, we wanted
communities to receive these same benefits. Our
Group Chief Executive wrote to the UK’s largest
employers and, together with our charity partner
Carers UK, we hosted peer learning forums and
campaigned for the UK Government to introduce
statutory carers leave which is now part of its
legislative programme.
Read more about our net zero
policy recommendations on
Pages 46 to 47
Read more about reducing
risk with suppliers on
Page 54
Read more about our transition
to a lower carbon future on
Pages 50 to 51
Read more about the positive
impact of market reform on
Bernstein Management
Corporation on
Page 26
Read more about modern
slavery governance in the
Safety, Health, Environment
and Security Committee on
Pages 80 to 81
Read more about how we
are helping carers thrive on
Page 52
Centrica plc Annual Report and Accounts 2019
17
Strategic Report
Key Performance Indicators
Our Key Performance Indicators (KPIs) help the Board and executive
management assess performance against our Group Priorities.
Our Group Priorities
Customer
Obsession
Operational
Excellence
Most Competitive
Provider
Cash flow
Growth
Empowered
Colleagues
Safety, compliance and
conduct foundation
Read more about
Our Strategy
Pages 12 to 13
Read more about
Remuneration
Pages 82 to 99
Read more about adjusted
performance measures
Pages 223 to 224
Adjusted operating cash flow(1)
Adjusted operating profit(1)
2019
2018
2017
1,830
2,245
2,069
2019
2018
2017
901
1,392
1,247
Adjusted operating cash flow is our key measure of financial
performance and is one of the financial metrics for the
short-term incentive plan for our Executive Directors.
Adjusted operating cash flow was down 18% reflecting lower
operating profit offset by working capital movements.
Adjusted operating profit is one of our fundamental
financial measures.
Adjusted operating profit was down 35% reflecting reduced
profit predominantly in our Upstream segment.
Link to Remuneration
Short-term incentive
Link to Group Priorities
Link to Remuneration
Short-term incentive
Link to Group Priorities
Adjusted basic earnings per share (EPS)(1)
Total shareholder return (TSR) by year
2019
2018
2017
7.3p
11.2p
12.5p
EPS is a standard measure of corporate profitability.
EPS is adjusted to better reflect the underlying performance
of the business.
Adjusted basic EPS was down 35%, reflecting the reduced
operating profit.
120
100
80
60
40
20
0
Centrica TSR
FTSE 100 TSR
Source:
Thomson Reuters
Datastream
2017
2018
2019
The Board believes that TSR is a valuable KPI to assess the
Company’s performance in the delivery of shareholder value.
Link to Remuneration
Long-term incentive
Link to Group Priorities
Link to Remuneration
Long-term incentive
Link to Group Priorities
(1) See notes 2, 4 and 10 to the Financial Statements for definition and reconciliation of these measures.
18
Centrica plc Annual Report and Accounts 2019
Total recordable injury frequency rate (TRIFR)
Process safety incident frequency rate (Tier 1 and 2)
2019
2018
2017
1.06
1.02
0.98
2019
2018
2017
0.08
0.06
0.14
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Keeping our people safe is a foundation of how we do
business. Our TRIFR per 200,000 hours increased by 4%.
We remain committed to creating an incident-free workplace.
We prevent potential incidents where we source, generate
and store energy with process safety. Less process safety
hours worked per 200,000 hours led to our frequency rate
increasing by 33%.
Link to Remuneration
Long-term incentive
Link to Group Priorities
Link to Remuneration
Long-term incentive
Link to Group Priorities
Brand net promoter score (NPS)(1)
Complaints(2)
2019
2018
2017
+15.1
+10.0
+9.4
2019
2018
2017
3,429
3,453
3,739
Everything we do is focused on satisfying the changing needs
of our customers. Improvements in customer service, enabled
by digital transformation, contributed to our aggregated NPS
improving by 5.1 points.
We are relentless in wanting to provide an excellent service
that satisfies our customers and reduces complaints. This has
led to our aggregated complaints per 100,000 customers
improving by 1%.
Link to Remuneration
Long-term incentive
Link to Group Priorities
Link to Remuneration
Long-term incentive
Link to Group Priorities
Employee engagement
2019
2018
2017
43%
55%
52%
Having a motivated and engaged workforce is key to our
success. While we took action on feedback from our annual
employee engagement survey to improve performance,
business restructuring impacted engagement which
decreased by 12%.
Link to Remuneration
Long-term incentive
Link to Group Priorities
The KPI performance outcome associated with executive
remuneration is set out on page 88.
(1) Aggregated scores across UK Home, North America Home, Ireland,
Centrica Home Solutions, UK Business and North America Business
weighted by customer numbers.
(2) Aggregated scores across UK Home, North America Home, Ireland, UK
Business and North America Business weighted by customer accounts.
Read more about our
responsible business
performance on
Pages 48 to 54 and 225 to 228
Centrica plc Annual Report and Accounts 2019
19
Strategic Report
Centrica
Consumer
Centrica Consumer is focused on three
areas, Energy Supply, In-Home Servicing
and Home Solutions.
› UK Home
› Ireland
› North America Home
› Centrica Home
Solutions
Sarwjit Sambhi
Chief Executive, Centrica Consumer
Our Centrica Consumer division is undergoing a digital
transformation, broadening its capabilities to enable the launch
of innovative new propositions – including combined energy
and services bundles – while improving data analytics and
customer segmentation. Customer satisfaction levels have risen
significantly, and we maintain strong market positions.
In the UK, we are the largest energy supplier; the number one
provider of contract energy services; and the largest installer
of boilers and smart thermostats. We have leading brand
awareness.
In North America, we are among the top three competitive
energy suppliers in each of our chosen geographies of Texas,
the US North East and Canada. We have a significant services
position in a highly fragmented market.
In Ireland, we are the largest gas supplier and the second
largest energy supplier overall.
39
38
9,230
9,401
Brand Net Promoter Score (NPS)
British Gas
Bord Gáis
Direct Energy
Hive
12
9
23
33
32
29
Customers (’000)
UK
Ireland
North America
500
499
2,782
2,618
Adjusted operating profit (£m)
Adjusted operating cash flow (£m)
505
750
913
1,019
2019
2018
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Centrica plc Annual Report and Accounts 2019
Growth in customer accounts
• Centrica Consumer customer accounts grew by 722,000 in
2019, after adjusting for the impact of the disposal of the
Clockwork North America home services business in April
which had 182,000 customer accounts at the end of 2018.
• In the UK, total accounts increased by 451,000 in 2019, with
364,000 growth in services due to higher sales of products
bundled with energy and 373,000 growth in cumulative home
solutions customers, including growth from our remote boiler
diagnostics proposition, BoilerIQ, and Cloud storage offer. This
more than offset a reduction in energy supply accounts.
• UK Home energy supply customer accounts fell by 286,000,
although the rate of losses significantly reduced compared to
2018 against a backdrop of continued high levels of price
competition and market switching. Net losses were also lower in
the second half of the year compared to the first half and
accounts remained broadly stable over November and
December 2019, and January 2020. This reflects the launch of a
number of attractive customer offers in the fixed price market,
including increased sales of energy and services bundles.
• Total accounts were broadly stable in Ireland against a
backdrop of high levels of competitive intensity.
• In North America Home, accounts increased by 206,000 as we
won some energy supply aggregation auctions in the US North
East. We also delivered an increase in sales to customers on
fixed price contracts.
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58%
Increase in the number of
breakdown appointments
booked online
Putting customers
at the heart
of our digital
transformation
Our customers increasingly want to go
online to complete day-to-day tasks.
We’re trying to make that experience as
simple, easy and effective as possible.
Calling a contact centre can be frustrating
and time consuming; but too often the
experience of going online is not much
better. That’s why in early 2018 we
embarked on an ambitious digital
transformation programme, identifying
hundreds of customer ‘pain points’ and
creating new online ways of tackling them.
The result has been a faster, slicker
website and app offering improved
customer experience.
We have three priorities: to ensure that
100% of any task – such as a meter
reading – can be completed successfully
online; to make it easy and simple with
fewer steps; and to make sure our online
services can be used effectively on
any device.
We’ve built an entirely new app which has
now been downloaded 1.3 million times
and is rated as ‘standout’ by the Energy
Saving Trust. Last year there were 2.9
million fewer calls to our British Gas
contact centres because customers found
it easier and more effective to deal with us
online. Here are just a couple of the new
features we’ve introduced so far.
‘Book, Track & Manage’
This allows our customers to book and
monitor British Gas engineer appointments
online. It includes booking progress
updates, a timeline to completion, the
ability to amend or cancel appointments
and a ‘Track my Engineer’ feature.
By contrast the new feature offers
customers a simple, interactive,
conversational troubleshooting
journey – with engaging visual prompts
– which dynamically adjusts their path
based on their product holding and
current status.
Results & key statistics: Breakdown
appointments booked online up 58%
since launch; calls about appointments
down 30% year on year.
‘Heating Offline Troubleshooting’
This new feature on our Hive app was
launched towards the end of last year to
address one of the biggest frustrations for
our Hive customers – what to do when the
connection between their boiler, smart
thermostat and remote control heating
app doesn’t work properly.
Previously, to fix the problem, customers
were directed to a static page on the
website with a long list of steps to attempt
which were seen as time consuming
and complicated. Many customers
understandably gave up and phoned a
contact centre instead to speak to an agent.
Customers rightly
expect that they
should be able to draw on
all the services we provide
using their PC, tablet or
smartphone. Our digital
transformation programme
is focused on delivering
simple and easy-to-use
customer journeys.”
Sarwjit Sambhi
Chief Executive, Centrica Consumer
Centrica plc Annual Report and Accounts 2019
21
Strategic Report | Divisional Review continued
Improved customer experience and enhanced
customer offers
• We continue to focus on improving customer experience and
our digital platforms in all markets, leading to a reduction in call
volumes in UK Home, North America Home and Ireland.
• The British Gas Brand Net Promoter Score (NPS) improved to
+12. NPS for Bord Gáis Energy, Direct Energy and Hive
remained at relatively high levels, although Bord Gáis Energy
saw a reduction to +23 against a backdrop of new entrants and
increasing competition in the Irish market.
• In UK Home, we saw a 16% increase in digital visits in 2019
compared to 2018, and our new digital app had over 2m
downloads in the year. The proportion of transactions
completed online had increased to 55% by the end of 2019
compared to 50% at the end of 2018 and call volumes dropped
by 4.3 million, or 15%.
• We now have more ‘online only’ than ‘offline only’ UK energy
supply customers.
• We fulfilled 98.2% of UK services appointments on the
scheduled day compared to 97.6% in 2018.
• In North America Home, energy digital marketing and web sales
were up 30% compared to 2018 and made up 21% of total
energy sales. The proportion of transactions completed online
increased to 49% in 2019 compared to 45% in 2018 and call
volumes dropped by 93,000 or 2%, despite growth in customer
accounts.
• We launched over 160 propositions in 2019 in UK Home,
including bundled energy and services offers, with 71% of
customers who took a bundled offer being new to services.
• We launched our first residential electric vehicle tariff in the UK
during the year and in November installed our first domestic
charging point.
• In January 2020, British Gas launched its new ‘Green Future’
tariff, one of the greenest tariffs on the market which offers
customers green gas and renewable energy.
These new teams are directly accountable
for the customers they serve locally and
will have full visibility of all their needs.
We are changing the way that we
recognise our engineers, so that rewards
are based squarely on customer approval
ratings and successful outcomes. Later
this year, we will launch a new integrated
computer system, in partnership with
Microsoft, to manage operations and
customer appointments more efficiently.
This is not just a new way of doing things.
It also marks a fundamental change in
our mindset. We are no longer thinking
in terms of ‘field operations’, but rather
of ‘customer delivery’. From now on,
we aspire to work around the customer,
rather than expecting the customer
to work around us.
The way we worked
before was a bit like
a department store, with
each department working
separately and not
understanding the full
needs of the customer.
Now, by bringing our skills
together in local teams,
we can better understand
and meet customer needs.”
Andrew Reaney
Customer Delivery Director, Centrica UK
Field Operations
Putting customers
at the heart of our
field operations
We have totally reorganised the way that
our engineers work so that we can deliver
a better service to UK households.
Our field operatives – the gas and
electrical engineers, heating installers,
plumbers and smart energy experts –
are one of our greatest assets. They are
invited into more homes every year than
any other brand in the UK and trusted
highly by our customers.
But until now they have been working
in a fragmented fashion, organised on
a nationwide basis around the individual
products and services they provide,
with different ways of doing things
and sometimes duplicating each
other’s efforts.
We realised that, to make services a real
engine for growth in the business, things
would have to change. So, starting last
July, we have completely reorganised.
We have dismantled the product ‘silos’
to create local multi-functional teams,
bringing all the different skills together,
under a local manager.
8,000
engineers and technicians
100+
new local managers recruited
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Centrica plc Annual Report and Accounts 2019
Progress towards fundamentally rebasing UK Home
• In July 2019, we announced that we were developing plans
to fundamentally rebase our UK Home business.
• In UK energy supply, our focus will be on continuing to improve
the customer experience while moving towards becoming the
lowest cost supplier by 2022. Achieving cost leadership will
enable sustainable customer and margin growth.
• In UK in-home servicing, we are also focusing on improving
our levels of competitiveness while maintaining a high-quality
customer experience.
• We removed around 800 non-customer facing roles across
energy and services in 2019 as part of our efficiency plans, with
energy supply back office costs 15% lower in 2019 than in 2018.
• The cost per UK energy supply customer was £109 in 2019
compared to £103 in 2018, although the underlying figure in
2018 was £111 when excluding the impact of a one-off bad debt
credit. The decrease in the underlying figure came despite the
lower average number of customer accounts than in 2018 and
the impact of inflation.
• UK services cost per customer in 2019 decreased to £330
compared to £348 in 2018, with significant levels of cost
efficiency more than offsetting the impact of inflation. Revenue
per customer was flat.
• In addition to the progress already made in 2019 to improve the
customer experience, we have plans in place to drive a further
increase in digital transactions to help reduce call volumes.
We are also upskilling contact centre colleagues to reduce the
number of internal call transfers, reducing costs and improving
the customer experience.
• We continue to develop plans to re-organise around customer
end-to-end journeys and transform our technology stack to be
more flexible and lower cost. We now have two end-to-end
customer journey teams up and running and have a proof of
concept technology platform based on our online-only British
Gas Lite offer live in the market.
• We are preparing ourselves to benefit from new market
opportunities, such as electric vehicle integration. In 2019,
we upskilled around 100 of our service engineers to install
electric vehicle charging points.
Refocusing Home Solutions
• We announced in July 2019 that our Home Solutions activity
would be focused on the UK and Ireland, as we continue
to leverage our distinctive field force and look to launch
propositions focused around Home Energy Management and
Remote Diagnostics and Monitoring.
• Centrica Home Solutions revenue increased by 10% to £74m
in 2019 and the gross margin percentage increased to 22%
compared to 19% in 2018.
• In May, we launched Hive thermostatic radiator valves which
allow customers to digitally manage the temperature in
individual rooms in their houses. We have sold over 100,000
units to date.
• Customer satisfaction rates remain high, with the Hive brand
NPS at +39, and we continue to see a positive impact on our
energy and services businesses. The energy NPS of a Hive
customer is 20 points higher on average than for an energy
only customer.
• We have taken actions to lower operating costs in the second
half of the year, reducing headcount in Centrica Home Solutions
by around 40%. As a result, we expect to deliver £15m of
operating cost savings and £10m of capital expenditure savings
in 2020 when compared to 2019.
10%
increase in Centrica Home
Solutions revenue
451,000
growth in UK customer accounts
49%
In North America Home, the
proportion of transactions completed
online increased to 49% in 2019
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Strategic Report
Centrica
Business
Centrica Business is focused on three
areas, Energy Supply, Energy Optimisation
and Business Services & Solutions.
› UK Business
› North America
› Centrica Business
Solutions
Business
› Energy Marketing
& Trading
Richard Hookway
Chief Executive, Centrica Business
Brand Net Promoter Score (NPS)
British Gas
Business
(12)
1
Direct energy
business
Centrica
Business
Solutions
Energy consumption
UK electricity
(GWh)
UK gas (mmth)
North America
electricity (GWh)
North America
gas (mmth)
10.8
10.5
484
433
80.7
84.3
Adjusted operating profit (£m)
75
Adjusted operating cash flow (£m)
32
28
29
29
Centrica Business has built enhanced capabilities across a range
of activities, including distributed energy, route-to-market services
and energy optimisation. We maintain strong market positions; we
have delivered cost efficiencies to position ourselves competitively;
and our customer satisfaction levels have improved.
We are the largest energy supplier to SME customers in the UK
and retain a significant presence in the Industrial & Commercial
market, where we focus on customers who want to take business
services and solutions as well as energy supply.
In North America, we are the second largest supplier of gas and
power to business customers and we have significant wholesale
and optimisation positions. We have major global route-to-market
and demand response optimisation positions, managing around
25 gigawatts of route-to-market capacity and 2.5 gigawatts of
optimisation capacity across the UK, North America and
Continental Europe.
7,753
7,064
217
282
214
2019
2018
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Centrica plc Annual Report and Accounts 2019
Customer number stability and volume growth
• UK Business delivered growth in small and medium enterprise
(SME) energy supply customer accounts, including from the
online only British Gas Lite tariff.
• North America Business energy supply customer accounts were
down 6%, reflecting our decision to focus our sales and retention
activity on higher value, higher consuming customers. Total gas
volumes were up 10%, reflecting this focus and the full year
impact of small bolt-on acquisitions completed during 2018.
Improved customer experience
• UK Business brand NPS increased by 13pts over the year to +1,
reflecting further operational improvements and enhancements
to our digital platform.
• North America Business brand NPS improved by 4pts to +32,
as we continued to launch new customer propositions, including
those offering optionality on hedging profiles giving the
customer more control.
• Centrica Business Solutions brand NPS remained high at +29.
Improving returns in North America Business
• We announced in July 2019 that, following a review of our
business energy supply and optimisation activity in North
America, we were making structural interventions to
improve returns.
• Actions taken to improve margin delivery and customer quality,
reduce costs and optimise capital employed have resulted in
an improvement in post-tax economic returns to 9% in 2019
from 6% in 2018.
• Further actions underway are expected to result in post-tax
average economic returns of 10-12%, which we are targeting
to achieve in 2020, and no worse than 8% at the bottom
of the cycle.
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Saving energy
and money to
boost healthcare
resources
in Devon
Centrica Business Solutions is
undertaking its most ambitious NHS
project yet in the south west of England.
The Royal Devon and Exeter NHS
Foundation Trust provides healthcare
services to a population of nearly
half a million across many sites and
communities. Understandably, the trust
would rather spend scarce resources on
caring for people than paying for energy.
So we’re helping the Trust to do that.
We’re currently installing state-of-the-art
energy technology at five healthcare
sites across Exeter, including a new
1.5 megawatt combined heat and
power (CHP) unit at Wonford Hospital
to generate electricity onsite, roof
mounted solar panels, LED light fittings,
air conditioning upgrades and new energy
efficient boilers.
The £7 million project is due for completion
by mid-2020 and is expected to reduce the
annual emissions of the trust by 2,200
tonnes of carbon dioxide, equivalent to
taking more than 1,450 cars off the road.
It will save money too, an impressive
£800,000 a year, which can be reinvested
in critical frontline services.
By providing these solutions we are
helping Royal Devon and Exeter to
achieve its broader sustainability goals.
Centrica currently supplies more than
1,300 NHS providers with products
and services.
2,200
tonnes of CO2 saved a year
1,450
Equivalent to taking
1,450 cars off the road
£800,000
a year cost saving
This initiative with
Centrica is a major
part of our approach to
reduce the amount of
money we spend on
energy and utilities,
releasing more funds to
invest in frontline patient
care and other vital
functions. At the same
time, reducing our energy
consumption helps reduce
our environmental impact.”
Robert Steele
Deputy Director of Strategic Capital
Planning, Royal Devon & Exeter NHS
Foundation Trust
Centrica plc Annual Report and Accounts 2019
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Strategic Report | Divisional Review continued
Growing Business Solutions
• We are delivering growth in Business Solutions through
leveraging existing energy supply customer relationships
and the expansion of our technology range, with the focus
increasingly on lower-carbon solutions. We are targeting
£1 billion of revenue by 2022 and EBITDA break-even by 2021.
• The Centrica Business Solutions order book has increased by
19% compared to the end of 2018, revenue in 2019 was up 36%
to £285 million and the adjusted operating loss reduced.
• On 1 July 2019, we acquired the energy services and solutions
company SmartWatt for a total consideration of $37 million,
adding further capabilities in energy efficiency, lighting
retrofits, heating, ventilation and air-conditioning, building
automation, water conservation and performance assurance
in North America.
• We continue to utilise our FlexPond Demand Side Response
platform in support of our customer solutions and are also
offering it as a ‘software as a service’ offer to third parties,
including an agreement with Japanese utility TEPCO to provide
flexibility services for the reserve market in the Kyushu region
of Japan.
Expanding our global LNG footprint and route-to-
market offering
• In LNG, we signed a landmark LNG sales and purchase
arrangement in February under which Tokyo Gas and Centrica
will jointly purchase 2.6 million tonnes per annum, delivered
ex-ship, from the Mozambique LNG Project from the start-up
of production until the early 2040s.
• In customer solutions, our global total route-to-market capacity
under management is now 25.0 Gigawatt (GW), 9% higher than
at the start of 2019.
Fresh impetus
for renewables
in North America
Direct Energy is gaining hundreds of new
customers in the US state of Virginia by
offering 100% renewable power.
The United States is a patchwork of
different energy rules, with some states
allowing free competition and others
retaining a monopoly supplier. That
creates a challenging environment for
Direct Energy.
One of our leading customers, real estate
group Bernstein Management Corporation,
has been buying retail power and gas from
Direct Energy Business for their Maryland
and Washington D.C. properties since
2010; but state regulations prevented them
from doing the same in Virginia. Until now.
Rule changes introduced last year mean
that customers with usage below 5
Megawatts can use an independent
supplier if that supplier can offer 100%
renewable power. Direct Energy acquired
its licence in February 2019 and Bernstein
was one of the first customers to sign up.
100%
Renewable power
below the utility default rate
200+
New customers
The Company will purchase renewable
power at a fixed rate, giving it certainty
and boosting progress towards its own
renewable goals. But the truly remarkable
aspect of the deal is that Bernstein is
paying less for its power now than the
prevailing monopoly utility rate for
electricity in Virginia and will continue
to do so.
Last October Centrica also launched a
new business unit in the US, Direct Energy
Renewable Services, which is focused on
this growing market. It will allow us to
meet the demands of customers like
Bernstein in a more joined-up way.
For us to have
the ability to offer
renewable power at
below the utility headroom
price speaks volumes.
It’s a ‘win, win’ for all
parties involved and it
clearly demonstrates the
demand for green energy
in Virginia.”
Keith Korin
Bernstein Account Lead,
Direct Energy Business
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Centrica plc Annual Report and Accounts 2019
Upstream
Our Upstream division consists of our
Exploration & Production (E&P) and Nuclear
power generation businesses.
› Spirit Energy
› Centrica Storage
› Nuclear
E&P total gas production
volumes (mmth)
E&P average achieved
gas sales prices (p/therm)
E&P average achieved
liquid sales prices (£/boe)
E&P lifting and other cash
production costs (£/boe)
15.2
14.3
Nuclear power
generated (£/MWh)
Nuclear achieved
power price (£/MWh)
Upstream adjusted operating profit (£m)
179
Upstream adjusted operating cash flow (£m)
635
2019
2018
2,339
2,592
42.9
49.3
44.1
41.2
10,199
11,820
49.2
45.1
567
1,012
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In E&P, Spirit Energy, our joint venture with Stadtwerke München,
is a robust, self-financing business.
However, Centrica’s journey is back to consumer, so E&P is no
longer strategically core for us. That is why we have announced
our intention to exit from Spirit Energy by the end of 2020.
We continue to own and operate the Rough field and the onshore
Easington gas processing terminal. Our focus is on maximising the
value of both these assets.
We also own a 20% interest in EDF Energy’s nuclear power
generation fleet. In 2018, we announced our intention to dispose
of this stake by the end of 2020.
Centrica plc Annual Report and Accounts 2019
27
Strategic Report | Divisional Review continued
Production and generation performance
• Nuclear generation volumes were down 14% to 10.2TWh in
2019 compared to 2018, reflecting the extensions to outages
at the Dungeness B and Hunterston B power stations.
• Total E&P production volumes were down 10% to 52.3mmboe
in 2019 compared to 2018.
– Spirit Energy production was down 2% to 45.8mmboe with
a slight increase in gas production volumes offset by
lower liquids production. We saw improved operational
performance from the operated Morecambe field which
largely offset natural decline across the portfolio and
lower availability at Statfjord.
– Rough production was down 42% to 6.5mmboe, in line
with the expected decline profile of the reservoir.
E&P development and exploration progress
• In March 2019, the Oda field, Spirit Energy’s first development
as the operator on the Norwegian Continental Shelf, came on
line five months earlier than originally planned and under
budget.
• The development of the Nova field in Norway is proceeding as
planned, with production due to begin in the third quarter of
2021. The field has an estimated 77mmboe of 2P reserves
and Spirit Energy owns 20%.
• In January 2020, we announced plans with our Statfjord
partners to drill up to 100 new wells and extend production
from the area by more than 10 years.
• Spirit Energy’s 2P reserves were 14mmboe higher at the end of
2019 than at the end of 2018, with 64mmboe of positive
revisions more than offsetting the impact of production and the
Valemon and Sindre divestments in the year. This represents a
2P reserves replacement ratio of 140%. The Statfjord life
extension resulted in 31mmboe of the revision, with positive
revisions also recognised at Kvitebjorn, Cygnus and South
Morecambe.
• In 2019, three wells were drilled in the Greater Warwick Area,
in which Spirit Energy owns a 50% interest. The Lincoln
Crestal well confirmed the presence of Iight oil and produced
at potentially commercial rates. The Warwick area yielded mixed
results. Warwick Deep proved unsuccessful with water
production and minor oil encountered. Warwick West was a
discovery and confirmed the presence of light oil which was
produced to surface during well testing. Further technical
analysis is required to understand reservoir quality in this area.
Breathing new life
into our longest
serving asset
Spirit Energy has transformed efficiency
and production at Morecambe.
The Morecambe Bay gas fields have been
a part of Centrica since the Company was
founded more than 20 years ago. At one
time, they accounted for 15% of the
UK’s entire gas needs. They are still
a significant production hub. But until
recently the ageing infrastructure was
beset by problems.
The challenge of extending Morecambe’s
life was taken on by the team at Spirit
Energy, our specialist exploration and
production joint venture with Stadtwerke
München. The first task was to shut down
the parts of the infrastructure that were
no longer needed. We now have one less
onshore terminal at Barrow and two fewer
platforms to maintain offshore.
The next step was to improve the integrity
of the remaining facilities and modernise
maintenance strategies to increase
uptime. Experts now manage our onshore
gas compressor, a key piece of equipment
which enables the flow of gas to the grid.
Proactive maintenance has helped us to
reduce the number of ‘trips’ and failures.
Better root cause analysis has enabled
us to eliminate defects and get the plant
back online quicker when there is a trip.
77%
Efficiency up from 32%
We are already reaping big benefits
and the results have exceeded our
expectations. Safety performance is
at a five-year high. Production volumes
increased from 3.2mmboe in 2018
to 6.7 million in 2019. Production
efficiency has more than doubled
from a lowly 32% to 77%.
The rationalised and stable asset also
costs less to run. Improved working
practices and a focus on supply chain
efficiencies have reduced operating cost
to £100 million in 2019, down from
£140 million the year before.
It is true that we are in the process of
selling our stake in Spirit Energy. But we
are doing this because Centrica’s journey
is back to the consumer. It has nothing to
do with the quality of Spirit as a business,
which is very high. The turnaround at
Morecambe shows what a focused team
can achieve and is a great illustration of
Spirit Energy’s potential.
It’s a great time to
be involved with
Morecambe. The facilities
are strategically important
as a gas hub and may
have a second life as we
transition to other forms
of energy. The Spirit team
are building an operating
foundation to be proud of
and we are now working
on the next phase of value
creation from our asset.”
John Cowie
Morecambe Hub Asset Manager,
Spirit Energy
28
Centrica plc Annual Report and Accounts 2019
Group Financial Review
The environment
was challenging for
Centrica’s portfolio in
2019, which impacted the
Company’s performance.
However, performance during
the second half was much
improved compared to the
first half.”
Chris O’Shea
Group Chief Financial Officer
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Group revenue
• Group revenue included in business performance reduced
by £0.6bn or 2% to £26.8bn (2018: £27.4bn). Gross segment
revenue, which includes revenue generated from the sale of
products and services between segments, reduced by £1.0bn
or 3% to £28.0bn (2018: £29.0bn).
• Centrica Consumer gross segment revenue was broadly flat as
the impact of energy supply customer account growth in North
America offset the impact of a lower average number of energy
supply accounts in the UK and lower prices, in part due to the
introduction of the UK default tariff cap.
• Centrica Business gross segment revenue fell by £0.7bn, largely
due to the impact of lower wholesale commodity prices and
warmer weather on gas optimisation revenue in North America.
• Upstream gross segment revenue fell by £0.4bn due to reduced
oil and gas production and nuclear power generation volumes
and lower achieved gas prices due to falling wholesale
commodity prices.
Adjusted operating profit
Statutory operating loss
£901m
2018: £1,392m
35%
Statutory loss for the year
attributable to shareholders
£(849)m
2018: £987m profit
Adjusted effective tax rate
£(1,023)m
2018: £183m profit
34%
2018: 41%
7ppt
Adjusted operating cash flow
Statutory basic earnings
per share (EPS)
£1,830m
(17.8)p
2018: £2,245m
18%
2018: 3.3p
Adjusted basic earnings
per share (EPS)
7.3p
Statutory net cash flow from
operating activities
£1,250m
2018: 11.2p
35%
2018: £1,934m
35%
Centrica plc Annual Report and Accounts 2019
29
Strategic Report | Group Financial Review continued
Operating profit
• The statutory operating loss was £849m (2018: operating
profit of £987m). Adjusted operating profit was £901m (2018:
£1,392m). The difference between the two measures of profit
relates to exceptional items and certain re-measurements. A
table reconciling the different profit measures is shown below.
Adjusted operating profit
• Centrica Consumer adjusted operating profit was down £245m
or 33% to £505m.
– There was a £300m negative revenue impact from the UK
residential energy supply default tariff cap, including a one-off
£70m impact in the first quarter due to Ofgem’s revision to the
methodology calculating supplier wholesale costs during the
transitional period.
– Total efficiency savings more than offset lower gross margin
resulting from lower average UK energy supply accounts and
a change in customer mix in both energy and services
towards lower priced products.
• Centrica Business adjusted operating profit was up £142m
or 189% to £217m.
– This includes the impact of a significant improvement in
power retail margins in North America and good trading and
optimisation performance in Europe.
– It also includes benefit from the decision to defer delivery of
gas from 2019 into 2020 from the one remaining large legacy
gas contract and strong trading and optimisation
performance in Europe.
• Upstream adjusted operating profit was down £388m or 68%
to £179m.
– Nuclear adjusted operating profit was down £27m or 59% to
£19m, with lower output resulting from extensions to outages
at the Dungeness B and Hunterston B nuclear power stations
not fully offset by the impact of a higher achieved power price.
– Exploration & Production adjusted operating profit was down
£361m or 69% to £160m, largely due to lower achieved gas
sales prices reflecting the falling UK NBP price, lower volumes
from Rough reflecting the field’s natural decline, higher
depreciation charges following 2018 asset write-backs
and production mix, and field specific write-offs.
Exceptional items
• A net exceptional pre-tax charge of £1,103m was included
within Group operating loss before taxation in 2019 (2018:
£185m) including:
– A £476m charge relating to the impairment of E&P assets,
predominantly due to the reduction in near-term prices and
long-term price forecasts and a conclusion that certain field
reserves levels were not sufficient for development.
– A £381m charge relating to the impairment of power assets,
including £372m related to the nuclear investment largely as a
result of a reduction in price forecasts and availability issues
at the Hunterston B and Dungeness B power stations.
– A £77m charge following the strategic decision to refocus
Centrica Home Solutions activity on the UK and Ireland,
largely related to asset impairments (including goodwill),
inventory write-downs and onerous contract provisions.
– £356m of restructuring charges arising from the continuation
of phase 2 of the Group’s cost efficiency programme,
principally related to redundancy, change resource,
consultancy, property rationalisation costs, and other
transformational activity including member compensation
payments from renegotiating UK defined benefit pension
arrangements.
– A £152m net credit relating to pension changes. This includes
a £260m credit in relation to a rule amendment to the UK
defined benefit pension scheme arrangements to offer
members an option to level up their ongoing pension if they
retire before the statutory pension age, partially offset by
£108m of pension strain costs associated with redundancy.
– A £35m net gain on disposals of the Clockwork assets,
Valemon, Sindre, the King’s Lynn power station (which is held
for sale) and contingent consideration on the historic disposal
of Trinidad and Tobago E&P assets.
• These charges in total generated a taxation credit of £116m
(2018: £89m). As a result, total net exceptional charges after
taxation were £987m (2018: £235m).
• Further details can be found in note 7(a).
Operating profit
Year ended 31 December
Notes
Adjusted operating profit/(loss)
Centrica Consumer
Centrica Business
Upstream
Group operating profit/(loss)
Net finance cost
Taxation
Profit/(loss) for the period
Profit attributable to non-controlling interests
Adjusted earnings
4(c)
8
9
2019
Business
performance
£m
Exceptional
items and certain
re-measurements
£m
Statutory
result
£m
Business
performance
£m
2018
Exceptional
items and certain
re-measurements
£m
Statutory
result
£m
505
217
179
901
(255)
(218)
428
(9)
419
(1,750)
–
219
(1,531)
(849)
(255)
1
(1,103)
750
75
567
1,392
(273)
(461)
658
(27)
631
(405)
(139)
128
(416)
987
(412)
(333)
242
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Centrica plc Annual Report and Accounts 2019
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 IFRS 9.
• 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 loss in the statutory results includes a net pre-tax
loss of £647m (2018: £220m) relating to these re-measurements,
with the decline in gas prices over the period being reflected in
the fair valuing of historic and current energy procurement to
meet the needs of our customers.
• These re-measurements generated a taxation credit of £103m
(2018: £39m). As a result, the total net re-measurement loss
after taxation was £544m (2018: £181m).
• The Group recognises the realised gains and losses on these
contracts when the underlying transaction occurs. The business
performance 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.
• Further details can be found in note 7(b).
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Group finance charge and taxation
Finance charge
• Net finance costs decreased to £255m (2018: £273m),
largely reflecting the impact of a £1.1bn repurchase of gross
debt which was completed in 2018 and the maturity of a bond
in September 2018. There were no exceptional net finance
items (2018: £139m).
Taxation
• Business performance taxation on profit decreased to £218m
(2018: £461m). After taking account of tax on joint ventures and
associates, the adjusted tax charge was £217m (2018: £458m).
The resultant adjusted tax rate for the Group was 34% (2018:
41%). The decrease in adjusted tax rate reflects the more highly
taxed E&P businesses contributing 18% of adjusted operating
profit, compared to 37% in 2018. An adjusted effective tax rate
calculation is shown below.
Group earnings
Adjusted earnings
• Profit for the year from business performance decreased to
£428m (2018: £658m) and after adjusting for non-controlling
interests, adjusted earnings fell by 34% to £419m (2018: £631m).
This reflects the overall decline in adjusted operating profit,
partly offset by the lower net finance costs and adjusted tax
charge as described above.
• Adjusted basic EPS was down 35% to 7.3p (2018: 11.2p).
Group statutory loss
• The statutory loss attributable to shareholders for the period
was £1,023m (2018: profit of £183m). 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 movement to a statutory loss, compared to a statutory
profit in 2018, is due to the reduction in adjusted earnings and
the increase in the exceptional charges and loss from certain
re-measurements, all as described above.
• The Group reported a statutory basic EPS loss of 17.8p (2018:
profit of 3.3p).
Dividend
• In addition to the interim dividend of 1.5p per share, the
proposed final dividend is 3.5p, giving a total full year
dividend of 5.0p (2018: 12.0p).
Group tax charge
Year ended 31 December
Adjusted operating profit before impacts of taxation
Add: JV/associate taxation included in adjusted operating profit
Net finance cost
Adjusted profit before taxation
Taxation on profit
Share of JV/associate taxation
Adjusted tax charge
Adjusted effective tax rate
2019
£m
901
(1)
(255)
645
218
(1)
217
34%
2018
£m
1,392
(3)
(273)
1,116
461
(3)
458
41%
Centrica plc Annual Report and Accounts 2019
31
Strategic Report | Group Financial Review continued
Group cash flow, net debt and balance sheet
Operating cash flow
• Adjusted operating cash flow, which is reconciled to net cash
flow from operating activities in the table below, fell by £415m
or 18% to £1,830m, largely in line with the reduction in adjusted
operating profit after accounting for the increase in depreciation.
• Net cash flow from operating activities decreased to £1,250m
(2018: £1,934m), which reflects the reduction in adjusted
operating cash flow as described above, higher pension
deficit repair payments as agreed with the trustees as part of the
triennial review, increased exceptional payments largely relating
to the Group’s restructuring programme and an inflow of margin
cash compared to an outflow in 2018.
Net cash flow
• Net cash outflow from investing activities decreased to £503m
(2018: £1,007m) primarily due to the Clockwork disposal
proceeds, reduced capital expenditure and lower acquisition
spend.
• Net cash outflow from financing activities fell to £1,077m (2018:
£2,540m) largely reflecting lower repayment of borrowings due
to the debt repurchase programme and a bond maturity in 2018,
and a slight reduction in cash equity dividends paid reflecting
the rebasing of the 2019 interim dividend paid in November
2019.
Net debt
• Reflecting all of this, and the Company adopting IFRS 16
which increased opening 2019 net debt by £394m, the Group’s
net debt increased by £525m to £3,181m in the year (2018:
£2,656m), including cash collateral posted or received in
support of wholesale energy procurement.
Balance sheet
• Net assets decreased to £1,795m (31 December 2018: £3,948m)
driven by the statutory loss made in the year, net actuarial
losses, exchange differences on translation of foreign
operations and dividend payments made during the year.
2019 Acquisitions and disposals
• On 1 July 2019 the Group acquired SmartWatt Energy Inc.,
a leading energy services and solutions company in North
America, for consideration of $37m (£29m). There have been
no other material acquisitions during the year.
• On 30 April 2019, the Group disposed of Clockwork Home
Services for a gross consideration of $300m which, after
deal-specific adjustments related to working capital, resulted
in a net consideration of $279m (£215m).
• The Group also disposed of Norwegian exploration and
production assets, Valemon and Sindre, during the year.
Proceeds of £33 million were equal to the carrying value of
the assets disposed of subsequent to the recognition of an
impairment charge of £49 million. The impairment charge
is included in net gain on disposal programmes within
exceptional items.
• Further details on acquisitions, assets purchased and disposals
are included in notes 4(e) and 12.
Events after balance sheet date
• On 23 December 2019, the Group agreed to sell its 382MW
King’s Lynn combined cycle gas turbine power station to
RWE Generation for headline consideration of £105 million,
adjusted for final working capital, based on a valuation date of
31 December 2019. The deal completed on 12 February 2020.
• Further details of events after the balance sheet date are
described in note 26.
Risks and capital management
• The nature of the Group’s principal risks and uncertainties are
largely unchanged from those set out in its 2018 Annual Report,
with two changes to note. The Information Systems and
Security risk has been separated into two principal risks,
enabling more focused conversations on our digital
transformation and ongoing security. A new principal risk,
Regulated Insurance and Services, has also been identified.
• In addition, there continues to be a high degree of uncertainty
surrounding the future relationship between the EU and UK
including trade agreements and the supply of electricity
and gas.
• Details of how the Group has managed financial risks such
as liquidity and credit risk are set out in note S3. Details of the
Group’s capital management processes are provided under
sources of finance in note 24(c).
Accounting policies
• UK listed companies are required to comply with the European
regulation to report consolidated financial statements in
conformity with International Financial Reporting Standards
(IFRS) as adopted by the European Union. The Group’s specific
accounting measures, including changes of accounting
presentation and selected key sources of estimation
uncertainty, are explained in notes 1, 2 and 3. Changes include
the presentation of the income statement for energy derivative
contracts following an IFRIC agenda decision on the recognition
of fair value.
Operating cash flow
Year ended 31 December
Net cash flow from operating activities
Add back/(deduct):
Net margin and cash collateral inflow/(outflow)(1)
Payments relating to exceptional charges
Dividends received from joint ventures and associates
Defined benefit pension deficit payment
Adjusted operating cash flow
(1) Net margin and cash collateral inflow includes the reversal of collateral amounts posted when the related derivative contract settles.
2019
£m
1,250
46
298
1
235
1,830
2018
£m
1,934
(57)
248
22
98
2,245
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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.
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 do not tolerate tax evasion or fraud by our employees or
other parties associated with Centrica. If we become aware
of any such wrongdoing, we take appropriate action.
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.
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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
19.0%
UK oil and gas production
40.0%
Norway oil and gas production
78.0%
Tax charge compared to cash tax paid
UK
Europe
North America
Total
Current tax
charge/(credit)
£m
Cash tax paid/
(recovered)
£m
1
131
57
189
(111)
193
46
128
Netherlands oil and
gas production
United States supply of
energy and services
Canada supply of
energy and services
Denmark energy services
Republic of Ireland supply
of energy and services
21.0%
26.0%
22.0%
12.5%
50.0%
For details on the Group’s effective tax rate see pages 29 to 32.
Further information on
the tax charge is set out
in note 9 on
Pages 135 to 137
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 2019
33
Strategic Report
Our Principal Risks
and Uncertainties
• Safety, compliance and conduct: We put customers at the
heart of everything we do. As part of treating customers fairly
we set high standards of fairness and have a low risk appetite
for failures of conduct towards customers. Our risk appetite is
as low as reasonably practicable as we continue to strive for
an incident-free workplace and to conduct business operations
in compliance with the laws and regulations and we have a
low appetite for rewarding and retaining people who fail to
demonstrate Our Values and act within Our Code.
Strengthening our System of
Risk Management and Internal Control
Each business unit and Group function is responsible for
identifying and assessing its significant risks. We consider both
the potential impact to the Group and the likelihood of occurrence
on an inherent and residual basis and aggregate these risks within
defined Principal Risk categories. 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
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.
We identify all ‘severe, but plausible’ consequences of our risks,
where the realisation is more than remote in likelihood. These
consequences are considered in our assessment of viability as
described on pages 44 to 45.
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. We are evolving our System of Risk Management and
Internal Control to ensure it remains appropriate in support of our
strategy.
Understanding those risks that impact our
strategy and determining how much risk we
would like to take.
The Group presented an update to the 2015 strategy in the July
2019 Interim announcement. The trends identified in 2015 continue
to play out with decentralisation of energy systems, shifting power
to the consumer; and increasing digitalisation, presenting both
opportunities and risks. Identifying and appropriately managing
these risks is critical to the successful delivery of our strategy
whilst enabling the transition to a lower carbon future.
The strategy update detailed an evolution of the Group Priorities.
Within our System of Risk Management and Internal Control we
assess risk in relation to the delivery of Group Priorities and
determine the level of risk we are prepared to take. Within this
framework we consider safety, compliance and conduct to
continue to be an underpinning priority. The Group Risk Appetite
Statements were updated in the context of the evolved Group
Priorities and approved in November 2019:
• Customer Obsession: It is only through delighting our
customers and giving them propositions that they want and are
willing to pay for that we will be able to grow our Group. We
have a moderate risk appetite for pursuing innovative
opportunities to deliver better service throughout the customer
journey.
• Operational Excellence: Paying attention to excellence in the
basics in our operations and the way we execute our business
processes as we serve our customers is fundamental to our
competitive success. As we aim to improve our operations,
we have a moderate risk appetite for pursuing innovative
opportunities to deliver better service through the customer
journey and to deliver improved operational excellence.
• Most Competitive Provider: Being the most competitive
provider enables us to retain our customers and enable the
provision of other services and solutions to them thereby
growing our Group. We have a moderate to high risk appetite for
identifying and implementing innovative improvements to save
cost but a lower risk appetite for managing procurement and
managing our business-as-usual processes in a rigorous and
systematic way.
• Cash flow Growth: Our aim is to deliver long-term shareholder
value through returns and cash flow growth. We assess our
stakeholder expectations in establishing our financial priorities,
allocating capital across our portfolio of businesses, and
operating within a disciplined financial framework. We have a
moderate risk appetite for seeking opportunities to deliver cash
flow growth. However, there are some aspects of this priority
impacted by external risks where we have to accept a higher
risk appetite.
• Empowered Colleagues: A productive, empowered and
capable workforce is critical to delivery of our Group strategic
priorities. Accordingly, we accept a moderate level of risk in
finding effective ways to empower ourselves to innovate and to
attract, develop and reward people with the diverse capabilities
needed to deliver our ambitions.
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Centrica plc Annual Report and Accounts 2019
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:
Identify
• Identify significant risks to
achieving business unit
and/or function objectives
Design & Implement Controls
• Design and implement
controls and actions to
mitigate the potential impact
and likelihood of risks
Assess & Analyse
• Assess inherent impact and
likelihood using the Group
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
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Our Enterprise Risk
Framework is designed to
enable us to identify, evaluate
and mitigate our risks
appropriately.
It comprises six steps:
Report, Evaluate & Improve
• Report consolidated risk,
assurance and control position
to the Group Ethics, Risk,
Assurance, Control and
Compliance Committee, Audit
Committee and Safety, Health,
Environment, Security and
Ethics Committee (SHESEC)
• 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
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
Calibrate & Assure
• Risks are calibrated to ensure
consistency and prioritise
responses
• Second line assurance and
internal audit activity
• Assess impact of assurance
findings
Centrica plc Annual Report and Accounts 2019
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Strategic Report | Our Principal Risks and Uncertainties continued
Our System of Risk Management and Internal Control: How Centrica works
Our Purpose
What we stand for
Our Values
Our Code
Strategy
Financial Framework
Our strategic framework
Board and Committees
Legal entities
Delegations of authority
Executive and Committees
Our governance
How we are organised and managed
Executive management
Management Systems
(policies, standards
and processes)
Business units
Operating functions
Group functions
Corporate functions
Second line assurance
Internal Audit
How we provide assurance
Mitigating risk through our System
of Risk Management and Internal Control
Our System of Risk Management and Internal Control is central to
our governance processes and comprises the following elements:
Our governance:
• Board and Committees: Structured to effectively execute
required duties and through which our Principal Risks are
monitored.
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 and enabling the transition to a lower
carbon future.
• Our Values: Our Values of Care, Collaboration, Courage,
Delivery and Agility underpin our strategy and Group 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: This is aligned throughout the organisation by the five
Group Priorities and underpinning priority of safety, compliance
and conduct.
• 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.
• 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:
• Second line 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 relating particularly to Finance, Health
Safety & Environment (HSES), and Digital Technology Services.
• Internal Audit: Providing confidence to the Board, via the Audit
Committee, that the Group has appropriate risk management
procedures and effective controls in place.
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Enterprise Risk Framework i
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Principal Risks
The Group Risk Universe is made up of a holistic framework of
Principal Risks, laid out below in the Group’s order of prioritisation
based on potential impact then likelihood of the risk. We have
indicated if the magnitude of the risk driving the prioritisation of
risks has increased, decreased or remained unchanged from last
year. 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. In order to reflect
the evolving risk landscape, we have made a number of changes
to our Group Risk Universe:
• Information Systems and Security: the Board agreed to
separate this into two Principal Risks (Digital Technology and
Information Systems and Cyber, Security and Resilience),
enabling more focused conversations on how we are investing
in our digital transformation and our ongoing security and
recognising the different appetites for risk between these
two areas.
• Regulated Insurance and Services: a new Principal Risk,
capturing risk relating to our regulated insurance and
services businesses British Gas Insurance Limited and British
Gas Services Limited. This will facilitate the alignment of our
Group Enterprise Risk Framework with the requirements for
these businesses.
For each Principal Risk, we discuss the nature of the risk and the
impact on our Group Priorities. Each Principal Risk is regularly
overseen directly by the Board or one of its Committees, with the
Board retaining overall responsibility for risk across the Group.
Our assessment of risk extends to risks associated with our
investments in joint ventures and associates, including our nuclear
business. The impact and likelihood of these risks are evaluated
and reported using a consistent approach.
Non-Financial Reporting Statement
The following Principal Risks have been identified as specifically
relating to the matters listed above: Health, Safety and
Environment (HSE), People, Strategy Delivery, Legal, Regulatory
and Ethical Standards Compliance and Procurement and Supplier
Management (Pages 38 to 43).
Principal Risk:
Related topic:
Health, Safety and Environment
Environment and Employees
People
Human Rights and Employees
Strategy Delivery
Social matters
Legal, Regulatory and Ethical
Standards Compliance
Procurement and Supplier
Management
Anti-bribery and
corruption
Human rights, anti-bribery
and corruption
Changes in risk climate and emerging risks
We monitor closely the evolving risk climate in relation to each of
our Principal Risks. We consider that the overall risk climate has
broadly remained unchanged over the past year, but the markets
in which the Group operates continue to be challenging.
Our global Consumer businesses continue to face significant
uncertainty with respect to political risks and potential regulatory
intervention. Markets in both the UK and US remain highly
competitive with pressure from new and existing entrants. Whilst
the outcome of the UK general election in December has provided
greater certainty over the UK’s Brexit strategy, the prospect was
raised of the nationalisation of parts of the energy sector under
an alternative government in the future. Our UK Energy Supply
business is now operating in a market subject to a price cap with
the potential for further regulation in UK markets. Recent
developments in US states (notably the announcement by New
York State to re-regulate aspects of its market) are indicators
that further interventions are also a possibility in North American
markets.
The Board recognises the significant emerging risks posed by
climate change. A climate change risk register is being developed
to identify and assess the Group’s climate change risks which will
be integrated into the Board’s oversight of risk through the Group
Enterprise Risk Framework. Further details of the risk and
opportunities posed by climate change can be seen on pages 46
to 51.
The Group continues to monitor risks relating to global energy and
services trends. Our Strategic Update in July 2019 highlighted that
the Company’s focus would be on its strengths of energy supply
and its optimisation, and on services and solutions centred around
energy, with an emphasis on helping our customers transition to a
low carbon future. This focus is critical to help the Group deliver
customer-led growth. Quarterly performance reviews are held with
each business and function to monitor progress against targets
and embed continuous improvement.
The continued drive for cost efficiency with a view to becoming
the lowest cost provider in all our markets, consistent with chosen
brand positioning and propositions, is key for the Group, but
brings associated risks and challenges. The volume, pace and
complexity of change remain significant, including continued
large-scale transformational programmes, organisational and
structural changes. The Board is focused on risks associated with
our people, ensuring that talent is retained and the Company has
the capabilities and capacity needed to deliver the strategic goals
for 2020 and beyond.
Our Information Systems are transitioning to a new operating
model, designed to create a new customer-centric architecture
approach to support our Group priority of customer obsession.
Security and privacy risks remain a core focus area for the Board
and regular Board reviews consider the threats and mitigating
actions being taken to detect and protect against potential
physical, cyber and insider attacks.
Maintaining capital discipline and balance sheet strength is key
and the Board focuses on monitoring our pension obligations and
the credit rating of the Group. To mitigate the risk of rising pension
obligations and contributions a revised pension funding plan has
been agreed and increased interest rate hedging will mitigate the
risk of further deficit growth.
Centrica plc Annual Report and Accounts 2019
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Strategic Report | Our Principal Risks and Uncertainties continued
Description
Political and Regulatory
Intervention
Risk of political or regulatory
intervention and changes, including
those resulting from Brexit, or a failure
to influence such changes.
Financial Market
Risk of financial loss due to our
exposure to market movements,
including commodity prices, inflation,
interest rates and currency
fluctuations.
Health, Safety and
Environment (HSE)
Risk of failure to protect the health
and safety of customers, employees
and third parties or to take appropriate
measures to protect our environment
and in response to climate change.
External Risk
Governance oversight:
Board
External Risk
with elements that are Risks
Requiring Judgement.
Governance oversight:
Board and Audit Committee
Risk Requiring Standards
Governance oversight:
Board and Safety, Health,
Environment, Security and Ethics
Committee
Priority
Magnitude
Priority
Magnitude
Priority
Magnitude
Priority
Priority
Priority
Magnitude
NO CHANGE
NO CHANGE
NO CHANGE
Potential
impacts
Mitigation
Brexit continues to pose risks should
the UK fail to agree a trade deal with
the EU or through macro-economic
impacts following the UK’s exit from
the EU. While the default price cap
has now been in force in the UK
market for 12 months, there is
continued regulatory pressure in the
Consumer Energy Supply markets in
the UK and North America that could
result in the erosion of our profit
margins. There is a risk of partial/total
regulation of a small number of retail
and/or natural gas markets in the US.
Operating costs could also increase in
the case of further smart meter and/or
energy efficiency obligations. The UK
General Election has brought the
threat of nationalisation back onto the
political agenda.
• We are committed to an open,
transparent and competitive UK
energy market which provides
choice for consumers.
• Executive Directors and senior
management actively engage in
discussions with political parties,
regulatory authorities and other
stakeholders.
• We have dedicated Corporate
Affairs and Regulatory teams which
examine upcoming political and
regulatory changes and their
impact. Our dedicated Brexit
project group continues to assess
the Brexit-related risks as the UK
aims to negotiate a trade deal with
the EU during 2020.
Due to our large upstream and
downstream business positions, our
exposure to adverse price movements
in commodity markets could impact
profitability and cash flow generation
across the business. While increased
volatility in commodity prices could
provide more opportunities, it could
also give rise to higher collateral costs
and/or additional credit risk for both
Energy Marketing & Trading (EM&T)
and North America Business. Further,
it would create volatility in asset and
contract valuations. An unseasonally
warm autumn/winter in the UK and a
cooler summer in the US could reduce
customer demand significantly.
• Financial risk is reviewed regularly
by the Financial Risk, Assurance
and Control Committee, and the
Group Ethics, Risk, Assurance,
Control and Compliance
Committee to assess financial
exposures and compliance with
risk limits. Regular review is also
undertaken by the Audit
Committee.
• Stress testing analysis is presented
weekly to the EM&T Risk
Committee.
• As we move into new trading
arrangements, we are focused on
ensuring that our financial risk
policies remain appropriate to the
risks we face.
• We have appropriate hedging
strategies in place that are regularly
updated to mitigate exposure to
commodity and financial market
volatility.
• We continue to invest in our
systems to further automate and
strengthen our control environment.
Our operations have the potential to
result in personal or environmental
harm. Significant HSE events could
have regulatory, financial and
reputational repercussions that would
adversely affect some, or all, of our
brands and businesses. We recognise
and report on incidents that do occur,
as described on page 19.
• HSE Management Systems are
established to include the policies,
standards and procedures to
protect customers, employees and
third parties.
• We continue to invest in training to
ensure we maintain safe operating
practices and require all employees
to complete the relevant online HSE
courses for their role.
• We drive an Incident Free Workplace
(IFW) culture across our business.
• We undertake regular reviews and
have assurance processes in place
with reporting to the HSE
Committee on a quarterly basis.
• We engage with regulatory
agencies such as the Environment
Agency, Oil and Gas Authority and
UK HSE to ensure we comply with
legislative/regulatory requirements.
• We are restructuring our business
to make it less carbon intensive
and we engage with climate change
bodies and NGOs to offer our
perspective, understand the
direction of future actions and assess
our readiness to respond to change.
Our Group
Priorities
Customer
Obsession
Operational
Excellence
Most
Competitive
Provider
Cash flow
Growth
Empowered
Colleagues
Safety, compliance
and conduct
foundation
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People
Change Management
Risk that we are unable to attract and
Risk of failure in the identification,
retain employees to ensure that the
alignment and execution of change
business has the appropriate capabilities
programmes and business
to meet our strategic objectives. There is
restructuring.
External Market
Environment
Risk that events in the external market
or environment could hinder the
delivery of our strategy.
also a potential risk of industrial action
as a large proportion of our field and
office-based employees are represented
by trade unions and works councils.
Risk Requiring Judgement
with elements that are Risks
Requiring Standards.
Risk Requiring Judgement
with elements that are Risks
Requiring Standards.
Governance oversight:
Governance oversight:
Board and Safety, Health, Environment,
Board
Security and Ethics Committee
Risk Requiring Judgement
Governance oversight:
Board
Magnitude
INCREASE
Magnitude
INCREASE
NO CHANGE
Failure to attract and retain key
If transformation projects are not
We operate in highly competitive
capabilities across the business could
aligned to our strategic objectives,
have a detrimental impact on our ability
or not implemented appropriately,
to meet our strategic objectives.
The risk of industrial action in our
businesses may have a potential impact
the expected benefits may not be
realised and resources for other
critical projects may be depleted.
on customer service levels and retention.
There are many transformation
We require the right behaviours from our
leaders and employees to deliver our
business strategy in line with Our Values
and Our Code.
initiatives that could be disruptive and/
or result in compromise to the control
environment if not governed
appropriately.
markets, where customer behaviour,
needs and demands are evolving due
to digitalisation, energy efficiency,
climate change, government initiatives
and the general economic outlook.
Failure to react appropriately and
rapidly to changes in customer
behaviour could result in the erosion
of our customer base, leading to
reduced revenues and associated
margins. In addition, we are subject
to global market volatility in our
upstream businesses in commodity
markets.
• Our Code and Our Values set the
• We have a standardised
• We focus on understanding
• We have been developing a more
defined in Group Investment
• Our Market and Competitive
behavioural expectations for all
employees and protection of
human rights.
requirement articulated as Our
Approach to Managing Change
Impacts.
• The Executive Committee has clear
• Transformation programmes are
oversight through regular discussions
of the people-related challenges
inherent in our transformation
approved by the Board via the
Group Strategic Planning and
capital allocation process.
programme.
strategic relationship with our trade
union colleagues and engage with
them on restructuring and issues that
could impact terms and conditions,
with clear and open processes to
cultivate an environment of trust and
honesty.
leaders.
• We conduct annual employee
engagement surveys and results are
reviewed and actioned by senior
• Investment appraisal criteria are
Committee Guidance.
• Progress on specific projects is
consistently monitored through
Steering Groups and reported
through to the Board.
• We have dedicated change
capability at Group and business
of benefits, the prioritisation of
efforts and to share best practice.
• We have post-merger integration
procedures in place to integrate
acquired businesses.
consumer segments and their
needs, through products and
services that are attractive and
competitive.
• We undertake regular analysis of
commodity price fundamentals
and their potential impact on our
business plans and forecasts.
Intelligence team monitors
movements in markets and
provides information to enable
appropriate decision-making.
• The Group is now equipped and
committed to help our customers
transition to a lower carbon future.
Innovations and our Technology
& Engineering function to keep
abreast of technological advances.
unit level to monitor the realisation
• We have developed Centrica
Description
Political and Regulatory
Financial Market
Intervention
Risk of political or regulatory
intervention and changes, including
those resulting from Brexit, or a failure
to influence such changes.
Risk of financial loss due to our
exposure to market movements,
including commodity prices, inflation,
interest rates and currency
fluctuations.
Health, Safety and
Environment (HSE)
Risk of failure to protect the health
and safety of customers, employees
and third parties or to take appropriate
measures to protect our environment
and in response to climate change.
External Risk
Governance oversight:
Board
External Risk
with elements that are Risks
Requiring Judgement.
Governance oversight:
Board and Audit Committee
Risk Requiring Standards
Governance oversight:
Board and Safety, Health,
Environment, Security and Ethics
Committee
People
Risk that we are unable to attract and
retain employees to ensure that the
business has the appropriate capabilities
to meet our strategic objectives. There is
also a potential risk of industrial action
as a large proportion of our field and
office-based employees are represented
by trade unions and works councils.
Risk Requiring Judgement
with elements that are Risks
Requiring Standards.
Governance oversight:
Board and Safety, Health, Environment,
Security and Ethics Committee
Change Management
Risk of failure in the identification,
alignment and execution of change
programmes and business
restructuring.
External Market
Environment
Risk that events in the external market
or environment could hinder the
delivery of our strategy.
Risk Requiring Judgement
with elements that are Risks
Requiring Standards.
Governance oversight:
Board
Risk Requiring Judgement
Governance oversight:
Board
Priority
Magnitude
Priority
Magnitude
Priority
Magnitude
Priority
NO CHANGE
NO CHANGE
NO CHANGE
Magnitude
INCREASE
Priority
Magnitude
INCREASE
Priority
Magnitude
NO CHANGE
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Potential
impacts
Brexit continues to pose risks should
Due to our large upstream and
Our operations have the potential to
the UK fail to agree a trade deal with
downstream business positions, our
result in personal or environmental
the EU or through macro-economic
exposure to adverse price movements
harm. Significant HSE events could
impacts following the UK’s exit from
in commodity markets could impact
have regulatory, financial and
the EU. While the default price cap
profitability and cash flow generation
reputational repercussions that would
has now been in force in the UK
market for 12 months, there is
across the business. While increased
adversely affect some, or all, of our
volatility in commodity prices could
brands and businesses. We recognise
continued regulatory pressure in the
provide more opportunities, it could
and report on incidents that do occur,
Consumer Energy Supply markets in
also give rise to higher collateral costs
as described on page 19.
the UK and North America that could
and/or additional credit risk for both
result in the erosion of our profit
Energy Marketing & Trading (EM&T)
margins. There is a risk of partial/total
and North America Business. Further,
regulation of a small number of retail
it would create volatility in asset and
and/or natural gas markets in the US.
contract valuations. An unseasonally
Operating costs could also increase in
warm autumn/winter in the UK and a
the case of further smart meter and/or
cooler summer in the US could reduce
energy efficiency obligations. The UK
customer demand significantly.
Mitigation
• We are committed to an open,
• Financial risk is reviewed regularly
• HSE Management Systems are
General Election has brought the
threat of nationalisation back onto the
political agenda.
transparent and competitive UK
energy market which provides
choice for consumers.
• Executive Directors and senior
management actively engage in
discussions with political parties,
regulatory authorities and other
stakeholders.
• We have dedicated Corporate
Affairs and Regulatory teams which
examine upcoming political and
regulatory changes and their
impact. Our dedicated Brexit
project group continues to assess
the Brexit-related risks as the UK
aims to negotiate a trade deal with
the EU during 2020.
by the Financial Risk, Assurance
and Control Committee, and the
Group Ethics, Risk, Assurance,
Control and Compliance
Committee to assess financial
exposures and compliance with
risk limits. Regular review is also
undertaken by the Audit
Committee.
• Stress testing analysis is presented
weekly to the EM&T Risk
Committee.
• As we move into new trading
arrangements, we are focused on
ensuring that our financial risk
policies remain appropriate to the
risks we face.
• We have appropriate hedging
strategies in place that are regularly
updated to mitigate exposure to
commodity and financial market
volatility.
• We continue to invest in our
systems to further automate and
strengthen our control environment.
established to include the policies,
standards and procedures to
protect customers, employees and
third parties.
• We continue to invest in training to
ensure we maintain safe operating
practices and require all employees
to complete the relevant online HSE
courses for their role.
• We drive an Incident Free Workplace
(IFW) culture across our business.
• We undertake regular reviews and
have assurance processes in place
with reporting to the HSE
Committee on a quarterly basis.
• We engage with regulatory
agencies such as the Environment
Agency, Oil and Gas Authority and
UK HSE to ensure we comply with
legislative/regulatory requirements.
• We are restructuring our business
to make it less carbon intensive
and we engage with climate change
bodies and NGOs to offer our
perspective, understand the
direction of future actions and assess
our readiness to respond to change.
Failure to attract and retain key
capabilities across the business could
have a detrimental impact on our ability
to meet our strategic objectives.
The risk of industrial action in our
businesses may 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 line with Our Values
and Our Code.
If transformation projects are not
aligned to our strategic objectives,
or not implemented appropriately,
the expected benefits may not be
realised and resources for other
critical projects may be depleted.
There are many transformation
initiatives that could be disruptive and/
or result in compromise to the control
environment if not governed
appropriately.
We operate in highly competitive
markets, where customer behaviour,
needs and demands are evolving due
to digitalisation, energy efficiency,
climate change, government initiatives
and the general economic outlook.
Failure to react appropriately and
rapidly to changes in customer
behaviour could result in the erosion
of our customer base, leading to
reduced revenues and associated
margins. In addition, we are subject
to global market volatility in our
upstream businesses in commodity
markets.
• Our Code and Our Values set the
behavioural expectations for all
employees and protection of
human rights.
• The Executive Committee has clear
oversight through regular discussions
of the people-related challenges
inherent in our transformation
programme.
• We have been developing a more
strategic relationship with our trade
union colleagues and engage with
them on restructuring and issues that
could impact terms and conditions,
with clear and open processes to
cultivate an environment of trust and
honesty.
• We conduct annual employee
engagement surveys and results are
reviewed and actioned by senior
leaders.
• We have a standardised
• We focus on understanding
requirement articulated as Our
Approach to Managing Change
Impacts.
• Transformation programmes are
approved by the Board via the
Group Strategic Planning and
capital allocation process.
• Investment appraisal criteria are
defined in Group Investment
Committee Guidance.
• Progress on specific projects is
consistently monitored through
Steering Groups and reported
through to the Board.
• 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.
• We have post-merger integration
procedures in place to integrate
acquired businesses.
consumer segments and their
needs, through products and
services that are attractive and
competitive.
• We undertake regular analysis of
commodity price fundamentals
and their potential impact on our
business plans and forecasts.
• Our Market and Competitive
Intelligence team monitors
movements in markets and
provides information to enable
appropriate decision-making.
• The Group is now equipped and
committed to help our customers
transition to a lower carbon future.
• We have developed Centrica
Innovations and our Technology
& Engineering function to keep
abreast of technological advances.
Centrica plc Annual Report and Accounts 2019
39
Strategic Report | Our Principal Risks and Uncertainties continued
Description
Strategy Delivery
Risk that our strategy is not
appropriate to respond to external
issues and/or the risk that the strategy
is not deliverable due to insufficient
capability.
Brand, Trust and
Reputation
Cyber, Security and
Resilience
Risk that our competitive position
is compromised by poor standards
of fairness and transparency, and by
failing to protect our brands.
Risk of IT system internal misuse,
cyber-attack, security of IT systems
and resilience and business
continuity.
Risk Requiring Judgement
Risk Requiring Judgement
Risk Requiring Standards
Risk Requiring Judgement
Risk Requiring Standards
Risk Requiring Judgement
Potential
impacts
Mitigation
Governance oversight:
Board
Governance oversight:
Board
Priority
Magnitude
DECREASE
Priority
Magnitude
DECREASE
Governance oversight:
Board, Audit Committee and
Safety, Health, Environment,
Security and Ethics Committee
Priority
Magnitude
NEW
Successful delivery of our strategy
requires serving customers in a way
that satisfies their changing needs in
a competitive marketplace. Failure to
identify changing trends in customers’
needs, stay ahead of technological
and digital advancements, develop
appropriate responses to changing
markets and competitive
environments, and build the
necessary capabilities to compete,
have the potential to adversely impact
our cash flow growth and value goals.
Failure to appropriately manage
brand perception, media attention
and lobbying from pressure groups
could impact customer sentiment and
could ultimately result in a reduction
in overall customer numbers.
Failure to be fair and transparent
could lead to reputational damage,
falling share prices and, in the case
of very poor standards, legal and
regulatory action.
Our substantial customer base and
strategic requirement to be at
the forefront of technological
development mean that it is critical
that our technology is robust, our
systems are secure and our data
is protected.
Sensitive data faces the threat of
misappropriation, for example from
hackers and viruses, leading to
potential financial loss and/or
reputational damage.
• The Board sets and reviews the
Group’s strategy, determining the
strategic direction and confirming
the strategic choices made by the
business. Regular reviews are
conducted considering changes in
market trends and the competitive
environment, social matters and the
business response.
• The Board and Executive
Committee regularly review the
capabilities required to deliver on
the strategy and address issues as
they appear.
• We have a clear financial framework
to ensure capital is allocated in
accordance with our strategy and
that balance sheet strength and
return on capital boundary
conditions are met.
• We have dedicated teams to ensure
we continue to develop and
innovate in new technologies.
• Our Digital Technology Services
function works in partnership with
change functions to assure and
deliver programmes of change.
• We aim to deliver a fair, simplified
and transparent offering to all our
customers.
• 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 NPS.
• We are transforming our complaints
process to lower backlogs and
resolution times, and to address
root causes.
• We closely monitor key metrics
including broken promises/
appointments, grade of service
and complaint numbers.
• We operate a combined Global
Security function which includes
Physical Security and Resilience
and Digital Technology Services
Information Security.
• Our information security strategy
seeks to integrate information
systems, personnel and physical
aspects to prevent, detect and
investigate threats and incidents.
• We have established governance
bodies to oversee compliance with
new security requirements.
• We regularly evaluate the adequacy
of our infrastructure and IT security
controls, test our contingency and
recovery processes, and undertake
employee awareness and training.
• Controls testing and security
patching around our core systems
is performed regularly, and our
controls are further tested by
outside experts.
Our Group
Priorities
Customer
Obsession
Operational
Excellence
Most
Competitive
Provider
Cash flow
Growth
Empowered
Colleagues
Safety, compliance
and conduct
foundation
40
Centrica plc Annual Report and Accounts 2019
Balance Sheet Strength
Financial Processing
Customer Service
and Credit Position
and Reporting
Risk that our balance sheet may not be
Risk of errors or losses arising from
resilient, with implications for our ability
the processing and reporting of
to withstand difficult market or trading
financial transactions for both internal
conditions or financial stresses to the
and external purposes.
business.
Risk of failure to consistently provide
good quality customer service
through the customer lifecycle,
with potential consequences being
increased consumer churn and
declining gross margin.
Governance oversight:
Board and Audit Committee
Governance oversight:
Board and Audit Committee
Governance oversight:
Board
Priority
Priority
Magnitude
Priority
Magnitude
NO CHANGE
NO CHANGE
Magnitude
INCREASE
Failure to operate within the Group’s
The accounting landscape is evolving
The delivery of high-quality customer
financial framework could result in risk to
with the adoption of IFRS 16 in 2019.
service is central to our business
maintaining our target credit rating,
which would impact 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, such
as pension schemes, resulting in
additional funding required to meet our
obligations.
During the current transformation of
our Finance function the potential for
failures in core controls is increased.
There is a risk that we fail to comply
with relevant tax and regulatory
requirements.
• We assess available resources on
• The Audit Committee reviews our
• Leadership teams in our frontline
a regular basis. Significant committed
compliance with both our internal
businesses establish accountability
facilities are maintained with sufficient
policies and external requirements.
for specific aspects of the
cash held on deposit to meet
fluctuations as they arise.
• We model the severe but plausible
scenarios and consequences of our
• The Audit Committee has regularly
reviewed progress with regard to
the further strengthening of the
control environment. During 2019
risks and their potential to impact our
Project Link was established to
net debt position.
• The current credit rating position
further enhance the financial
control environment of the Group.
is reported and discussed regularly by
• Our financial control framework
the Board.
incorporates our financial controls
• We consider accounting assumptions
impacting on our balance sheet
compliance.
carefully, including decommissioning
• We undertake detailed testing and
and impairment.
• Long-term obligation estimates are
updated annually.
• Counterparty exposures are restricted
by setting credit limits for each
counterparty, where possible with
reference to published credit ratings.
• Wholesale credit risks associated with
commodity trading and treasury
positions are managed in accordance
with Group policy.
evaluation of the effectiveness of
our controls in response to critical
financial risks, reporting to the
Finance, Risk, Assurance and
Control Committee quarterly.
• The Group Tax function has a
control framework, to ensure
compliance with all requirements,
which has been globalised to drive
consistency and simplification.
and management self-assessment
• Customer and Field Operations
strategy. With the entry of new
competitors to the market, customers
are increasingly likely to switch if they
are unimpressed with their customer
experience.
Remaining at the forefront of digital
developments and innovation is
critical as it leads to increased choice
and control for our customers.
We also face risks regarding our
ability to develop and price
propositions competitively and
profitably, which has increased
recently as our business moves into
new markets.
customer journey and assess
performance daily and weekly.
• 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.
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.
• Customer service agents are quality
assessed for consistency with a
rigorous training and performance
management programme.
• Performance parameters are
monitored weekly for all third-party
service providers involved in the
customer service process.
Description
Strategy Delivery
Risk that our strategy is not
appropriate to respond to external
issues and/or the risk that the strategy
is not deliverable due to insufficient
capability.
Brand, Trust and
Reputation
Cyber, Security and
Resilience
Risk that our competitive position
Risk of IT system internal misuse,
is compromised by poor standards
cyber-attack, security of IT systems
of fairness and transparency, and by
and resilience and business
failing to protect our brands.
continuity.
Balance Sheet Strength
and Credit Position
Financial Processing
and Reporting
Risk that our balance sheet may not be
resilient, with implications for our ability
to withstand difficult market or trading
conditions or financial stresses to the
business.
Risk of errors or losses arising from
the processing and reporting of
financial transactions for both internal
and external purposes.
Customer Service
Risk of failure to consistently provide
good quality customer service
through the customer lifecycle,
with potential consequences being
increased consumer churn and
declining gross margin.
Risk Requiring Judgement
Risk Requiring Judgement
Risk Requiring Standards
Risk Requiring Judgement
Risk Requiring Standards
Risk Requiring Judgement
Governance oversight:
Governance oversight:
Board
Priority
Board
Priority
Magnitude
DECREASE
Magnitude
DECREASE
Governance oversight:
Board, Audit Committee and
Safety, Health, Environment,
Security and Ethics Committee
Priority
Magnitude
NEW
Governance oversight:
Board and Audit Committee
Governance oversight:
Board and Audit Committee
Governance oversight:
Board
Priority
Magnitude
INCREASE
Priority
Magnitude
Priority
Magnitude
NO CHANGE
NO CHANGE
i
S
t
r
a
t
e
g
c
R
e
p
o
r
t
Potential
impacts
Successful delivery of our strategy
Failure to appropriately manage
Our substantial customer base and
requires serving customers in a way
brand perception, media attention
that satisfies their changing needs in
and lobbying from pressure groups
strategic requirement to be at
the forefront of technological
a competitive marketplace. Failure to
could impact customer sentiment and
development mean that it is critical
identify changing trends in customers’
could ultimately result in a reduction
that our technology is robust, our
in overall customer numbers.
systems are secure and our data
needs, stay ahead of technological
and digital advancements, develop
appropriate responses to changing
markets and competitive
environments, and build the
necessary capabilities to compete,
have the potential to adversely impact
our cash flow growth and value goals.
Failure to be fair and transparent
could lead to reputational damage,
falling share prices and, in the case
of very poor standards, legal and
regulatory action.
is protected.
Sensitive data faces the threat of
misappropriation, for example from
hackers and viruses, leading to
potential financial loss and/or
reputational damage.
Failure to operate within the Group’s
financial framework could result in risk to
maintaining our target credit rating,
which would impact 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, such
as pension schemes, resulting in
additional funding required to meet our
obligations.
The accounting landscape is evolving
with the adoption of IFRS 16 in 2019.
During the current transformation of
our Finance function the potential for
failures in core controls is increased.
There is a risk that we fail to comply
with relevant tax and regulatory
requirements.
Mitigation
• The Board sets and reviews the
• We aim to deliver a fair, simplified
• We operate a combined Global
Group’s strategy, determining the
strategic direction and confirming
the strategic choices made by the
business. Regular reviews are
conducted considering changes in
market trends and the competitive
environment, social matters and the
business response.
• The Board and Executive
Committee regularly review the
capabilities required to deliver on
the strategy and address issues as
they appear.
• We have a clear financial framework
to ensure capital is allocated in
accordance with our strategy and
that balance sheet strength and
return on capital boundary
conditions are met.
• We have dedicated teams to ensure
we continue to develop and
innovate in new technologies.
• Our Digital Technology Services
function works in partnership with
change functions to assure and
deliver programmes of change.
and transparent offering to all our
customers.
• We engage with NGOs, consumer
and customer groups, political
Security function which includes
Physical Security and Resilience
and Digital Technology Services
Information Security.
parties, regulators, charities and
• Our information security strategy
other stakeholders to identify
solutions to help reduce bills and
improve trust in the industry.
• We review and monitor changes
seeks to integrate information
systems, personnel and physical
aspects to prevent, detect and
investigate threats and incidents.
in our customer brand position
• We have established governance
through NPS.
• We are transforming our complaints
process to lower backlogs and
resolution times, and to address
root causes.
• We closely monitor key metrics
including broken promises/
bodies to oversee compliance with
new security requirements.
• We regularly evaluate the adequacy
of our infrastructure and IT security
controls, test our contingency and
recovery processes, and undertake
employee awareness and training.
appointments, grade of service
• Controls testing and security
and complaint numbers.
patching around our core systems
is performed regularly, and our
controls are further tested by
outside experts.
• We assess available resources on
a regular basis. Significant committed
facilities are maintained with sufficient
cash held on deposit to meet
fluctuations as they arise.
• We model the severe but plausible
scenarios and consequences of our
risks and their potential to impact our
net debt position.
• The current credit rating position
is reported and discussed regularly by
the Board.
• We consider accounting assumptions
impacting on our balance sheet
carefully, including decommissioning
and impairment.
• Long-term obligation estimates are
updated annually.
• Counterparty exposures are restricted
by setting credit limits for each
counterparty, where possible with
reference to published credit ratings.
• Wholesale credit risks associated with
commodity trading and treasury
positions are managed in accordance
with Group policy.
• The Audit Committee reviews our
compliance with both our internal
policies and external requirements.
• The Audit Committee has regularly
reviewed progress with regard to
the further strengthening of the
control environment. During 2019
Project Link was established to
further enhance the financial
control environment of the Group.
• Our financial control framework
incorporates our financial controls
and management self-assessment
compliance.
• We undertake detailed testing and
evaluation of the effectiveness of
our controls in response to critical
financial risks, reporting to the
Finance, Risk, Assurance and
Control Committee quarterly.
• The Group Tax function has a
control framework, to ensure
compliance with all requirements,
which has been globalised to drive
consistency and simplification.
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
are unimpressed with their customer
experience.
Remaining at the forefront of digital
developments and innovation is
critical as it leads to increased choice
and control for our customers.
We also face risks regarding our
ability to develop and price
propositions competitively and
profitably, which has increased
recently as our business moves into
new markets.
• Leadership teams in our frontline
businesses establish accountability
for specific aspects of the
customer journey and assess
performance daily and weekly.
• 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.
• 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.
• Customer service agents are quality
assessed for consistency with a
rigorous training and performance
management programme.
• Performance parameters are
monitored weekly for all third-party
service providers involved in the
customer service process.
Centrica plc Annual Report and Accounts 2019
41
Strategic Report | Our Principal Risks and Uncertainties continued
Description
Digital Technology and
Information Systems
Risk of reduced availability and
sustainability, data optimisation
and business benefit realisation
associated with IT systems and data
essential for our operations.
Risk Requiring Standards
and elements that are Risks
Requiring Judgements.
Governance oversight:
Board, Audit Committee and Safety,
Health, Environment, Security and
Ethics Committee
Business Planning,
Forecasting and
Performance Management
Asset Development,
Availability and
Performance
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.
Risk that failures in the development
or integrity of our investments in
operated and non-operated assets
could compromise performance
delivery.
Risk Requiring Judgement
with elements that are Risks
Requiring Standards.
Governance oversight:
Board
Risk Requiring Judgement
Governance oversight:
Board
Legal, Regulatory and
Ethical Standards
Compliance
Risk of failure to comply with laws
and regulations, and to behave ethically
in line with Our Code, resulting in
adverse reputational and/or financial
impact.
Regulated Insurance
Procurement and Supplier
and Services
Management
Risk of loss/adverse change in the
value of insurance liabilities, due to
Risk of failure to source effectively
and to co-ordinate and collaborate
inadequate pricing and provisioning,
with the supply chain to ensure value
resulting from premium and reserve
delivery and continuity.
risk, catastrophe risk and other
non-life underwriting risks.
Risk Requiring Standards
Risk Requiring Standards
Governance oversight:
Governance oversight:
Board and Safety, Health, Environment,
Regulated Entity Boards, Board,
Risk Requiring Judgement
with elements that are Risks
Requiring Standards.
Security and Ethics Committee and
Audit Committee and Safety, Health,
Governance oversight:
Audit Committee
Environment, Security and Ethics
Board and Safety, Health,
Committee
Environment, Security and Ethics
Committee
Priority
Magnitude
Priority
Magnitude
Priority
NEW
NO CHANGE
Magnitude
DECREASE
Magnitude
DECREASE
Priority
Priority
Magnitude
Priority
Magnitude
NEW
NO CHANGE
Potential
impacts
Mitigation
Reliance on our IT infrastructure is
significant, and it is therefore key that
our systems are available in line with
user requirements but balanced with
financial resources to ensure
sustainability.
Our data is a key asset and
optimisation of that data is key to
delivery of our strategic objectives.
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.
• We have a Digital Technology
Services Strategy Committee in
place to track progress of the
strategic priorities for technology,
data and digital activities.
• We regularly evaluate the adequacy
of our infrastructure and IT security
controls, test our contingency and
recovery processes, and undertake
employee awareness and training.
• Controls testing and security
patching around our core systems
is performed regularly and our
controls are further tested by
outside experts.
We prioritise how we allocate
resources according to our business
plans and forecasts.
Failure to accurately plan and
forecast, accounting for the evolving
business environment, could result
in sub-optimal decisions and failure
to realise anticipated benefits.
Failure to invest in the maintenance
and development of our assets could
result in significant safety issues or
asset underperformance through
unplanned outages.
Operational integrity is vital to our
ability to deliver projects in line with
the strategic objectives.
During 2019 we experienced asset
outages across our Nuclear fleet as
reported on page 8.
Any real or perceived failure to follow Our
There is a significant increase in the
Our business operations rely on
Code or comply with legal or regulatory
number of customer claims as a result
products and services provided
obligations would undermine trust in our
of extreme cold conditions.
Non-compliance could lead to financial
overpriced leading to low volume
business.
penalties, reputational damage,
customer churn and/or legal and/or
regulatory action.
• Capital allocation and investment
decisions are governed through
the Investment Committee.
• Group-wide minimum standards
are applied to all assets, whether
operated or non-operated.
• Maintenance activity and
improvement programmes are
conducted across the asset base
to optimise effectiveness and
maximise production levels.
• Annual planning processes are
subject to scrutiny from the
Executive Committee and the
Board with respect to underlying
market trends, competitive threats,
organisational capability and
delivery. Central contingencies are
considered in response to the
aggregated risk position.
• Group functions utilise standard
planning processes in support of
business unit priorities, driving
improved integration of plans.
• The performance of each business
unit is reviewed against their plan
throughout the year so that any
indications of plans not being
delivered can be understood and any
required actions can be undertaken.
• Quarterly performance review
meetings involving the Group CEO
and CFO enable the review of plans
and forecasts, with revisions
identified as necessary.
• Post Investment Reviews are
conducted to assess investment
performance, whether benefits
were fully realised and lessons that
can be applied for future investment.
• Regulatory compliance monitoring
• We utilise risk models and demand
• We operate an end-to-end
activities are performed by a single
data to understand the cold
Gross Premium Rate is significantly
sales or Net Premium Rate is
significantly underpriced, resulting in
inadequate cash flow and/or leading
to a high loss ratio, and adversely
affecting profitability and solvency.
Claims made by customers are not
adequately validated, leading to the
completion of work which is not
underwritten by the insurer, which
adversely impacts the loss ratio BGI
is exposed to, or an unintended
liability as a result of imperfectly or
ambiguously worded policies and/or
terms & conditions.
weather risks with the data and
corresponding actions overseen
by the Quarterly Insurance Risk
Committee.
• Pricing of premiums is closely
monitored and reviewed.
• Anti-fraud controls have been
designed and implemented to
mitigate the risk of fraudulent
claims.
• Insurance policy documentation
is subject to review and approval
at the Joint Insurance Meeting.
through third parties, including
outsourced activities, infrastructure
and operating responsibility for some
assets. We rely on these parties to
comply with contractual terms in
addition to legal, regulatory and
ethical business requirements.
Failure to comply with the Group
policy and standards when procuring
goods and services or to manage key
suppliers and contracts effectively
could inhibit the ability of the business
to maintain competitive products and
services or expose the Group to a
range of regulatory or legal risks.
category management process to
maximise value capture throughout
the procurement lifecycle, from
market analysis through to ongoing
contract management and
monitoring.
• All suppliers are required to sign up
to our ‘Ethical Procurement’
policies and procedures.
• We review the ethical conduct of
our suppliers, including a
programme of supplier visits to
provide additional assurance over
practices employed.
• Financial health, human rights risk
and anti-bribery and corruption
due diligence and monitoring are
implemented in supplier selection
and contract renewal processes.
• Audits are conducted in relation
to third-party operation of jointly
operated Exploration & Production
assets.
function to drive Group-wide
consistency and quality.
• Control frameworks are in place to
deliver customer experience in line
with requirements over sales
compliance, billing, retentions,
customer correspondence and
complaints handling. These are
regularly reviewed by relevant
leadership teams through KPIs.
• Our Financial Crime team monitors
threats throughout the business and
adequacy of response to the threat of
anti-bribery and corruption.
• A global ‘Speak Up’ helpline exists to
provide a consistent Group-wide
approach and reinforce the
importance of this channel as a
means to flag unethical behaviour.
Our Group
Priorities
Customer
Obsession
Operational
Excellence
Most
Competitive
Provider
Cash flow
Growth
Empowered
Colleagues
Safety, compliance
and conduct
foundation
42
Centrica plc Annual Report and Accounts 2019
Description
Digital Technology and
Information Systems
Risk of reduced availability and
sustainability, data optimisation
and business benefit realisation
associated with IT systems and data
essential for our operations.
Business Planning,
Forecasting and
Asset Development,
Availability and
Performance Management
Performance
Risk that plans and forecasts may not
Risk that failures in the development
be deliverable or may fail to drive
or integrity of our investments in
efficient and effective performance,
operated and non-operated assets
and the risk of failures in performance
could compromise performance
reporting.
delivery.
Risk Requiring Standards
and elements that are Risks
Requiring Judgements.
Risk Requiring Judgement
with elements that are Risks
Requiring Standards.
Governance oversight:
Governance oversight:
Board, Audit Committee and Safety,
Board
Health, Environment, Security and
Ethics Committee
Risk Requiring Judgement
Governance oversight:
Board
Legal, Regulatory and
Ethical Standards
Compliance
Risk of failure to comply with laws
and regulations, and to behave ethically
in line with Our Code, resulting in
adverse reputational and/or financial
impact.
Regulated Insurance
and Services
Risk of loss/adverse change in the
value of insurance liabilities, due to
inadequate pricing and provisioning,
resulting from premium and reserve
risk, catastrophe risk and other
non-life underwriting risks.
Risk Requiring Standards
Risk Requiring Standards
Governance oversight:
Board and Safety, Health, Environment,
Security and Ethics Committee and
Audit Committee
Governance oversight:
Regulated Entity Boards, Board,
Audit Committee and Safety, Health,
Environment, Security and Ethics
Committee
Procurement and Supplier
Management
Risk of failure to source effectively
and to co-ordinate and collaborate
with the supply chain to ensure value
delivery and continuity.
Risk Requiring Judgement
with elements that are Risks
Requiring Standards.
Governance oversight:
Board and Safety, Health,
Environment, Security and Ethics
Committee
Priority
Magnitude
Priority
Magnitude
Priority
NEW
NO CHANGE
Magnitude
DECREASE
Priority
Magnitude
DECREASE
Priority
Magnitude
Priority
Magnitude
NEW
NO CHANGE
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user requirements but balanced with
financial resources to ensure
sustainability.
Our data is a key asset and
optimisation of that data is key to
delivery of our strategic objectives.
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.
Services Strategy Committee in
place to track progress of the
strategic priorities for technology,
data and digital activities.
• We regularly evaluate the adequacy
of our infrastructure and IT security
controls, test our contingency and
recovery processes, and undertake
• Controls testing and security
patching around our core systems
is performed regularly and our
controls are further tested by
outside experts.
Potential
impacts
Reliance on our IT infrastructure is
We prioritise how we allocate
Failure to invest in the maintenance
significant, and it is therefore key that
resources according to our business
and development of our assets could
our systems are available in line with
plans and forecasts.
Failure to accurately plan and
forecast, accounting for the evolving
result in significant safety issues or
asset underperformance through
unplanned outages.
business environment, could result
Operational integrity is vital to our
in sub-optimal decisions and failure
ability to deliver projects in line with
to realise anticipated benefits.
the strategic objectives.
During 2019 we experienced asset
outages across our Nuclear fleet as
reported on page 8.
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 lead to financial
penalties, reputational damage,
customer churn and/or legal and/or
regulatory action.
Mitigation
• We have a Digital Technology
• Annual planning processes are
• Capital allocation and investment
employee awareness and training.
• Group functions utilise standard
decisions are governed through
the Investment Committee.
• Group-wide minimum standards
are applied to all assets, whether
operated or non-operated.
• Maintenance activity and
improvement programmes are
conducted across the asset base
to optimise effectiveness and
maximise production levels.
subject to scrutiny from the
Executive Committee and the
Board with respect to underlying
market trends, competitive threats,
organisational capability and
delivery. Central contingencies are
considered in response to the
aggregated risk position.
planning processes in support of
business unit priorities, driving
improved integration of plans.
• The performance of each business
unit is reviewed against their plan
throughout the year so that any
indications of plans not being
delivered can be understood and any
required actions can be undertaken.
• Quarterly performance review
meetings involving the Group CEO
and CFO enable the review of plans
and forecasts, with revisions
identified as necessary.
• Post Investment Reviews are
conducted to assess investment
performance, whether benefits
were fully realised and lessons that
can be applied for future investment.
• Regulatory compliance monitoring
activities are performed by a single
function to drive Group-wide
consistency and quality.
• Control frameworks are in place to
deliver customer experience in line
with requirements over sales
compliance, billing, retentions,
customer correspondence and
complaints handling. These are
regularly reviewed by relevant
leadership teams through KPIs.
• Our Financial Crime team monitors
threats throughout the business and
adequacy of response to the threat of
anti-bribery and corruption.
• A global ‘Speak Up’ helpline exists to
provide a consistent Group-wide
approach and reinforce the
importance of this channel as a
means to flag unethical behaviour.
There is a significant increase in the
number of customer claims as a result
of extreme cold conditions.
Gross Premium Rate is significantly
overpriced leading to low volume
sales or Net Premium Rate is
significantly underpriced, resulting in
inadequate cash flow and/or leading
to a high loss ratio, and adversely
affecting profitability and solvency.
Claims made by customers are not
adequately validated, leading to the
completion of work which is not
underwritten by the insurer, which
adversely impacts the loss ratio BGI
is exposed to, or an unintended
liability as a result of imperfectly or
ambiguously worded policies and/or
terms & conditions.
Our business operations rely on
products and services provided
through third parties, including
outsourced activities, infrastructure
and operating responsibility for some
assets. We rely on these parties to
comply with contractual terms in
addition to legal, regulatory and
ethical business requirements.
Failure to comply with the Group
policy and standards when procuring
goods and services or to manage key
suppliers and contracts effectively
could inhibit the ability of the business
to maintain competitive products and
services or expose the Group to a
range of regulatory or legal risks.
• We utilise risk models and demand
• We operate an end-to-end
data to understand the cold
weather risks with the data and
corresponding actions overseen
by the Quarterly Insurance Risk
Committee.
• Pricing of premiums is closely
monitored and reviewed.
• Anti-fraud controls have been
designed and implemented to
mitigate the risk of fraudulent
claims.
• Insurance policy documentation
is subject to review and approval
at the Joint Insurance Meeting.
category management process to
maximise value capture throughout
the procurement lifecycle, from
market analysis through to ongoing
contract management and
monitoring.
• All suppliers are required to sign up
to our ‘Ethical Procurement’
policies and procedures.
• We review the ethical conduct of
our suppliers, including a
programme of supplier visits to
provide additional assurance over
practices employed.
• Financial health, human rights risk
and anti-bribery and corruption
due diligence and monitoring are
implemented in supplier selection
and contract renewal processes.
• Audits are conducted in relation
to third-party operation of jointly
operated Exploration & Production
assets.
Centrica plc Annual Report and Accounts 2019
43
Strategic Report
Viability Statement
Requirement
In accordance with provision 31 of the 2018 UK Corporate
Governance Code (2018 Code) the Directors have assessed the
prospects and viability of the Group taking into account the
business model (as set out in the Strategic Report on pages 14 to
15), current position in the context of liquidity and credit metrics of
the Group, and principal risks.
Assessment of prospects
Central to our prospects and delivery of our long-term growth
objectives is the Group’s business model and strategy which
was reviewed in 2019 along with the revised Group Financial
Framework to 2022 as set out on page 14. A summary of the
business strategy is provided in the Strategic report on pages 12
to 13. In assessing our prospects, we consider the success in
delivery of our strategy and our current business performance. We
are confident that the measures we have taken and the efficiencies
we have realised, as described on page 13, leave the Group in a
strong relative competitive position.
The progress in delivering the Group’s strategic objectives is
assessed annually by the Board through its Corporate Planning
process. During this process the Group also considers the
forecast strength of the Group at the end of the planning period
and the forecast cash the Group would generate against its
long-term obligations to debt and defined pension holders.
In assessing delivery of the strategic plan, we consider the market
context as well as the progress on executing on our strategic
objectives. The financial position of the Group, its performance,
cash flows and liquidity are presented in the Financial Review on
pages 29 to 33. The Board considers the principal risks facing the
Group, as set out on pages 34 to 43. The risks we consider to be
of greatest significance include:
• the risk of further political or regulatory turbulence or
intervention;
• external risks associated with commodity and other index
movements;
• risks associated with the effectiveness of our internal control
environment in relation to cyber, data protection and customer
conduct; and
• risks related to our competitive positioning in a world of rapid
digital innovation and increased customer choice.
Our risk climate has not receded during the year, but we have
embedded improved controls and assurance activities in areas
including finance, performance management, information security,
data protection, cyber, asset integrity, personal safety and
regulatory compliance, which we can demonstrate have increased
our resilience in the face of both internal and external risks.
The Directors have evaluated and approved the Group Annual
Plan for 2020 and, during 2019, have approved the updated
strategic plan. In doing so, the Board considered the longer-term
prospects of the Group in assessing the forecast strength of the
Group, the planned cash generation and obligations at the end of
the planning period. Overall, we are comfortable in the prospects
for the Group in the context of our strategy and our management
of the principal risks.
Assessment of viability
The Board continues to believe that three years is the appropriate
timeframe to assess viability reflecting the strategic planning
horizon for the Group. The Group’s focus on the energy supply
and services businesses means our most significant risks
continue to be shorter term in nature including the potential for
regulatory change and competitive pressures creating disruption
in our customer-facing markets. Similarly, the commodity markets
in which we operate generally only have transparent and
executable pricing available for a three-year period.
A key consideration in the viability assessment is the management
of the Group’s financing profile through accessing a diverse
source of term funding and maintaining access to carefully
assessed levels of standby liquidity. These committed facilities of
£4.4 billion (set out on page 158) are not due to expire until 2024.
The undrawn committed facilities at 31 December 2019 were
£3.1 billion.
To make the viability assessment, we have identified five
sensitivities (A to E) which incorporate the impact of our principal
risks as set out on pages 34 to 43. These five key sensitivities and
the linkage to our principal risks are set out in the table below.
These risks were selected as they have the most material impact
on cash flow, liquidity and credit metrics.
Viability sensitivity tests assessed
Links to Principal Risks
A. External risks associated with a 30% fall in commodity prices
Financial Markets
B. The risk of further regulatory intervention and/or risks in relation to
cyber, data protection and customer conduct
C. Significant under performance operationally of our Upstream asset
portfolio
D. Failure to fully deliver our growth agenda and programme to transition
Centrica to a low cost, customer focused provider
Legal, Regulatory and Ethical Standards Compliance
Cyber, Security & Resilience
Digital Technology and Information Systems
Health, Safety and Environment
Asset Development, Availability and Performance
Change Management
People
Strategy Delivery
External Market Environment
E. Additional Pension contributions are required, the level of undrawn
Balance Sheet and Credit Position
credit facilities are reduced and the Group is subject to a single notch
credit downgrade
44
Centrica plc Annual Report and Accounts 2019
Minor mitigations were required in certain of the above scenarios,
and additional mitigations could be deployed to increase
headroom and reduce the risk of a credit downgrade include
reductions in operational expenditure, bonuses, capital
expenditure and dividend payments, all of which are within
the Group’s control.
Conclusion
The Directors have considered all the above factors in their
assessment of viability over the next three years, including the
availability of mitigating actions within their control in the event
that one of the scenarios above materialises. We have performed
sensitivity analysis that enables the Directors to confirm that they
have a reasonable expectation that no individual risk, or plausible
combination of risks, 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.
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These sensitivities were applied to the Group Annual Plan for 2020
and our Strategic Forecasts over 2021 and 2022 with a particular
focus on the impact on headroom against the £3.1 billion of undrawn
committed facilities noted previously and our credit metrics.
The five sensitivities were then grouped into three scenarios as set
out in the table below. We do not believe that it is plausible that all
five sensitivities would occur at the same time, and therefore we
consider each of the three scenarios as a plausible combination
of events and sensitivities. Within these scenarios, commodity
(sensitivity A) and credit rating and liquidity risks (sensitivity E)
were selected as constant events in all three scenarios.
Sensitivities grouped into 3 scenarios
Scenario 1: A significant external event outside of the Group’s
control such as a significant and sustained reduction in
commodity price, along with additional regulatory events and
additional debt and liquidity risks
Scenario 2: A significant external event outside of the Group’s
control such as a significant and sustained reduction in
commodity price, along with a significant disruption to the
Asset-Based Businesses and additional debt and liquidity risks
Scenario 3: A significant external event outside of the Group’s
control such as a significant and sustained reduction in
commodity price, along with an underperformance in
delivering Gross Margin and additional debt and liquidity risks.
A + B
+ E
A + C
+ E
A + D
+ E
The scenarios applied sought to confirm that the Group would
have sufficient liquidity available against its existing undrawn
committed facilities of £3.1 billion and that calculated credit
metrics would not imply a sustained fall to below investment
grade (S&P BB and Moody’s Ba1 NP).
The key assumptions embedded in these tests include:
• historical evidence and the evaluation of similar events observed
in the market have been used to inform the potential impact
of modelled scenarios;
• whilst we have announced an intention to dispose of the
Spirit Energy and Nuclear businesses, this assessment has
been prepared on the basis that the current portfolio of
assets is maintained and no disposal proceeds are received.
By including the disposal the viability assessment is not
negatively impacted; and
• no new debt funding within the three-year period of the
assessment.
In order to reach a conclusion as to the Group’s viability the
Directors have considered the following:
• Given the available headroom, did any of the tests breach the
available headroom in the 3-year period. While scenario 1
had the most severe impact, sufficient headroom against
the £3.1 billion of committed facilities was available in all
three scenarios.
• With regards to a downgrade to sub investment grade, scenario 2
had the most severe impact. Given Centrica is currently rated
BBB (s)/ A-2 (s) for S&P, and Baa1 (n)/ P-2 (n) for Moody’s, this
scenario did not lead to a downgrade to sub investment grade
(BB for S&P, and Ba1 NP for Moody’s).
Centrica plc Annual Report and Accounts 2019
45
Strategic Report
A Pathway to Net Zero
Climate change is the greatest threat facing
society and the energy sector is at the
forefront of the need to respond. That’s why
we’re committed to enabling a lower carbon
future and why we’ve set out key policy
recommendations to support a pathway
to net zero.
We welcome the political momentum that has developed around
the need to tackle climate change and we are committed to
working with governments, regulators and legislators, to ensure
we have the right policies and frameworks in place to achieve net
zero by 2050.
The next decade is vital if we are to mitigate the worst effects
of climate change. We do not, however, believe that the world is
moving fast enough in taking action or finding solutions to some of
the challenges around net zero. Decarbonisation will require action
at all levels of society – it will involve inspiring and empowering
consumers, as well as policy support to introduce and scale up
activities and technologies for a lower carbon future.
Power
Heat
The gas network
Transport
The power sector has been at the heart of the
energy transition and is where the quickest
progress can be made in reducing emissions
over the next 20 years. Despite generation
from renewables being at an all-time high and
generation from fossil fuels at an all-time low(1),
the UK still needs a quadrupling of renewable
capacity by 2050(2). To maximise utilisation
and minimise costs, we also need a mix of
technologies to back-up intermittency and
balance the grid while avoiding the need
for expensive network upgrades and the
construction of large-scale centralised assets.
We’re calling on the UK Government to:
• stimulate investment and reduce risk in
expanding renewable generation by allowing
developers to participate in regular renewable
auctions (CfDs), and set an escalating carbon
price with a clear forward trajectory; and
• implement a policy framework and reforms to
the network architecture that support
renewables by driving expansion of flexible
and decentralised technologies such as
storage, solar and demand response.
Fossil fuels dominate heating, so transforming
how we heat our homes and businesses is
an urgent challenge. With 85% of UK homes
having a gas boiler(3), we need to accelerate the
deployment of lower carbon heating solutions.
Hybrid heat pumps are the most practical and
cost-competitive alternative in the near term,
while hydrogen is needed longer term.
Gas provides an important back-up to
intermittent renewables and will remain a key
part of the energy mix as we transition to a
lower carbon future. We believe green gas and
hydrogen should increasingly be injected into
the network to replace natural gas. This would
also help decarbonise heat in the least
disruptive and most cost-effective way.
We’re calling on the UK Government to:
• enable the roll-out of hybrid heat pumps by
We’re calling on the UK Government to:
• provide greater clarity on the mechanisms
setting up a grant scheme when the
Renewable Heat Incentive ends in 2021, while
expanding wider energy efficiency funding for
industrial, commercial and public sectors;
• introduce higher decarbonisation standards
by bringing forward a Future Homes Standard
to 2021 from 2025, banning the use of gas and
oil-fired heating in new builds as well as
phasing out oil and coal usage in off-grid
homes by 2022; and
• stimulate investment and research to define
the longer-term role that heat networks, heat
pumps, biogas and hydrogen can play.
that support green gas beyond 2021 to boost
investment and increase blending of green
gas in the network;
• collaborate across the sector to update the
Gas Quality Index which will allow more green
gas to be injected into the network and carbon
savings to be banked more efficiently; and
• encourage policy to accelerate trials and
adoption of hydrogen and Carbon Capture
and Storage (CCS) in the long term. Key sites
should be identified to support large-scale
projects, while new funding models are
needed to encourage investment with more
effective allocation of risk between the
developer and government.
Transport is the most polluting sector in the
UK(4) and electric vehicles (EVs) provide a great
opportunity to cut emissions. With EVs set to
become cost-competitive by the mid-2020s
and The Paris Declaration on Electro-Mobility
and Climate Change targeting 100 million EVs
to be on the road by 2030, it’s vital that we
continue their drive into the mainstream and
expand the charging infrastructure rapidly.
We’re calling on the UK Government to:
• require EV charge points to be smart and
interoperable to maximise usability and
reduce ‘range anxiety’ which is a key barrier
to take-up;
• allow EV charging to take place in a
competitive market to ensure consumers get
the best deal; and
• enable research and development into low
carbon gases like biogas and hydrogen, which
will likely support the decarbonisation of larger
vehicles and shipping.
2.7GW†
9,000
Our flexible, distributed and low carbon capacity
under management
(1) Carbon Brief, Analysis: UK electricity generation
in 2018 falls to lowest level since 1994, 2019.
(2) Committee on Climate Change (CCC), Net Zero
Report, 2019.
Our global footprint of skilled engineers
and technicians to help decarbonise homes
and businesses
† Included in PwC’s limited assurance engagement.
(3) CCC, Heat in UK Buildings Today, 2017.
46
Centrica plc Annual Report and Accounts 2019
Largest UK
biomethane provider
We have a 50% share in Barrow Green Gas,
the UK’s largest shipper of biomethane
17,200
Electric vehicle charge points we’ve
installed since 2013
(4) Office for National Statistics, Road Transport
and Air Emissions, 2019.
Towards this aim, we have set out key policy recommendations for
the near term that will support energy’s pathway to net zero across
the critical areas of power, heat, the gas network and transport.
With the UK now committed to become net zero by 2050, we have
focused primarily on outlining the policy recommendations that we
believe will help the UK Government achieve this, while summarising
how we advocate for lower carbon policies beyond the UK.
Power
Heat
The gas network
Transport
The power sector has been at the heart of the
Fossil fuels dominate heating, so transforming
Gas provides an important back-up to
energy transition and is where the quickest
how we heat our homes and businesses is
intermittent renewables and will remain a key
progress can be made in reducing emissions
an urgent challenge. With 85% of UK homes
part of the energy mix as we transition to a
over the next 20 years. Despite generation
having a gas boiler(3), we need to accelerate the
lower carbon future. We believe green gas and
from renewables being at an all-time high and
deployment of lower carbon heating solutions.
hydrogen should increasingly be injected into
generation from fossil fuels at an all-time low(1),
Hybrid heat pumps are the most practical and
the network to replace natural gas. This would
the UK still needs a quadrupling of renewable
cost-competitive alternative in the near term,
also help decarbonise heat in the least
capacity by 2050(2). To maximise utilisation
while hydrogen is needed longer term.
disruptive and most cost-effective way.
and minimise costs, we also need a mix of
technologies to back-up intermittency and
balance the grid while avoiding the need
for expensive network upgrades and the
construction of large-scale centralised assets.
We’re calling on the UK Government to:
We’re calling on the UK Government to:
• enable the roll-out of hybrid heat pumps by
• provide greater clarity on the mechanisms
setting up a grant scheme when the
that support green gas beyond 2021 to boost
Renewable Heat Incentive ends in 2021, while
investment and increase blending of green
expanding wider energy efficiency funding for
gas in the network;
We’re calling on the UK Government to:
industrial, commercial and public sectors;
• collaborate across the sector to update the
• stimulate investment and reduce risk in
expanding renewable generation by allowing
developers to participate in regular renewable
auctions (CfDs), and set an escalating carbon
price with a clear forward trajectory; and
the network architecture that support
renewables by driving expansion of flexible
and decentralised technologies such as
storage, solar and demand response.
• implement a policy framework and reforms to
homes by 2022; and
by bringing forward a Future Homes Standard
gas to be injected into the network and carbon
to 2021 from 2025, banning the use of gas and
savings to be banked more efficiently; and
oil-fired heating in new builds as well as
phasing out oil and coal usage in off-grid
• encourage policy to accelerate trials and
adoption of hydrogen and Carbon Capture
and Storage (CCS) in the long term. Key sites
• stimulate investment and research to define
should be identified to support large-scale
the longer-term role that heat networks, heat
projects, while new funding models are
pumps, biogas and hydrogen can play.
needed to encourage investment with more
effective allocation of risk between the
developer and government.
Transport is the most polluting sector in the
UK(4) and electric vehicles (EVs) provide a great
opportunity to cut emissions. With EVs set to
become cost-competitive by the mid-2020s
and The Paris Declaration on Electro-Mobility
and Climate Change targeting 100 million EVs
to be on the road by 2030, it’s vital that we
continue their drive into the mainstream and
expand the charging infrastructure rapidly.
We’re calling on the UK Government to:
• require EV charge points to be smart and
interoperable to maximise usability and
reduce ‘range anxiety’ which is a key barrier
to take-up;
• introduce higher decarbonisation standards
Gas Quality Index which will allow more green
• allow EV charging to take place in a
competitive market to ensure consumers get
the best deal; and
• enable research and development into low
carbon gases like biogas and hydrogen, which
will likely support the decarbonisation of larger
vehicles and shipping.
2.7GW†
9,000
and businesses
Our flexible, distributed and low carbon capacity
Our global footprint of skilled engineers
under management
and technicians to help decarbonise homes
(1) Carbon Brief, Analysis: UK electricity generation
in 2018 falls to lowest level since 1994, 2019.
(2) Committee on Climate Change (CCC), Net Zero
Report, 2019.
† Included in PwC’s limited assurance engagement.
(3) CCC, Heat in UK Buildings Today, 2017.
Largest UK
biomethane provider
We have a 50% share in Barrow Green Gas,
the UK’s largest shipper of biomethane
17,200
Electric vehicle charge points we’ve
installed since 2013
(4) Office for National Statistics, Road Transport
and Air Emissions, 2019.
Our commitment to net zero
Since 2015, we have been repositioning our
business away from centralised power generation
and oil and gas production, towards providing
energy services and solutions that enable a lower
carbon future. And in 2019, we set 2030
Responsible Business Ambitions to:
• help our customers reduce their emissions by
25% through direct and indirect action;
• enable a decarbonised energy system with
7GW of flexible, distributed and low carbon
technologies; and
• be net zero by 2050 and develop a pathway
to it by 2030.
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Net
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Our global recommendations
Tackling climate change is a global imperative, so we also
advocate lower carbon policies beyond the UK. Below
are a few examples from our core markets.
Ireland priorities:
• ensure that natural gas remains the most cost-effective
fossil fuel during the transition to net zero, and introduce
appropriate supports to stimulate investment in
grid-injected Renewable Gas projects;
• implement appropriate support schemes, funding
mechanisms and skills development to help customers
transition to lower carbon heating solutions;
• support CCS near Whitegate Power Station to provide a
clean and reliable back-up to renewable generation; and
• enable EVs by developing the charging infrastructure
and increasing support for Compressed Natural Gas
(CNG), Bio-CNG and hydrogen.
North America priorities:
• support robust competitive markets to give consumers
greater choice and access to a range of low carbon
and energy efficiency solutions;
• develop smart grid capabilities that enable data
insights, flexibility and distributed energy solutions to
balance a lower carbon grid;
• promote electrification and reform wholesale markets to
send fair price signals that recognise the full value of
carbon-free generation, energy efficiency and demand
response; and
• support the transition to EVs, which includes robust
competition for charging services.
Read more about
our strategy on
Pages 12 to 13
Read more about our
Responsible Business
Ambitions on
Pages 48 to 54
Centrica plc Annual Report and Accounts 2019
47
Strategic Report
Delivering our Responsible
Business Ambitions
Energy is at the heart of homes, businesses
and communities and has huge potential to
contribute to a more sustainable world.
We take our role as a global energy services and solutions
company very seriously, and are committed to accelerate the
positive impact we have in society and on the environment. That’s
why, in 2019, we introduced our 2030 Responsible Business
Ambitions – a set of 15 global goals that help our customers run
their world in ever more sustainable ways.
Our 2030 Ambitions support the United Nations Sustainable
Development Goals and address some of the most challenging
issues facing society, in areas where we can have the biggest
impact. This includes tackling climate change, driving innovation
to make our customers’ lives easier, building a more skilled and
inclusive workforce and making our communities stronger.
We have a long journey ahead of us, but, by working closely with
our customers and expert partners, we will maximise our positive
impact and help create a more sustainable world. In doing so, we
will realise our strategy to satisfy the changing needs of our
customers and enable the transition to a lower carbon future.
Our 2030 Ambitions are underpinned by our Responsible Business
Foundations, which ensure our business operates with integrity.
Read more about
our Responsible Business
Ambitions at
centrica.com/sustainability
Our 2030 Responsible Business Ambitions
Helping you run your world in ever more sustainable ways
Non-Financial Reporting Statement
In line with the Non-Financial Reporting Directive, we have set
out where the relevant information we need to report against can
be found, together with an explanation of the relevant Group policies
which relate to the below matters and an overall summary of the
effectiveness of such policies. Specific examples of how these policies
are implemented, any due diligence processes are conducted and
outcomes can be found on the pages specified below.
Business Model
(Pages 14 to 15)
Social matters (Pages 16 to 17,
19 to 26, 40, 49 and 53 to 54)
Anti-Bribery and Corruption
(Pages 43 and 54)
Environment (Pages 16 to 17, 38,
46 to 47, 50 to 51 and 54)
Human rights (Pages 17, 39, 43
and 54)
Employees (Pages 16, 19,
38 to 39, 52 and 54)
Non-financial key performance
indicators across Our 2030
Ambitions and Foundations
(Pages 49 to 54 and 225 to 228)
Our Code represents a high-level
summary of our key policies and
forms the foundation for how we
do business. Our policy positions
are embodied across our
Responsible Business Ambitions
and Foundations framework.
Where specific policies are
published externally, these are
shared throughout.
Read more about
Our Code at
centrica.com/ourcode
Read more about our
Group policies including
the Diversity, Respect
and Inclusion Policy, the
Health, Safety, Environment
and Security Policy and
the Procurement and
Corporate Responsibility
Policy for Suppliers at
centrica.com/policies
Our Ambition for Customers
Delivering for
our customers
Our Ambition for Climate Change
Enabling the transition
to a lower carbon future
Our Ambition for Colleagues
Building the workforce
of the future
Our Ambition for Communities
Creating stronger communities
48
Centrica plc Annual Report and Accounts 2019
Our Ambition for Customers
Delivering for
our customers
Through the latest innovations and a
commitment to service, we are making
our customers’ lives easier.
Satisfy our customers with excellent service
2030 Ambition
2019 Progress (Year 1)
Make it simpler for people to
deal with us in ways that
work for them
49%
Customers using online
account management
Our customers want and deserve a better service. One of the
ways we are doing this is through the transformation of our
customers’ digital experience. We are reorganising processes to
create smoother journeys, transforming our IT stack to become
more flexible and embedding machine-learning automation
alongside improved apps. In UK Home, we have also introduced
capabilities to book appointments and track engineer visits online,
while upgrading diagnostics to boost first-time fix rates. Actions
like these have increased the volume of customers managing their
accounts online and improved customer satisfaction, as reflected
in our aggregated NPS rising by 5.1 points to +15.1.
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transformation on
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Key: Progress against Ambitions
On track
Behind
Deliver solutions to make our customers’ lives easier
2030 Ambitions
2019 Progress (Year 1)
Help customers understand
and manage their energy
better
10
Innovations delivered
Give customers peace
of mind through tailored
propositions and connected
technologies
6
Innovations delivered
Develop solutions to help our
customers run their worlds 6
Innovations delivered
During 2019, we delivered 22 innovations across our goal areas to
transform the way we live, work and move. For example, we:
• introduced and sold 100,000 Hive Radiator Valves which helps
customers manage the temperature in individual rooms to save
energy and improve comfort; and
• developed innovative technologies through our £100 million
Centrica Innovations fund which includes investment in Mixergy.
Mixergy is a smart hot water system that only heats the amount of
water required by adjusting to household routines while storing
excess renewable energy from the grid, improving flexibility and
reducing energy use from heat losses by up to 40% a year.
We additionally rolled out existing services and solutions that make
our customers’ lives easier and more sustainable. Around 1.8 million
customers now use Hive connected home products that can be
controlled with just a tap on the app – from smart thermostats,
plugs, lights and cameras, to contact and motion sensors. Our
leadership of the UK’s smart meter roll-out was also maintained,
with cumulative installs totalling over 7.7 million across homes and
businesses, improving bill accuracy and energy management.
We bought originally three and
then another five…no longer do we
have either hot or cold spots within the
house as the heating is more even and
we only heat rooms which we use at
certain times of the day.”
Richard Southgate gave his new Hive Radiator Valves
a 5-star rating on Trustpilot (18 December 2019)
Centrica plc Annual Report and Accounts 2019
49
Strategic Report | Delivering our Responsible Business Ambitions continued
Our Ambition for Climate Change
Enabling the
transition to a lower
carbon future
We are helping to shape a low carbon
future by enabling our customers, the
energy system and our business to
manage energy more sustainably.
Enable a decarbonised energy system
2030 Ambition
2019 Progress (Year 1)
Deliver 7GW of flexible,
distributed and low carbon
technologies as well as
provide system access and
optimisation services
2.7GW†
Flexible, distributed and low
carbon technologies
We are helping create a cleaner energy system by pioneering
end-to-end solutions that enhance grid flexibility, support
renewables and reduce reliance on fossil fuels. In line with plans
during 2019, we delivered 2.7GW† of flexible, distributed and low
carbon technology – enough capacity to directly charge around
400,000 electric vehicles simultaneously. This included signing an
agreement with Tokyo Electric Power Company, to use our demand
response platform to meet industrial demand more flexibly when
the grid is under pressure, which avoids the need to turn on
additional generation from fossil fuels. We also provided a route-to-
market for renewables with 11GW under management. To further
this, we have entered into a long-term Power Purchase Agreement
for Intersect Power’s Athos Solar I 250MW project, generating clean
energy for around 70,000 homes in North America.
Key: Progress against Ambitions
On track
Behind
Help our customers reduce emissions in line
with Paris goals(1)
2030 Ambition
2019 Progress (Year 1)
Reduce our own emissions in line with Paris goals(1)
Help our customers reduce
emissions by 25%, by direct
(3%) and indirect action
3.9%(2)
Emission reduction
Over 90% of our carbon emissions arise from our customers. So
the greatest contribution we can make to tackle climate change is
to help them use energy more sustainably. Through our services
and solutions, we directly enabled customers to reduce emissions
by an average of 3.9% in 2019. This is equivalent to 2.6mtCO2e,
which is an increase of 180% compared to 2018 and is equivalent
to the annual emissions of around 900,000 UK homes.
For example, we:
• continued to grow the infrastructure for a low carbon transport
system by installing over 17,200 electric vehicle (EV) charge
points since 2013, and joined forces with Ford to deliver
charging installations and energy tariffs at scale;
• signed one of the UK’s largest combined green energy
contracts supplying over 4,500 Catholic schools and churches;
and
• partnered with Budweiser Canada to provide 100% certified
renewable power to brew beer from zero carbon sources.
Read our Health, Safety,
Environment and Security
Policy at
centrica.com/HSESpolicy
2030 Ambition
2019 Progress (Year 4)
Be net zero by 2050 and
communicate our pathway to
it by 2030
55,145†
Internal carbon footprint
(tCO2e)
Following the strategic transformation of our business, we now
produce over 80% less carbon than we did a decade ago (see
Strategy overleaf). During 2019, however, our total carbon emissions
rose by 31% compared to 2018 due to increased generation from
our upstream assets. Meanwhile, the internal carbon footprint of
our property, fleet and travel declined by 39% against our 35%
reduction target for 2015-25. The reduction of our 2019 footprint
was achieved through low carbon fleet initiatives like installing GPS
and ‘right sizing’ vehicles to smaller and more efficient models,
delivering property efficiencies across lighting, heating and cooling
systems, alongside savings arising from the restructuring of our
business. To further reduce emissions, we joined EV100 which
brings together forward-looking companies committed to
accelerating the transition to EVs, and commits us to electrify our
12,500-strong fleet by 2030.
(1) Paris goals refer to the global agreement to keep temperature rise well below 2°C
above pre-industrial levels, and pursue efforts to limit the increase to 1.5°C.
(2) Direct savings only. We intend to enhance our understanding and disclosure
of indirect customer carbon savings relating to decarbonising the energy
system and advocating for cleaner energy policies. Read how we are
advocating for cleaner energy policies on page 17.
Included in PwC’s limited assurance engagement. See page 225 or
centrica.com/assurance for more details.
†
50
Centrica plc Annual Report and Accounts 2019
Task Force on
Climate-related
Financial
Disclosures
Climate change is the greatest challenge
facing society, and the energy sector
has a key role in tackling it. We are
committed to reducing energy’s impact
on the climate, and support increased
disclosure on how companies are
responding to this important issue.
Towards this, we became signatories
of the Task Force on Climate-related
Financial Disclosures (TCFD) in 2020,
and we are committed to progressively
align with the recommendations, as well
as continuously improve our disclosure.
Governance
The Board has oversight of climate-
related issues. In 2019, the Safety, Health,
Environment, Security and Ethics
Committee reviewed our position on
climate change, our performance against
our 2030 Ambitions to tackle climate
change (see previous page), and our
analysis of asset resilience in a net zero
2050 scenario. Meanwhile, the Centrica
Executive Committee’s Health, Safety,
Environment and Security (HSES)
Sub-Committee, which is chaired by the
Group Chief Executive and is responsible
for setting objectives, targets and policies
on climate change, met quarterly during
2019. The Sub-Committee developed,
approved and assessed performance
against our 2030 Ambitions while
performing deep dives on topics such
as low carbon products.
Our carbon emissions
Total carbon emissions
Scope 1 emissions
Scope 2 emissions
Scope 3 emissions
Total carbon intensity by revenue
Total energy use(2)
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Became signatories of the Task
Force on Climate-related Financial
Disclosures in 2020
DISCLOSURE INSIGHT ACTION
Rated ‘A’ for leadership in action and
disclosure on climate change by CDP
Strategy
Our business is based on satisfying the
changing needs of our customers and
enabling the transition to a lower carbon
future. We are moving away from fossil
fuel production to focus on providing
services and solutions that help our
customers run their world in ever more
sustainable ways, while setting an
Ambition to become net zero by 2050.
We have assessed the strategic risks and
opportunities of decarbonisation,
including a 1.5 degree scenario in the UK,
and believe that we are well positioned to
succeed in the energy transition. In 2020,
we will continue to assess our strategy
against the requirements of the low
carbon transition while senior leaders
will further engage stakeholders such as
Climate Action 100+ to inform our strategy
(see page 16).
Risk management
Climate change risks are managed
through our Enterprise Risk Management
process. Risk profiles are produced at
a business level and reviewed quarterly
at the Group Ethics, Risk, Assurance,
Control and Compliance Committee.
The HSES function additionally provides
horizon scanning, testing and calibration.
Meanwhile, longer-term risks are
assessed at the annual Board Planning
Conference, which considers how the
market environment, technology and
policy are influenced by climate change.
We have identified and assessed near-
and long-term climate-related risks and
opportunities. These include trends in
policy, technology and markets, such
as the decarbonisation of heat, the
electrification of transport and changing
consumer behaviour. Physical aspects
of climate change have also been
considered – from the potential impact
of extreme weather on our people and
operations, to an increase in average
temperatures on demand for services
and solutions.
Metrics and targets
We were early adopters of best practice
greenhouse gas emissions reporting and
have a strong track record in setting
and achieving climate-related targets.
We monitor and report our global scope 1,
2 and 3 emissions (see table below) and
have set 2030 Ambitions that are
aligned to Paris goals. As part of our
TCFD implementation roadmap, we will
develop and implement a framework to
track and disclose metrics that assess
climate-related risks and opportunities
on our business.
2019
2,283,514tCO2e†
2,246,167tCO2e†
37,347tCO2e†
127,209,632tCO2e
101tCO2e/£m
2018
1,737,122tCO2e
1,698,388tCO2e
38,734tCO2e
126,137,878tCO2e
74tCO2e/£m(1)
UK & Offshore
Non-UK
UK & Offshore
Non-UK
3,130,631,079
KWh
6,964,542,291
KWh
1,642,646,626
KWh
5,635,480,865
KWh
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.
†
(1) Restated due to a change in accounting methodology.
(2) Total energy use of 10,095,173,370kWh has been included in PwC’s limited assurance engagement.
Included in PwC’s limited assurance engagement. See page 225 or centrica.com/assurance for more details.
Centrica plc Annual Report and Accounts 2019
51
Strategic Report | Delivering our Responsible Business Ambitions continued
Our Ambition for Colleagues
Building the
workforce of the
future
We are developing vital skills and a
more inclusive workforce to ensure
we deliver for our customers.
Key: Progress against Ambitions
On track
Behind
Empower people with future skills
2030 Ambition
2019 Progress (Year 1)
Inspire and develop
100,000 people with
essential STEM skills
11,409(1)
People
We are developing essential STEM (Science, Technology,
Engineering and Maths) skills, to deliver for our customers. In
2019, colleagues learnt new skills through our apprenticeships,
Career Development Hub and specialist Learning Academies.
From 2020, we want to reach more people with new and
inspirational STEM learning content.
(1) May involve double counting if someone has undertaken more than one
Build a more inclusive workplace
2030 Ambitions
2019 Progress (Year 1)
Attract and develop more
women into STEM with
40% of STEM recruits to
be female
17%
Female STEM recruits
Aspire for senior
leadership
to reflect the full diversity
of our labour markets
29%
10%
Senior gender
diversity
Senior ethnic
diversity
Help one million carers
stay in or return to work
via active promotion of
carer-positive policies
1,000
Carers supported
Having a diverse workforce that reflects our communities is key
to satisfying the changing needs of our customers. That’s why
we are passionate about creating an inclusive workplace where
everyone feels motivated and able to reach their full potential.
Towards this in 2019, we:
• sought to encourage the next generation of young girls to
explore a career in STEM by working with the Royal Academy
of Engineering to showcase strong female role models;
• rolled out unconscious bias training with interactive workshops
completed by leadership and made further training available
to all employees; and
• progressed our carer-positive culture by extending our world-
class carers leave allowance to up to six weeks in total,
advocated for the introduction of statutory carers’ leave in
the UK which is now part of the UK Government’s legislative
programme and hosted peer learning forums to share
best practice.
Despite our efforts, progress against some Ambitions were
impacted by business transformation so we hope to make greater
progress next year. We received recognition for diversity and
inclusion activities in 2019, including the Working Families’ Best
in Care and Eldercare Award while two of our leaders ranked
in the OUTstanding LGBT+ Role Model Lists.
Read our Diversity, Respect
and Inclusion Policy at
centrica.com/DRIpolicy
STEM activity.
Our diversity
Gender breakdown(2)
Board of Directors
Senior executives and direct reports
Senior management
All employees
2019
Changes to gender senior executives and
direct reports not made for 2018
Female
Male
Female
Male
Headcount
Percentage
Headcount
Percentage
Headcount
Percentage
Headcount
Percentage
2
12
224
7,420
17
35
29
29
10
22
561
18,507
83
65
71
71
2
12
277
8,723
17
32
28
29
10
25
703
21,359
83
68
72
71
(2) Headcount as at 31 December differs from numbers referenced elsewhere in the Annual Report and Accounts due to different methodologies. To accurately reflect
the full diversity of our workforce, we use overall headcount numbers rather than a headcount based on their full-time equivalent. Gender of three employees
is unknown. In January 2020, female representation on the Board increased to 23%.
Ethnic minority breakdown(3)
Board of Directors
Senior executives and direct reports
Senior management
All employees
2019
2018
Headcount
Percentage
Headcount
Percentage
3
6
81
3,126
25
18
10
12
0
8
86
3,683
0
22
9
12
(3) Based on 63% of employees in 2019 and 65% of
employees in 2018 who voluntarily disclosed that
they are from a Black, Asian, Mixed/Multiple
or other ethnic group across the UK and North
America, which constitutes the majority of
our workforce.
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Centrica plc Annual Report and Accounts 2019
Our Ambition for Communities
Creating stronger
communities
By offering our knowledge and
expertise, we are empowering
communities to take control of
their energy and tackle pressing
social issues.
Key: Progress against Ambitions
On track
Behind
Apply new energy technologies to drive
positive change
2030 Ambitions
2019 Progress (Year 1)
Deliver £5bn of value for
communities through new
and distributed energy
technologies
£27.6m
Value for communities
Deliver £300m in energy
efficiency savings to public
and essential services
£2.5m
Savings for public and
essential services
Our services and solutions help communities increase their energy
resilience, reduce their environmental impact and unlock financial
savings that can be used to build a more productive and prosperous
economy for all.
For example in 2019, we:
• enabled money from energy savings to be redirected towards
patient care by cumulatively installing distributed energy
solutions at 90 hospitals; and
• rolled-out technologies such as solar and battery storage in
over 200 UK homes and businesses as part of the Cornwall
Local Energy Market trial. The trial will test how flexible demand,
generation and storage can support the grid during peak times,
help stimulate the growth of renewables and create
opportunities to reduce energy bills.
Read more about how we are
saving energy and money to
boost healthcare in Devon on
Page 25
Read more about how
distributed energy solutions
are creating savings for
communities at
centrica.com/economicfuture
Our research shows that if just 50% of the UK’s Industry,
Healthcare and Hospitality & Leisure sectors took up distributed
energy solutions, the potential benefits would be:
£980m
260,000
Annual energy bill savings
Jobs supported
£18.5bn
Gross value added to the
economy
11%(1)
Annual carbon footprint
reduction
Sustainable healthcare will help
our budgets stretch further and the
savings, alongside the reduction in our
carbon emissions, are invaluable.”
David Furnival
Group Director of Estates at Facilities, Manchester University
NHS Foundation Trust (Centrica Business Solutions customer)
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Collaborate across sectors to improve
local communities
2030 Ambitions
2019 Progress (Year 1)
Encourage our people
to share their skills by
volunteering over
100,000 days
2,452
Volunteering days
Deliver 2,500 skills
development opportunities
for young people not in
education or employment
362
Young people
We tackle issues our communities and business care passionately
about. In 2019, over 360 young, unemployed people were given
the opportunity to gain workplace skills through Movement to
Work. This brings the overall number of young people helped
through the scheme to 1,800 since 2014. Our volunteering days
reduced by almost 50% compared to 2018, with participation
impacted by the reorganisation of our business.
£6m
Contributions we have
enabled over the course
of our flagship charity
partnerships with Carers UK,
Focus Ireland and the
Children’s Miracle Network
Hospitals in North America
(1) Carbon and economic values are calculated using different scenarios.
See centrica.com/economicfuture for more information.
Centrica plc Annual Report and Accounts 2019
53
Strategic Report | Delivering our Responsible Business Ambitions continued
Our Responsible Business
Ambitions
Our Responsible Business Ambitions are
underpinned by strong foundations that
ensure our business operates with integrity.
Customers
We care about our customers and want to be there for them.
We spent £164 million in mandatory and voluntary contributions
to help people with their energy bills. This included nearly 619,000
customers through the UK’s Warm Home Discount scheme and
over 2,400 customers via North America’s Neighbor-to-Neighbor
bill assistance programme. The British Gas Energy Trust
supported an additional 24,200 customers and non-customers
with energy and debt advice. We are also upskilling our call centre
advisers to avoid the need for transferring calls, which contributed
to our aggregated complaints per 100,000 customers falling by
1% to 3,429.
Environment
Our environmental impact is monitored and managed closely.
Following a reduction of more than 40% across our water and
waste consumption in 2018, our water consumption dropped
a further 11% to 516,836m3 while our waste decreased 9% to
27,596 tonnes. We do not undertake water-intensive activities
in water-stressed zones.
Colleagues
We want our people to feel safe, engaged and rewarded. While
there were no significant (Tier 1) process safety events in 2019,
we had two Tier 2 process safety events. The events related to a
439kg release of gas into the atmosphere following a partial valve
opening at a Spirit Energy platform, while a small fire occurred at
a customer’s site when a combined heat and power (CHP) engine
failed. Meanwhile, our total recordable injury frequency rate
increased by 4% to 1.06 per 200,000 hours worked. We strive
for an incident-free workplace and aim to continuously improve
performance with targeted safety interventions alongside
improved controls and monitoring. Alongside physical safety,
we also focus on mental health. Mental health support was
progressed in 2019 with the introduction of the ‘Unmind’ Wellbeing
app, leadership training and support via our 150-strong network of
Mental Health First Aiders. The reorganisation of our business
contributed to our employee engagement score declining by 12%
to 43% favourable. We recognise our people have been through
significant change and we want to improve their experience by
connecting them with our purpose and enabling them to perform
at their best.
We reward our people fairly. This includes paying at least the
Living Wage in the UK and upholding equal pay. We are working
to reduce our gender pay gap but recognise that it will take time
for the positive impact of our diversity and inclusion action plan
(see page 52) to transform our business, sector and society.
Our gender pay gap is driven by more men working in higher-paid,
traditionally male-dominated technical roles such as engineering
and, in 2019, our median gender pay gap reduced by 1% to 30%
which remains above the national average.
54
Centrica plc Annual Report and Accounts 2019
Communities
Our Code and Our Values help us operate in a way that is
beneficial to society by setting out the high standards and
behaviours we expect from everyone who works for us or with
us. For example, Our Code includes our commitment to uphold
and protect human rights. We take action to ensure our people
and suppliers are safeguarded from abuses which includes
undertaking human rights training and conducting on-the-ground
ethical site inspections (see page 17) as part of our work to uphold
the UK’s Modern Slavery Act. Clear guidance is additionally
provided on avoiding bribery and corruption by condemning
payments we feel to be improper and taking extra care when
offering or receiving gifts and hospitality. To reduce risk, training is
provided to colleagues in higher risk roles while our Financial
Crime team undertakes due diligence and monitors action to
reduce threats including across supplier selection, contract
renewals and our gifts and hospitality register. During 2019, we
provided refresher training to help employees with their ongoing
understanding of Our Code. Due to the significant transformation
of our business, completion rates of training dropped from 96% to
82% so we will focus on improving this in 2020. If anyone suspects
Our Code is being violated, we provide a confidential Speak Up
helpline to raise concerns (see page 56).
We want our presence to be a force for good in our communities.
In 2019, we invested £167 million in mandatory, voluntary and
charitable contributions (see page 53). We also assessed a further
52 suppliers on their social, ethical and environmental standards
which resulted in a sustainability score of 59 (low risk). This is
better than the multi-industry average of 45 (medium risk).
If suppliers receive a medium or high-risk rating, we consider
appropriate action which may involve collaboration to raise
standards and conducting an on-the-ground ethical site
inspection or terminating our relationship.
Read more about Our Code
and policies at
centrica.com/ourcode
Read more in our Gender Pay
Statement at
centrica.com/genderpay
Read more about our
Procurement and Corporate
Responsibility Policy for
Suppliers at
centrica.com/supplierpolicy
Read more in our Modern
Slavery Statement at
centrica.com/modernslavery
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:
Justine Campbell
Group General Counsel
& Company Secretary
12 February 2020
Directors’ and Corporate
Governance Report
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Dear Shareholder
This is my first review since becoming Chairman of Centrica
in February 2019. I am pleased to introduce the Directors’
and Corporate Governance Report for 2019 which sets out
the systems and procedures the Company has put in place
to structure authority, balance responsibility, and provide
accountability to our stakeholders.
2018 UK Corporate Governance Code
In 2018 the Financial Reporting Council (FRC) published its
updated UK Corporate Governance Code which applied to the
Company from 1 January 2019. The 2018 Code is substantially
different from the previous versions and Centrica supports the
FRC’s aim of setting higher standards of corporate governance
to promote transparency and integrity in business and attract
investment in the UK for the long term, benefitting the economy
and wider society.
The 2018 Code focuses on demonstrating how the governance
of a company contributes to its long-term sustainable success,
achieves wider objectives and has a greater emphasis on culture
and board diversity. These principles already existed in Centrica,
and many of the initiatives being promoted by the FRC – including
those relating to corporate culture and values, diversity and
inclusion, strengthening the stakeholder voice and adopting and
operating appropriate remuneration structures – continued to be
areas of focus for the Board in 2019.
The Directors’ and Corporate Governance Report enables
shareholders and wider stakeholders to evaluate how we have
complied with the principles of the 2018 Code through the
application of its principles. It also illustrates how your Board
ensures that the Company has effective corporate governance
in place that contributes to the long-term sustainable success
of the Company and its strategy for shareholders and for
stakeholders more generally.
The 2018 Code and associated guidance are available on the
FRC’s website at www.frc.org.uk. The index on page 101 sets out
where to find each of the required disclosures in respect of Listing
Rule 9.8.4 and Disclosure Guidance and Transparency Rules
4.1.5R and 7.2.1.
We strive to
maintain a robust
and effective governance
framework which supports
the execution of our
strategy and remains
consistent with Our
Values and behaviours.”
Charles Berry
Chairman
Highlights
• First year as Chairman
• Three new Non-Executive
Directors and one Executive
Director
• Applied all the principles and
fully complied with the
provisions of the 2018 Code
throughout the year.
Corporate governance
Effective corporate governance provides an essential foundation
for the long-term sustainable 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 2018 UK Corporate Governance
Code (2018 Code) during the year.
Centrica plc Annual Report and Accounts 2019
55
Governance | Directors’ and Corporate Governance Report continued
Corporate governance
At Centrica we recognise the importance of effective corporate
governance in supporting the long-term success and sustainability
of our business. Sound corporate governance enables clear and
consistent delegation of authority from the Board to senior
management and beyond in order to promote robust, informed
and transparent decision-making. It also promotes effective
stewardship to ensure the delivery of strategic objectives and
sustainable success. It is the Board’s responsibility to set the
tone for the organisation including the right culture, values and
behaviours that are intended to protect and promote the long-term
success of the business. We strive to maintain a robust and
effective governance framework which supports the execution
of our strategy and remains consistent with Our Values.
The Board is responsible for providing leadership and stewardship
of the Group within a framework of appropriate and effective
controls that enable risks to be assessed and then managed in a
manner which promotes the long-term sustainable success of the
Group. The Board is also responsible for overseeing the execution
of the Group’s strategy, operational and financial performance,
financial reporting, internal control and risk management, and
corporate governance.
In order to facilitate its oversight role in these areas, and to ensure
that it retains decision-making power over matters considered to
be material to the current or future financial performance of the
Group, the Board has put in place the governance framework.
This includes a schedule of matters reserved to the Board. In order
to allow the Board to focus on its priorities, a number of its
oversight responsibilities have been delegated to five Committees.
These responsibilities are set out in terms of reference for each
Committee. The Board regularly reviews the remit, authority,
composition and terms of reference of each committee.
The Board has also delegated authority to the Group Chief
Executive for the execution of the strategy and day-to-day
management of the Group. The Chief Executive’s Committee
supports the Group Chief Executive in the performance of
his duties. The Board oversees, challenges and supports
executive management in the execution of the strategy and
management of the Group.
Board refreshment and succession planning
During 2019, the Board and the Nominations Committee
continued to dedicate considerable time to succession planning.
Centrica continues to embrace the importance of diversity and
inclusion in all Board recruitment. As part of a structured and
continuous process of Board refreshment, this year again saw
several changes to the Board.
Margherita Della Valle stepped down from the Board as Non-
Executive Director and Chairman of the Audit Committee on
12 May 2019. I joined as a Non-Executive Director on 31 October
2018, becoming Chairman of the Board on 21 February 2019.
Two further Non-Executive Directors were appointed to the Board
during the year, Pam Kaur, who joined in February 2019 and Kevin
O’Byrne who joined in May 2019 and was appointed Chairman of
the Audit Committee. Heidi Mottram was appointed to the Board
on 1 January 2020. The Board acknowledges that work needs to
continue to be carried out to further advance and ensure the right
balance on the Board.
In December 2018, we announced that Mark Hodges, Chief
Executive, Centrica Consumer would be stepping down from the
Board in February 2019. We welcomed Mark’s successor, Sarwjit
Sambhi, an internal candidate, to the Board in March 2019.
56
Centrica plc Annual Report and Accounts 2019
Culture and Values
The Board recognises the importance of its role in setting the tone
for the organisation and monitoring the Group’s culture and values.
Our Code sets out our minimum expectations for all those we
work with or alongside. It is a guide to making good choices and
represents our commitment to doing the right thing and acting
with integrity.
During the year, the Board took several opportunities to engage
both formally and informally with colleagues from across the
business enabling a better understanding of the extent to which
Our Values – care, delivery, collaboration, agility and courage –
have been embedded throughout the Group. Our Code, along with
Our Values, underpin everything that we do.
During 2019, we provided refresher training to help employees with
their ongoing understanding of Our Code, with 82% completing it.
In September 2019, we celebrated the second anniversary of Our
Values. Chris O’Shea and Sarwjit Sambhi hosted a Q&A session
to celebrate the anniversary, and employees asked excellent
questions around leaders enabling more recognition of colleagues
who uphold Our Values, and how living Our Values can support
our customer obsession. In addition to this, employees were
invited to take part in Our Values’ new year’s resolutions challenge
and share their work-related aspirations.
An employee engagement survey was conducted in October 2019.
It is important we obtain feedback from our colleagues about what
we are doing well and what we can improve, so that we can take
action on issues that matter to our people and build a motivated
and engaged workforce that can deliver for our customers. Further
information on employee engagement can be found on page 54.
Speak Up is a confidential whistleblowing hotline for employees to
report serious concerns. The Company relaunched Speak Up last
year to provide a consistent Group-wide approach to raising a
concern or seeking advice about any malpractice and misconduct
observed in the Group. The Board acknowledges that speaking up
can often require the demonstration of one of Our Values,
courage, and therefore the Company has various options available
to employees when it comes to raising a concern. In the first
instance employees are always encouraged to discuss their
concerns with their manager. There are times when this might not
be the best option so they should consider an alternative manager
or function lead. If an employee is not comfortable approaching
someone internally then they can raise their concern to the Speak
Up helpline or use the online web tool.
Diversity and inclusion
The Group is committed to putting diversity, inclusion, care and
respect at the heart of what we do. Our vision is to employ a rich
and diverse mix of people who reflect the societies in which we
work. We’re creating a workplace in which the most talented
individuals reach their full potential, whatever their age, gender or
background. Our 2030 Responsible Business Ambition is for our
senior leadership teams to reflect the diversity of our communities
and the customers they serve by 2030. The Chairman leads the
Board in its support for the recommendations of the Hampton-
Alexander Review, which aims to raise the proportion of women
on UK boards to at least one-third by the end of 2020, and also the
Parker Review on ethnic diversity on boards. In November 2019,
the Company joined energy sector leaders in committing to
eliminate the exclusion of disabled people worldwide by signing up
to The Valuable 500, a campaign encouraging global business
leaders to recognise the value of the world’s 1.3 billion disabled
people. The Company also supports networks for employees who
are, for example, carers, LGBT+, from an ethnic minority, disabled,
and US veterans and military members.
Board effectiveness review
The Board carries out an annual evaluation of its effectiveness
which includes assessing how it develops and promotes its
shared vision of the purpose of the Group, its culture, its values
and the behaviours it wishes to encourage in carrying out its
business, since the behaviours demonstrated, individually as
Directors and collectively as the Board, set the tone from the
top. The previous review of the Board for 2018 was an external
evaluation conducted by a governance consultancy, Independent
Audit Limited, which has no other relationship with the Company.
For the 2019 Board evaluation, Independent Audit Limited
was again engaged and supported a self-assessment of the
Section 172(1) Directors’ Duty
effectiveness of the Company’s Board and Committees, including
observing Board and certain Committee meetings. The Board
believed that this approach would bring the benefits of continuity
from Independent Audit’s Limited reappointment and recognised
that the Board was in a transitional phase, given the number of
changes to the Board during the year. The evaluation exercise was
led by the Chairman and supported by the Group General Counsel
& Company Secretary. The results of this review are set out on
page 66.
Conclusion
Your Board is committed to maintaining high standards of
corporate governance across the Group and believes this is
integral to the delivery of our strategy for the long-term
sustainable success of the Company for the benefit of
shareholders and stakeholders.
I am pleased to say that Centrica has applied all the principles
and fully complied with the provisions of the 2018 Code
throughout the year.
The Directors’ and Corporate Governance Report which follows
has been prepared in order to provide stakeholders with a
comprehensive understanding of the Company’s governance
framework under the 2018 Code, the Companies Act 2006, the
UK Listing Rules and the Disclosure Guidance and Transparency
Rules. I hope that you find the Report informative and engaging.
Charles Berry
Chairman
12 February 2020
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Section 172(1) considerations
Where to find more information
Decisions for the long-term success of the Company
Our Strategy – six key factors in Directors’ decision-making
Stakeholder engagement – decisions involving the interests of
employees and the effect of that on principal decisions
e.g. exiting Exploration & Production
Responsible Business Ambitions
Board activity – examples of decisions made by the Directors
How the Board engages with stakeholders and how the
Directors have regard to the need to foster the
Company’s business relationship with all of its
stakeholders, and the effect of that regard
Stakeholder Engagement
Responsible Business Ambitions
Board activity
Risk
Training and information
Principal Risks and Uncertainties – risk management process,
including financial risks
Directors’ and Corporate Governance Report – Training and development
for Directors
Policies and procedures
Responsible Business Ambitions – Non-Financial Reporting Statement
Directors’ and Corporate Governance Report – Governance framework
Capital allocation and dividend policy – the long-term
approach to making decisions around the amount and
timing of returns to shareholders, including dividends,
share buybacks and other capital distributions within
the context of any relevant legal or financial constraints
Business Model – group financial framework
Board activity
Note 11
Culture and workforce
Stakeholder Engagement
Responsible Business Ambitions
Directors’ and Corporate Governance Report
Workforce engagement
Page(s)
12
16 to 17
48 to 54
64
16 to 17
48 to 54
64
34 to 45
65
48
63
14
64
139
16 to 17
48 to 54
56 and 79
67
Centrica plc Annual Report and Accounts 2019
57
Governance | Directors’ and Corporate Governance Report continued
Board of Directors
Charles Berry
Chairman
Iain Conn
Group Chief Executive
Chris O’Shea
Group Chief Financial Officer
C
$
Charles joined the Board as
a Non-Executive Director on
31 October 2018 and became
Chairman of the Board and
Nominations Committee on
21 February 2019.
Relevant skills and experience
Charles has a wealth of
international energy and
engineering knowledge and
a track record of successful
leadership of businesses across
the industrial, minerals,
telecommunications and retail
sectors. He also has extensive
experience, in both the UK and
US, of the regulatory framework of
the energy and service markets.
Previous experience
Charles has previously held
chairman roles at Senior plc, Drax
Group plc, EAGA plc and Thus
Group plc. Charles was an
executive director of Scottish
Power plc from 1999-2005.
External appointments
Chairman of The Weir Group PLC
and member of the steering group
of the Hampton-Alexander Review.
$
DC
$
Iain was appointed Group Chief
Executive on 1 January 2015 and
is Chairman of the Disclosure
Committee.
Relevant 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.
Previous experience
Iain was previously BP’s chief
executive, downstream (BP’s
refining and marketing division),
a position he held for seven years.
Iain was a board member of BP
for 10 years from 2004 and had
previously held a number of senior
roles throughout BP including
in trading, exploration and
production, and the management
of corporate functions such as
safety, marketing, technology and
human resources. He also served
as a non-executive director and
latterly senior independent director
of Rolls-Royce Holdings plc from
January 2005 until May 2014.
External appointments
Non-executive director of BT
Group plc, chairman of the
advisory board of Imperial College
Business School and a member of
the CBI’s President’s Committee.
Responsibilities
The Group Chief Executive is
responsible for the executive
leadership and day-to-day
management of the Company, to
ensure the delivery of the strategy
agreed by the Board.
Chris was appointed Group
Chief Financial Officer on
1 November 2018.
Relevant skills and experience
Chris is an experienced listed
company chief financial officer
with considerable experience
of complex, multi-national
organisations, not only in the
energy sector but also in
technology-led engineering
and services industries.
Previous experience
Prior to joining the Company,
Chris was group chief financial
officer of both Smiths Group plc
and Vesuvius plc, and a
non-executive director of Foseco
India Ltd, an Indian-listed supplier
to the foundry industry. From 2006
to 2012 Chris held various senior
finance roles with BG Group plc,
including chief financial officer of
Europe and Central Asia, prior to
which he held a number of senior
roles with Royal Dutch Shell plc in
the UK, the US and Nigeria, and
with Ernst & Young. Chris studied
Accounting and Finance at the
University of Glasgow, is a
Chartered Accountant, and holds
an MBA from the Fuqua School of
Business at Duke University.
External appointments
Chairman of the Tax Committee
of the 100 Group of UK Finance
Directors.
Responsibilities
Responsible for providing
strategic financial leadership of
the Company and day-to-day
management of the finance
function. Also responsible for
Exploration & Production.
It is considered that each
of the Directors on the
Board of the Company
effectively contributes to
the Company’s long-term
sustainability by actively
promoting the success of
the Company, generating
value for shareholders and
contributing to the wider
society.
Full biographies
can be found at
centrica.com/board
Committee membership key
C Chairman of the Board
AC Audit Committee
DC Disclosure Committee
NC Nominations Committee
RC Remuneration Committee
SC Safety, Health, Environment,
Security and Ethics Committee
Denotes Committee
Chairman
Skills and experience key
Energy Sector
Geopolitics
Emerging Markets
Financial Services
Technology
Engineering/Safety
Consumer services
Government/Regulatory
$ Finance/M&A
Reasons for the (re-)election
of each of our Directors at the
forthcoming AGM can be found
on our website within the Centrica
plc Notice of Annual General
Meeting 2020.
58
Centrica plc Annual Report and Accounts 2019
Charles Berry
Chairman
Iain Conn
Chris O’Shea
Group Chief Executive
Group Chief Financial Officer
Sarwjit Sambhi
Chief Executive, Centrica
Consumer
Richard Hookway
Chief Executive, Centrica
Business
Joan Gillman
Non-Executive Director
Stephen Hester
Senior Independent Director
C
$
$
DC
$
Charles joined the Board as
a Non-Executive Director on
Iain was appointed Group Chief
Chris was appointed Group
Executive on 1 January 2015 and
Chief Financial Officer on
31 October 2018 and became
is Chairman of the Disclosure
1 November 2018.
Chairman of the Board and
Nominations Committee on
21 February 2019.
Committee.
Iain possesses a deep
Relevant skills and experience
understanding of the energy
Relevant skills and experience
company chief financial officer
with considerable experience
Relevant skills and experience
Chris is an experienced listed
chairman roles at Senior plc, Drax
in trading, exploration and
Group plc, EAGA plc and Thus
production, and the management
finance roles with BG Group plc,
Charles has a wealth of
international energy and
engineering knowledge and
a track record of successful
leadership of businesses across
the industrial, minerals,
telecommunications and retail
sectors. He also has extensive
experience, in both the UK and
US, of the regulatory framework of
the energy and service markets.
Previous experience
Charles has previously held
Group plc. Charles was an
executive director of Scottish
Power plc from 1999-2005.
External appointments
Chairman of The Weir Group PLC
and member of the steering group
of the Hampton-Alexander Review.
sector built up over a lifetime in the
of complex, multi-national
industry and has demonstrated
organisations, not only in the
strong commitment to customers,
energy sector but also in
safety and technology.
Previous experience
Iain was previously BP’s chief
executive, downstream (BP’s
technology-led engineering
and services industries.
Previous experience
Prior to joining the Company,
refining and marketing division),
Chris was group chief financial
a position he held for seven years.
officer of both Smiths Group plc
Iain was a board member of BP
for 10 years from 2004 and had
and Vesuvius plc, and a
non-executive director of Foseco
previously held a number of senior
India Ltd, an Indian-listed supplier
roles throughout BP including
to the foundry industry. From 2006
to 2012 Chris held various senior
of corporate functions such as
including chief financial officer of
safety, marketing, technology and
Europe and Central Asia, prior to
human resources. He also served
which he held a number of senior
as a non-executive director and
roles with Royal Dutch Shell plc in
latterly senior independent director
the UK, the US and Nigeria, and
of Rolls-Royce Holdings plc from
with Ernst & Young. Chris studied
January 2005 until May 2014.
Accounting and Finance at the
External appointments
Non-executive director of BT
Group plc, chairman of the
advisory board of Imperial College
University of Glasgow, is a
Chartered Accountant, and holds
an MBA from the Fuqua School of
Business at Duke University.
Business School and a member of
External appointments
the CBI’s President’s Committee.
Chairman of the Tax Committee
Responsibilities
The Group Chief Executive is
responsible for the executive
leadership and day-to-day
of the 100 Group of UK Finance
Directors.
Responsibilities
Responsible for providing
management of the Company, to
strategic financial leadership of
ensure the delivery of the strategy
the Company and day-to-day
agreed by the Board.
management of the finance
function. Also responsible for
Exploration & Production.
$
$
NC RC SC
$
AC NC RC
$
Sarwjit was appointed Chief
Executive, Centrica Consumer and
joined the Board on 1 March 2019.
Relevant skills and experience
Sarwjit joined Centrica in 2001
and has held senior leadership
positions in retail, strategy,
finance, trading, power
generation, exploration and
production.
Previous experience
Prior to joining the Company,
Sarwjit worked for the
management and technology
consulting company, Booz Allen &
Hamilton. Most recently, he was
Managing Director, UK Home at
the Group.
External appointments
Director of Energy UK
(representing Centrica).
Responsibilities
Responsible for executive
leadership and day-to-day
management of Centrica
Consumer in support of the
Group Chief Executive and the
delivery of the strategy agreed
by the Board.
Richard was appointed Chief
Executive, Centrica Business and
joined the Board on 1 December
2018.
Joan joined the Board on
11 October 2016 and is the
Employee Champion on the
Board.
Relevant skills and experience
Joan’s expertise lies in optimising
stakeholder management
and shaping growth and
transformational strategies to lead
and govern high performing
teams. She has a consistent track
record of thought leadership and
growth in new technology.
Previous experience
Joan started her career as an
executive in a Senator’s office of
the United States Senate. As the
internet became a growing force,
she has driven growth and
transformation across four media
and communications companies
since 1995. Most recently, Joan
served as 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. Joan led one of Time
Warner Cable’s three operating
divisions, doubling revenues and
overseeing the company’s big
data strategy.
External appointments
Director of Airgain, Inc.,
InterDigital, Inc and Cumulus
Media, Inc.
Relevant skills and experience
Richard has worked in the energy
sector for 35 years at BP plc, most
recently as Group Chief Operating
Officer for Global Business
Services and IT.
Previous experience
Prior to joining the Company,
Richard spent seven years as
chief financial officer for BP’s
Downstream division
which includes customer-facing
businesses, refining and
marketing and the P&L for BP’s oil
trading activities. He previously
held a number of senior
commercial roles both in the UK
and in North America including
head of the Natural Gas Liquids
business based in Houston and
the Commercial and Industrial
Marketing business for Europe.
He also held positions in trading,
exploration and production,
petrochemicals and in group
functions.
External appointments
Non-Executive Director of EDF
Energy Nuclear Generation Group
Limited (representing Centrica).
Responsibilities
Responsible for executive
leadership and day-to-day
management of Centrica Business
in support of the Group Chief
Executive and the delivery of the
strategy agreed by the Board.
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Stephen joined the Board on
1 June 2016 and is the Senior
Independent Director.
Relevant skills and experience
Stephen has wide-ranging
experience, particularly in
customer-facing businesses,
together with recognised
expertise in transforming business
performance. He has a deep
knowledge of operating within
highly regulated businesses with
over 35 years’ experience in
financial services and within FTSE
100 companies.
Previous experience
Stephen has previously held
positions as chief executive of
Royal Bank of Scotland Group,
chief executive of British Land plc
and chief operating officer of
Abbey National plc, as well as a
number of senior executive roles
at Credit Suisse First Boston in
London and New York.
External appointments
Group chief executive of RSA
Insurance Group plc.
Centrica plc Annual Report and Accounts 2019
59
Governance | Directors’ and Corporate Governance Report continued
Pam Kaur
Non-Executive Director
Heidi Mottram
Non-Executive Director
Kevin O’Byrne
Non-Executive Director
Carlos Pascual
Non-Executive Director
AC SC NC
$
NC SC
NC
$
NC RC SC
Pam joined the Board on
1 February 2019.
Heidi joined the Board on
1 January 2020.
Relevant skills and experience
Pam has extensive experience
in audit, business, compliance,
finance and risk management.
Previous experience
Pam has previously held various
senior roles at global financial
institutions including Citigroup,
Lloyds TSB, the Royal Bank of
Scotland and Deutsche Bank, and
has worked with regulators and
supervisory boards across the
world. She has an MBA in finance
and a BCom (Hons) from Panjab
University in India and is a
qualified chartered accountant.
External appointments
Group Chief Risk Officer at HSBC
Holdings plc.
Relevant skills and experience
Heidi brings considerable relevant
strategic and operational
experience acquired in her current
and previous roles. Her deep
understanding of the importance
of customer service, delivered in
complex multi-stakeholder
environments with a high public
profile, is particularly pertinent to
the Company, at this time, as it
focuses on the delivery of its
customer-centric strategy.
Previous experience
Heidi began her career with British
Rail in the mid-1980s. She held a
number of roles in GNER, before
joining Midland Mainline in 1999
as Operations Director. She was
Commercial Director for Arriva
Trains Northern from January
2004, before becoming Managing
Director of Northern Rail Limited,
the UK’s largest rail franchise.
External appointments
CEO of Northumbrian Water
Limited and Northumbrian Water
Group Limited. Vice-Chair of the
North East Local Enterprise
Partnership, and a member of the
CBI Board and Vice-Chair of
Newcastle University Council.
Carlos joined the Board on
1 January 2015.
Relevant skills and experience
Carlos has held a number of
senior positions in the energy
industry and is a senior leader in
energy geopolitics and economic
and commercial development.
Previous experience
Between 2011 and 2014 Carlos
established and directed the US
State Department’s Energy
Resource Bureau and until August
2014 Carlos was special envoy
and co-ordinator 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
Center on Global Energy Policy,
Columbia University, and senior
vice-president for global energy
at IHS Markit.
Kevin joined the Board on 13 May
2019 and is Chairman of the Audit
Committee.
Relevant skills and experience
Kevin brings extensive retail and
finance experience to the Board,
having occupied senior roles in a
number of leading UK and
international retailers. The Board
considers that Kevin has recent
and relevant financial experience.
Previous experience
Kevin was previously chief
executive officer of Poundland
Group plc, and held executive
roles at Kingfisher plc including
divisional director UK, China and
Turkey, chief executive officer of
B&Q UK & Ireland and group
finance director. Prior to that he
was finance director of Dixons
Retail plc. From 2008 to 2017 he
was a non-executive director and
chairman of the audit committee
of Land Securities Group PLC
where he was also senior
independent director from 2012 to
2016.
External appointments
Group chief financial officer of
J Sainsbury plc.
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Centrica plc Annual Report and Accounts 2019
Steve Pusey
Non-Executive Director
Scott Wheway
Non-Executive Director
Board changes and attendance
AC NC SC
$
NC RC SC
$
Steve joined the Board on 1 April
2015 and is Chairman of the
SHESEC.
Scott joined the Board on 1 May
2016 and is the Chairman of the
Remuneration Committee.
Relevant skills and experience
Steve has a wealth of international
experience as a senior customer-
facing business technology
leader. He also has
considerable experience in the
telecommunications industry, in
both the wireline and wireless
sectors, and in business
applications and solutions.
Previous experience
Between 2006 and July 2015
Steve was the chief technology
officer of Vodafone Group Plc and
held responsibility for defining and
leading their global technology
strategy. Steve was a director of
Vodafone Group Plc for six years.
Prior to joining Vodafone Group
Plc, Steve was executive vice
president and president of Nortel
in Europe, Africa and the Middle
East, and spent several years with
British Telecom. Steve is a
graduate of the Advanced
Management Program at Harvard
University.
External appointments
Non-executive director of
FireEye, Inc.
Relevant skills and experience
Scott has a wealth of experience
as a senior customer-facing
business leader with a mix of
deep retail and consumer
expertise. He has considerable
knowledge gained in both the
retail and insurance sectors,
together with a strong
understanding of operating within
highly regulated businesses.
Previous experience
Scott worked in retail for 27 years
both in the UK and internationally.
He is the former chief executive
officer of Best Buy Europe (retail
services), director of The Boots
Company plc, managing director
and retail director of Boots the
Chemist at Alliance Boots plc and
a director of the British Retail
Consortium. He formerly held a
number of senior executive
positions at Tesco plc (retail
services), including chief executive
of Tesco in Japan, and served as
non-executive director of Aviva plc.
External appointments
Chairman of AXA UK plc and
senior independent director of
Santander UK group Holdings
PLC.
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Board changes
• Pam Kaur joined the Board
on 1 February 2019
• Rick Haythornthwaite
stepped down from the
Board on 20 February 2019
• Charles Berry became
Chairman on 21 February
2019
• Mark Hodges stepped
down from the Board on
28 February 2019
• Sarwjit Sambhi joined the
Board on 1 March 2019
• Margherita Della Valle
stepped down from the
Board on 12 May 2019
• Kevin O’Byrne joined the
Board on 13 May 2019
• Heidi Mottram joined the
Board on 1 January 2020
The Board has agreed that
each Director shall stand for
election or re-election at each
AGM. Copies of the Executive
Directors’ service contracts
and the Non-Executive
Directors’ Letters of
Appointment are available
for inspection by shareholders
at each AGM and during
normal business hours at the
Company’s registered office.
Board attendance
Board(1)(3)
Number of meetings 11
Charles Berry(2)
Iain Conn
10/11
11/11
Margherita Della Valle 3/3
Joan Gillman
11/11
Rick Haythornthwaite 2/2
Stephen Hester
Mark Hodges
Richard Hookway
Pam Kaur
Kevin O’Byrne
Chris O’Shea
Carlos Pascual(2)
Steve Pusey(2)
Sarwjit Sambhi
Scott Wheway
11/11
2/2
11/11
10/10
8/8
11/11
9/11
10/11
9/9
11/11
(1) During the year there
were 11 Board meetings, of
which nine were scheduled
meetings and two were called
at short notice.
(2) All absences were due
to Directors having
unavoidable diary conflicts.
(3) Attendance is expressed
as the number of meetings
attended out of the number
eligible to be attended.
Board diversity
By gender
By nationality
By tenure
Male
Female
83%
17%
British
67%
American 17%
8%
Indian
8%
Irish
*Data as at 31 December 2019
0-3 years 69%
3-6 years 31%
Centrica plc Annual Report and Accounts 2019
61
Governance | Directors’ and Corporate Governance Report continued
Senior Executives
Charles Cameron
Director of Technology &
Engineering and Chairman
of Centrica Innovations
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 the Group, 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.
Justine Campbell
Group General Counsel
& Company Secretary
Jill Shedden, MBE
Group Human Resources
Director
Mike Young
Group Chief Information
Officer
Justine was appointed Group
General Counsel & Company
Secretary on 1 April 2019 and has
responsibility for legal, regulatory,
compliance and governance
across the Group.
Skills and experience
Justine joined Centrica in 2013 as
General Counsel for British Gas.
Prior to joining Centrica, Justine
was General Counsel and
Corporate Affairs Director of
Vodafone UK for five years, before
which she spent seven years at
O2/Telefonica, the final two as
European general counsel. She
qualified with Freshfields in
London and Brussels and holds a
law degree from Trinity College,
Dublin and an advanced
management qualification from
the Saïd Business School, Oxford.
Jill was appointed Group Director,
Human Resources on 1 July 2011.
Skills and experience
Jill joined British Gas plc as a
graduate in 1988 and has since
held a wide range of 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.
External appointments
Non-executive director of Thames
Water Utilities Limited.
Mike was appointed Group Chief
Information Officer on
1 November 2016.
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 the Group he was group
chief information officer with the
media and digital marketing
company Dentsu Aegis Network.
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Governance framework
The Board
The Board is collectively
responsible for the long-term
success of the Group.
With due regard to the views
of shareholders and other
stakeholders, it provides
leadership and direction
including establishing the
Group’s culture, values and
ethics, setting strategy and
overseeing its implementation,
ensuring only acceptable risks
are taken and being responsible
for corporate governance
and the overall financial
performance of the Group.
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 under
governance 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 about
our Stakeholder
Engagement on
Pages 16 to 17
Read more on how we
manage our Risks on
Pages 34 to 45
Read more about
Our Strategy and
Our Business Model on
Pages 12 to 15
Chairman
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.
Group Chief Executive
Responsible for the executive
leadership and day-to-day
management of the Company,
to ensure the delivery of the
strategy agreed by the Board.
Board composition and roles
Group Chief Financial Officer
Responsible for providing
strategic financial leadership of
the Company and day-to-day
management of the finance
function.
Senior Independent Director
Acts as a sounding board for the
Chairman and serves as a
trusted intermediary for the
other Directors, as well as
shareholders as required.
Independent Non-Executive
Directors
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.
Group Executive Directors
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.
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Group Company Secretary
Adviser to the Chairman and the
Board on matters of corporate
governance, induction, training
and the efficient management of
Board and Committee meetings.
Responsible for ensuring the
effectiveness of the Company’s
governance framework.
Audit
Committee
Disclosure
Committee
Nominations
Committee
Remuneration
Committee
Committees
Safety, Health,
Environment,
Security and Ethics
Committee
For more information
Pages 69 to 75
For more information
Page 76
For more information
Pages 77 to 79
For more information
Pages 82 to 99
For more information
Pages 80 to 81
The role and responsibilities of each
Committee are set out in its Terms of Reference
found on the Company’s website at
centrica.com/boardcommittees
Centrica plc Annual Report and Accounts 2019
63
Governance | Directors’ and Corporate Governance Report continued
Board activity
Board meetings
The Board held 11 meetings in 2019, nine of which were in person
and two by scheduled telephone conferences. If Directors are
unable to attend a meeting, they have the opportunity beforehand
to discuss any agenda items with the Chairman.
Each year the Board seeks to combine one or two meetings with
visits to the Group’s operations and in 2019 visited North America
Home, Houston, in March and British Gas, Stockport, in
September. Details of these visits can be found on page 65.
During the year, the Non-Executive Directors, including the
Chairman, met frequently without management present. The
Non-Executive Directors met once during the year without the
Chairman present.
Board activity
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
During 2019, Board discussions included:
reports and approvals. In addition, each Board meeting features
deep dives into a specific operation or topic. In 2019, the Board’s
focus for the first half was on the strategic update and during that
the Board reviewed the foundations of the 2015 Group Strategy
Review (GSR), considered developments in the external
environment since the time of the GSR and in that context
reflected on the Company’s progress in delivering its strategy.
Various scenarios were modelled and discussed, with regard to all
stakeholders, focusing in particular on the options for exiting
Exploration & Production, and Nuclear and the implications for the
Group’s financial framework. In addition, the Board reviewed the
Group’s potential for delivering further cost efficiencies as well as
the future potential of the North America Business, Centrica
Business Solutions and Centrica Home Solutions business units.
Following four months of review, the Board announced the results
of its review in July 2019, including the divestment of Spirit Energy
and the rebasing of the dividend.
Key areas of activity
Matters considered
Views of Stakeholder groups considered
Strategy and business plan
• Strategic update
• Group Annual Plan
• Multi-year efficiency programme update
• Portfolio optimisation
• Group Strategic Transformation Programme
Performance and risk
• Group Performance Reports, including reports
from the Group Chief Executive, Group Chief Financial
Officer and Executive Directors
• Business reviews
• Periodic results –including dividend
• Going concern and viability statements
• UK Defined Benefit Pension Schemes Valuation
and Funding
• Annual Report and Accounts
• AGM documentation
• 2018 UK Corporate Governance Code
• Board evaluation findings
• Succession planning for Directors and Senior
Leadership Team
• Reports from Committee Chairs
• Conflicts of interest review
• Terms of Reference reviews
• Director independence
• Employee engagement surveys
• Feedback from Employee Champion
• Investor updates and feedback
• Our Code
• Diversity and inclusion
• Culture, talent & capability review
• Town hall meetings
• Site visits
• Gender pay gap reporting
• Climate change
• Brexit preparations
• Energy supply nationalisation
• Modern Slavery Act
• Price cap and judicial review
Governance
Culture and stakeholders
Political and regulatory
environment
• Customers
• Investors and shareholders
• Communities and NGOs
• Government and regulators
• Suppliers
• Colleagues
• Customers
• Investors and shareholders
• Suppliers
• Government and regulators
• Colleagues
• Investors and shareholders
• Government and regulators
• Colleagues
• Investors and shareholders
• Communities and NGOs
• Government and regulators
• Colleagues
• Investors and shareholders
• Communities and NGOs
• Government and regulators
• Suppliers
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Centrica plc Annual Report and Accounts 2019
integrated planning and dispatch) Programme. Two showcases
were presented to the Board members covering customer STAR
intervention (demonstrating the value of thinking differently
resulting in improved performance across key metrics), and
customer empathy.
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. Directors are also able to seek
independent professional advice at the Company’s expense in
respect of their duties.
Board diversity
The Company recognises the benefits of diversity and inclusion
in all its forms, at Board level and throughout the Group.
Our Nominations Committee is committed to ensuring and
promoting a diverse blend of skills, backgrounds and nationalities
on the Board and further details on the Committee’s activities in
this regard are set out in the Nominations Committee report on
pages 77 to 79.
The Company supports the recommendations of the Hampton-
Alexander and Parker Reviews in relation to gender and ethnic
diversity and is continuing to develop a diverse talent pipeline
with the necessary skills, experience and knowledge.
Our Chairman, Charles Berry, is a member of the Hampton-
Alexander steering group.
As at 31 December 2019, 17% of the Board were women and
comprised Directors from the UK, Ireland, US and India with a
wide range of skills and expertise. Heidi Mottram was appointed
a Non-Executive Director with effect from 1 January 2020,
increasing the proportion of women on the Board to 23%.
Read more about our
employee diversity on
Page 52
Board planning conference
At this year’s planning conference the Board focused on the
performance and implementation of the most material deliverables
arising from the Strategic Update announced in July 2019. It
marked the beginning of the Group Annual Plan cycle for 2020.
Following the Board Planning Conference, the 2020 Group Annual
Plan was finalised and approved by the Board.
Site visits
While the bulk of the Board’s work is conducted around the
boardroom table, Directors recognise the importance and benefits
gained by visiting the Group’s operations. During 2019, the Board
visits included the Group’s operations in the US (Houston) and the
UK (Stockport).
In March 2019, the Board visited Centrica’s North America Home
team in Houston. The visit comprised a scheduled Board meeting
and discussions with the North America Home leadership team on
strategy and performance. There was also a town hall held with
employees and some Board members, including the Chairman.
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Directors’ independence and conflicts
All our Non-Executive Directors are considered to be independent
against the criteria in the 2018 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.
The Non-Executive Directors’ Letters of Appointment state that
Non-Executive Directors must inform the Group Company
Secretary of any other business, directorships, appointments,
adviserships or other relevant connections (including any
relevant changes, and a broad indication of the time involved). By
accepting their appointment, Non-Executive Directors agree to
confirm that they are able to allocate sufficient time to meet the
expectations of their role and to perform their responsibilities
effectively. Directors also confirm that they will inform the Board of
any subsequent changes to their circumstances which may affect
the time they can commit to their duties. The agreement of the
Chairman must be obtained before accepting additional
commitments that might affect the time Non-Executive Directors
are able to devote to their appointment.
In accordance with the Companies Act 2006 and the Company’s
Articles of Association, Directors are required to report actual or
potential conflicts of interest to the Board for consideration and, if
required, 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.
The Company’s Articles of Association provide how Directors are
appointed, retired and replaced. These can be found on our
website.
Directors’ induction
All new Directors appointed to the Board receive a comprehensive
induction programme which is led by the Chairman and supported
by the Group Chief Executive. This programme is tailored to meet
each individual’s needs and is structured and designed to ensure
that new Directors are equipped with the requisite information and
knowledge about the Group and its markets to contribute
meaningfully and effectively to Board discussions as soon as
possible. The programme includes 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.
On completion of the induction programme, all new Directors will
have sufficient knowledge and understanding of the business to
effectively contribute to strategic discussions and the oversight of
the Group.
Training and development for Directors
It is important to make sure that Directors’ skills and knowledge
are refreshed and updated regularly. The Chairman is responsible
for the ongoing development of all Directors and discusses with
each Director any individual training and development needs,
such as formal and informal briefings, meetings with management
and visits to the Group’s operations. As part of this approach,
formal insight and training sessions are held each year. In March,
a session was held for new Directors which focused on Market
Abuse Regulation and Directors’ duties (including their section
172(1) duty). This was followed in September by teach-ins on
planning and dispatch, digital journeys, and the SIPD (simplified,
Centrica plc Annual Report and Accounts 2019
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Governance | Directors’ and Corporate Governance Report continued
In September 2019, the Board visited British Gas, UK Home, in
Stockport. The visit comprised a scheduled Board meeting and
discussions with the British Gas UK Home Energy & Services
leadership team on strategy, performance and culture. In addition,
the visit provided the Board with an opportunity to meet
colleagues involved with British Gas operations. The Board
members were able to meet and explore the plans relating to the
digital transformation of the customer operations environment for
UK Home Energy & Services.
Evaluation of the Board and its Committees
The Board recognises that it continually needs to monitor and
improve its performance. The performance and effectiveness of
the Board and its Committees are subject to formal review through
the annual evaluation process. In accordance with the 2018 Code,
Centrica’s annual evaluation of Board effectiveness is facilitated by
an independent third party at least once every three years.
Three-year evaluation cycle
Year 1
Year 2
Year 3
Internal Self-Assessment:
Questionnaires for the Board
and Committee members
plus individual meetings with
the Chairman. The outcome is
discussed by the Board and
recommendations are made
for actions to be taken during
the year.
Internal Self-Assessment:
Questionnaires for the Board
and Committee members
plus individual meetings with
the Chairman. The outcome is
discussed by the Board and
recommendations are made
for actions to be taken during
the year and progress is
assessed against actions
agreed from the previous
year.
External review:
Facilitated by an external,
independent party, bringing
expertise, objectivity and
fresh perspective to the
process, whilst serving as a
catalyst to facilitate dialogue
and add value to conclusions
of the evaluation.
Progress against the 2017-18 external Board
evaluation
In 2017-18, the performance and effectiveness of the Board were
reviewed through an externally facilitated evaluation process by
Independent Audit Limited, a governance consultancy that has no
other relationship with Centrica. The Directors concluded that the
Board and its Committees continued to discharge their duties
and responsibilities effectively. A number of opportunities for
improvement in the way the Board operates were also identified
and these were set out in the 2018 Annual Report. The main agreed
actions included reviewing and enhancing Board papers and
presentations to promote high quality input, debate, support and
challenge at meetings; reviewing the use of operational KPIs in
Board reports to enhance the level and clarity of insight provided
to the Board; and considering whether further discussion on
business performance should be incorporated into future
Board agendas.
During 2019, these areas were progressed, through: the alignment
of timings and processes of Secretariat and Centrica’s Executive
Committee (CEC); guidance for Board papers drawn up and
templates updated; and KPIs reflected and reported on at each
Board meeting, with new KPIs added where necessary.
For the 2019 Board effectiveness evaluation, Independent
Audit Limited was again engaged to support a follow-up self-
assessment of the effectiveness of Centrica’s Board and
Committees. The Board believed that this approach would bring
benefits of continuity.
The evaluation process was led by the Chairman and supported
by the Group General Counsel & Company Secretary. All Board
members and certain executives completed questionnaires which
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Centrica plc Annual Report and Accounts 2019
were designed to focus on issues that were raised in the 2017-18
external evaluation. Additionally, Independent Audit Limited
observed Board and Committee meetings and reviewed meeting
papers and presentations. The responses from the questionnaires
were collated with Independent Audit Limited’s observations and
the results of the review were presented to and discussed by the
Board at its meeting in December 2019.
The Directors believe that the Board and Committees continue to
operate effectively and, around the boardroom table, there are
good levels of engagement and, overall, a collegiate atmosphere.
The Directors also recognise that there have been significant
changes to the Board, with seven new Directors joining the Board
since the last effectiveness evaluation. Good progress has been
made in bringing the refreshed Board together and this will
continue to be a focus for the Chairman. While progress has also
been made on the actions identified in the previous effectiveness
evaluation, these will continue to be ongoing themes for 2020.
Chairman’s performance
The Senior Independent Director, Stephen Hester, conducted the
evaluation of the Chairman’s performance through discussions
with Directors and Senior Executives. Stephen then discussed the
feedback with the Chairman.
Individual performance
The Chairman held performance meetings with each Director to
discuss their individual contribution and performance over the
year and their training and development needs. Following these
meetings, the Chairman confirmed that each Director continued
to make an effective contribution to the Board and the Company.
Workforce engagement
Employee engagement is critical to our
success. During 2019, we began the work
to embed the role of Employee Champion
as an integral part of Centrica’s
governance framework. Using the output
from employee discussions in 2018, we
formalised the Employee Champion role
in written terms of reference to ensure
that its purpose was clear, it was well
supported by the Company, and there
were mechanisms in place for reporting
and feedback.
The key purposes set out in the terms of
reference are to:
• Bring employee perspectives to the
Board to increase board effectiveness
and decision making through the lens of
an employee;
• Review reports on the Group’s
organisational health and culture; and
• Bring about positive results for employees
with the Board being better informed by
employee perspective and insight.
During 2019, I continued discussions with
employees across the Centrica group.
Workshops were held at our UK sites in
Manchester, Cardiff, Windsor, Staines and
London and in the US, at our main locations
in New Jersey and Houston. These
workshops were held across a range of
organisational levels to gather a broad
range of views and were structured around
understanding how we could “improve the
experience of our colleagues” to empower
them and to help them perform at their best
in order to better serve our customers.
Colleagues were also encouraged to share
their views on any other aspects of their
working environment.
I am pleased to report that employees
across the group continued to engage fully
and openly, sharing their views on key
themes such as ways of working in the
context of significant organisational
transformation, and colleagues’
understanding of the Group’s strategy as it
relates to the roles they perform. Feedback
from colleagues during the workshops was
not always positive and this was reinforced
by the engagement scores from the Our
Voice employee engagement survey which
were lower than the previous year. After the
workshops, feedback and observations
were provided to senior management who
kept the Board informed on actions taken to
address employee concerns. Additionally,
follow-ups were sent to all employees
summarising thoughts, observations and
the actions arising from the workshops.
Our workshops
USA
United Kingdom
Houston
1
New Jersey
2
2
1
Manchester
3
Cardiff
4
Windsor
5
Staines
6
London
7
3
4
London
5
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The principal purpose of the role of
Employee Champion is to ensure the voice
of the workforce is heard in the
boardroom and considered in Board
discussions and decision making. The
Board has listened to what employees
have said and has therefore made
empowering colleagues a Group priority
for 2020 and beyond. Its aim is to
eliminate obstacles and create
opportunities for our employees to deliver
for our customers. To ensure this
happens, a number of initiatives were
implemented during 2019 including:
• The inclusion of people and culture in the
SHESEC agenda;
• The development of a people and talent
dashboard for the Board; and
• The appointment of the Employee
Champion to the Remuneration
Committee.
We will further develop the role and
impact of the Employee Champion during
2020 and beyond, with a focus on the
following key areas:
• Engagement for all Board members with
colleagues at offsite visits and town hall
briefings;
• Improved communications to enable all
of our colleagues to connect to our
Purpose and to perform at maximum
capability;
• Ensure the Board has more clarity on
goals and initiatives that senior
executives are pursuing to address pain
points that prevent colleagues from
performing at their best;
• Graduate and apprentice focused events
to support engagement with future
leaders; and
• Diversity, respect and inclusion –
ensure that this remains firmly on the
Board agenda.
Looking ahead, I will continue to spend
time with colleagues in 2020 and work
with senior executives to develop a
programmatic effort to ensure that we
create an environment where each
employee can reach their full potential
and be at their best, and we can retain
and develop the best talent to continue to
deliver for our stakeholders.
Joan Gillman
Employee Champion
Centrica plc Annual Report and Accounts 2019
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Shareholder engagement
The Board is committed to maintaining open channels of
communication with all of the Company’s stakeholders.
An important part of this is providing a clear explanation of the
Company’s strategy and objectives, and ensuring feedback is
acknowledged, considered and, where appropriate, acted
upon. During 2019, the Chairman held 27 one-to-one meetings
with investors.
Meetings, roadshows and conferences
We typically offer meetings with senior management to our major
institutional shareholders twice a year, following the Company’s
Preliminary and Interim results. These meetings are attended by
the Group Chief Executive and Group Chief Financial Officer, and
also sometimes divisional Chief Executives, to ensure that
shareholders have the opportunity to hear directly from
management on the Company’s performance and progress.
In addition, management and/or Investor Relations attend a
number of investor conferences throughout the year, giving
shareholders further opportunity to meet and receive updates
directly from Company representatives, while senior management
are also available to meet on an ad hoc basis with major
shareholders if requested.
Engagement themes with our institutional
shareholders
During the year, engagement themes included:
• Centrica’s strategic update, announced alongside the Interim
results in July;
• The intended divestments of Nuclear and Spirit Energy;
• The regulatory and political environment for UK energy;
• Restructuring and cost efficiency progress;
• Climate change and Centrica’s role in this; and
• CEO succession.
Key investor relations activities during the year
Q1 (Jan–Mar)
Q2 (Apr–June)
Preliminary results
Post-results investor
meetings
Annual Report published
Chairman’s one-to-one
meetings with investors
(including ESG colleagues)
AGM
Trading update
Q3 (Jul–Sep)
Interim results
Post-results investor
meetings
Q4 (Oct–Dec)
Trading update
Meetings between the CEO and CFO and the Company’s major shareholders
Chairman and Senior Independent Director meet with major institutional shareholders
Press releases available on centrica.com
Annual General Meeting
Our AGM is attended by our Board and Executive Committee
members and is open to all our shareholders to attend. A summary
presentation of financial results is given before the Chairman deals
with the formal business of the meeting. Shareholders present
during the meeting can question the Board. Representatives from
Investor Relations and customer services are available before
and after the meeting to answer any additional questions that
shareholders may have. Our 2019 AGM was very well supported;
the level of support for the resolutions carried ranged from 85.27%
to 99.91%.
We are holding our 2020 AGM at the Manchester Central
Convention Complex, Windmill St, Manchester M2 3GX on
Monday, 11 May 2020. The move to a regional location reflects the
breadth of our customer and shareholder base and office
locations too, and we look forward to holding future AGMs in other
UK locations to enable us to reach more of our shareholders.
Further information is available in the Notice of AGM (see centrica.
com/agm20).
Reuniting our shareholders with unclaimed dividends
Since 2009, together with our Registrar, Equiniti, and its partner
ProSearch, Centrica has run an asset reunification programme.
This seeks to reunite shareholders with uncashed dividends
and share entitlements. To date, we have successfully reunited
£23.5million of share and dividend assets with shareowners.
At the 2019 AGM, shareholders approved the adoption of new
Articles which have provided the Company with greater control
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and flexibility in relation to its treatment of untraced shareholders,
the procedure for the payment of dividends and the holding of
combined physical and electronic general meetings. Following the
adoption of the new Articles and attempts to trace shareholders,
the forfeited shares were sold in June 2019. The funds will be
spent on progressing Centrica’s 2030 Responsible Business
Ambitions and the 15 global goals we have set to contribute to
a more sustainable world. Further information can be found on
page 48 and on our website. As agreed, the Company will honour
all late claims and asks shareholders who want to make a claim to
contact our Registrars who are managing this process for us.
Contact details can be found on page 222.
Share dealing programme
We continue to run our popular share dealing programme for
shareholders with shareholdings of up to 5,000 shares, giving
them the option to sell or increase their shareholdings at a fixed
fee. Shareholders who sold their shares had a further option to
donate the proceeds to UK Charity ShareGift, resulting in over
£404,000 being donated since 2010.
Centrica.com
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.
Read more about Shareholder
Information on
Page 222
Audit Committee
Kevin O’Byrne
Committee Chairman
My priority in this first
year has been to get to
know Centrica – its people, its
businesses, its operations, and
its risk management processes
and internal controls.”
Committee membership
Meetings attended(1)
Kevin O’Byrne, Chairman (since 13 May 2019)
Margherita Della Valle, Chairman (until 12 May 2019)
Stephen Hester, Senior Independent Director
Pam Kaur, Non-Executive Director (since 1 February 2019)
Steve Pusey, Non-Executive Director
2/2
1/1
3/3
3/3
3/3
(1) Attendance is expressed as the number of meetings attended out of the
number eligible to be attended.
All current Audit Committee members also attended the two joint
SHESEC/Audit Committee meetings held in 2019.
Committee highlights in 2019
• Kevin O’Byrne and Pam Kaur
• Monitored progress on
joined the Committee as Chair
and Member respectively
• Conducted reviews of the
control environment of
Centrica Business, Centrica
Consumer and Spirit Energy
• Continued dialogue with
management in relation to the
Finance Transformation
Programme
projects to enhance Group
level controls and an
independent review by
Internal Audit of their
effectiveness (or
implementation)
• Reviewed accounting
judgements in particular
relating to exceptional or
one-off items excluded from
underlying results
Areas of focus for the Committee in 2020
• Review of Group-wide
Financial Risk
• Reviews of regulated entity
risks within UK Insurance,
North America Business
and EM&T
• External Quality Assessment
(EQA) of Internal Audit
to be performed in 2020
(performed every three to five
years, with the last EQA being
in 2016)
• Review and refresh of
Enterprise Risk Framework
• Monitor delivery of certain
Finance Transformation
actions
• Continue to monitor ongoing
projects to enhance Group
level controls and Internal
Audit’s review of their
effectiveness
• Review trading controls of
EM&T
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Dear Shareholder
On behalf of the Board, I am pleased to present the Audit
Committee’s report for the year ended 31 December 2019
which explains the Committee’s focus and activities during
the year and its objectives for 2020. This is my first report to
you as Audit Committee Chair having joined the Board in May
2019. My priorities in this first year have been to spend time
visiting a number of Company offices, meeting with
colleagues, and understanding the operations, risk
management processes, and internal controls. I have also
spent time with the Company’s professional advisers. I hope
you find this report an interesting explanation of our work
during the year. It should be read in conjunction with our UK
Corporate Governance Code compliance section on pages
55 to 56, Our Principal Risks and Uncertainties on pages 34
to 43 and our Viability Statement on pages 44 to 45.
The Audit Committee assists the Board in fulfilling its oversight
responsibilities by reviewing and monitoring the integrity of the
financial information provided to shareholders and other
stakeholders. The Committee oversees financial reporting and
related risks and internal controls, and also has a role in
overseeing the internal and independent auditors, as well as
interacting with other members of management and external
stakeholders.
I believe that the Committee has performed effectively in 2019 and
I would like to thank members of the Committee and all the
colleagues who have contributed to our work, for their time and
commitment during what has been another busy year. In the
coming year I plan to increase my own knowledge of the business
while ensuring this Committee continues to perform effectively.
Role of the Committee
The Committee’s Terms of Reference are available on
centrica.com. The core responsibilities of the Committee are to:
• support the Board in fulfilling its responsibilities to maintain
effective governance and oversight of the Company’s financial
reporting, internal controls and risk management;
• 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 position, performance,
business model and strategy;
• monitor and review the operation and effectiveness of the
Group’s Internal Audit function, including its independence,
strategic focus, activities, plans and resources;
• facilitate the appointment and, if required, the removal of the
Group Head of Internal Audit, Risk & Control;
• manage the relationship with the Group’s external auditors on
behalf of the Board including the policy on the award of
non-audit services;
• conduct a tender for the external audit contract at least every
10 years and make appointment recommendations to the
Board; and
• 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.
Centrica plc Annual Report and Accounts 2019
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Governance | Committee Reports continued
The Committee regularly undertakes reviews of its Terms of
Reference to ensure it reflects the actual role carried out by
the Committee and is operating at maximum effectiveness.
Membership of the Committee and attendance
at meetings
The Committee is comprised solely of independent Non-Executive
Directors: Kevin O’Byrne (since 13 May 2019), Stephen Hester,
Pam Kaur (since 1 February 2019) and Steve Pusey. Margherita
Della Valle stepped down from the Audit Committee on 12 May
2019.
Kevin O’Byrne, as Group Chief Financial Officer of J Sainsbury plc,
is considered by the Board to have recent and relevant financial
experience as required by the 2018 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 Group Head of Internal
Audit, Risk & Control, none of whom do so as a right. Other Senior
Executives will attend as required to provide information on
matters being discussed which fall within 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
Group Head of Internal Audit, Risk & Control at each meeting
without other Executive Directors present.
The Committee met five times in 2019, twice jointly with the
SHESEC, where each committee retains discretion to require a full
presentation and discussion on any joint meeting topic at their
respective meeting if deemed appropriate. I have appreciated the
contribution from the members of the Committee, management
team and auditors in facilitating an open discussion and in taking
the important work of the Committee forward.
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. At the joint meetings between the Committee and
the SHESEC, the Committees considered 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 2020.
More detail on the key issues considered by the Committee in
2019 are given below.
Main activities of the Committee during 2019
• Conducted reviews of the control environment of Centrica
Business, Centrica Consumer and Spirit Energy;
• Continued dialogue with management in relation to the Finance
Transformation Programme;
• Review of 2018 financial results, Annual Report and Accounts
and 2019 Interim results;
• Review of structure of 2019 Annual Report and Accounts to best
reflect the Group’s operations in line with the strategic update in
July 2019;
• Oversight of implementation of IFRS 16;
• Update to the policy on independence of external auditors
following a decision to reduce the annual non-audit fee limit;
• Effectiveness review of external auditors;
• Continued oversight of the maintenance and development of the
control environment;
• Regular reports on Risk, Assurance and Controls, Internal
and External Audit;
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Centrica plc Annual Report and Accounts 2019
• Monitored progress on projects to enhance Group level controls
and on independent review by Internal Audit of their
effectiveness or implementation; and
• Reviewed accounting judgements in particular relating to
exceptional or one-off items excluded from underlying results.
Effectiveness of the Committee
Read more about the Committee’s effectiveness, which was
considered as part of this year’s evaluation process, on page 66.
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 Group Head of
Internal Audit, Risk & Control is also a matter for the Committee.
The Committee approved the Group’s annual Internal Audit plan.
The plan is developed in response to those risks identified through
the Enterprise Risk Management processes, using the
independent insight and experience of the Internal Audit team
and their advisers. It incorporates assurance over all aspects of
our Group Risk Universe, including the Principal Risks in the
categories of Strategic, Financial, Operational and Legal &
Regulatory risk. 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.
An External Quality Evaluation of Internal Audit will be conducted
in 2020 (deferred from 2019 to accommodate the roll-out of a new
audit software tool and methodology), following a positive
outcome in 2016. Further information on the Principal Risks is
available on pages 34 to 45.
During the year, the Committee received regular reports
summarising the findings from the Group Internal Audit team’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 the System
of Risk Management and Internal Controls, including compliance
with Our Code, and policies are assessed. In addition, there is
a comprehensive programme to assess the Group’s entity level
controls. The results of the annual process, together with the
conclusions of the internal reviews by Internal Audit, enable the
Audit Committee and the SHESEC, on behalf of the Board, to form
and report their view on effectiveness.
During 2019, there was further activity to improve the financial and
commercial controls across the Group. These improvements were
discussed within the Committee and the SHESEC throughout the
year to provide support and guidance to our management teams.
The Committee concluded that the System of Risk Management
and Internal Control is effective, whilst recognising the need for
ongoing and continuous improvement. We have confidence in
the work of Internal Audit and the functional assurance teams,
alongside our management teams, to identify issues that arise
and remediate control gaps where necessary in line with our
risk appetite.
In addition, to ensure the independence of the external auditors
and in accordance with International Standards on Auditing (UK &
Ireland) 260 and Ethical Standard 2019 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 external audit
process was effective.
Non-audit fees
To safeguard the objectivity and 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. All requests to utilise Deloitte for
non-audit services must be approved by the Chairman of the Audit
Committee and the current cap on non-audit work is £1 million
(reduced from £2.75 million during 2019), which is assessed
annually for appropriateness against external guidance and
regulation. This cap is significantly below the EU regulation of 70%
non-audit fees compared to the three-year average of statutory
audit fees. Non-audit fees for 2019 totalled £0.8 million – being
10% of this three-year average. All non-audit work within this
policy is detailed and reviewed by the Committee at the next
meeting. All significant non-audit work is tendered and, where
Deloitte was appointed, it was considered that its skills and
experience not only made it the most appropriate supplier of the
work but also there was clear evidence that another firm could not
be used without adversely impacting the business.
Kevin O’Byrne
on behalf of the Audit Committee
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Fair, balanced and understandable
As part of the Committee’s determination, on behalf of the Board,
of whether the Annual Report, taken as a whole, is fair, balanced
and understandable and provides the information necessary for
shareholders to assess the Company’s position and performance,
business model and strategy, the Committee considers the
processes and controls involved in its production and the financial
reporting responsibilities of the Directors under section 172 of the
Companies Act 2006 to promote the success of the Company for
the benefit of its members as a whole. There is a robust
governance framework around the production of the Annual
Report to ensure it is critically reviewed and signed off by the key
teams in the relevant businesses and functions and the Committee
was satisfied that the process was effective and confirmed to the
Board that the Annual Report, when taken as a whole, was fair,
balanced and understandable.
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, audit plan, performance and
independence of the external auditors as well as whether a formal
tender process is required. The Committee last led a formal audit
tender process in 2016, the details of which can be found in the
2016 Annual Report and Accounts.
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.
Deloitte was appointed as the Company’s auditor at the
beginning of 2017 and will this year perform its third full audit.
The re-appointment of Deloitte as auditors was approved by
shareholders at the AGM in May 2019 and it has been
recommended for re-appointment again in 2020.
The Company has complied with the Statutory Audit Services
Order 2014 for the financial year under review.
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,
primarily looking at the key areas of audit quality, capability and
competence, past performance and independence. This
assessment included a review of the report issued by the Audit
Quality Review (AQR) team regarding Deloitte and separately an
internal questionnaire was completed by the Chairman of the
Board, Committee members and senior 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.
The FRC’s AQR review of Deloitte’s 2017 audit was completed in
early 2019 and the Committee reviewed the detailed findings.
Recommendations have been built into ongoing processes. The
Committee was satisfied with the external auditor’s commitment
to audit quality, the robust and professional working relationship
with management and demonstration of strong technical
knowledge and professional scepticism.
Centrica plc Annual Report and Accounts 2019
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Governance | Committee Reports continued
Key judgements and financial reporting matter in 2019
Audit Committee reviews and conclusions
Determination of long-term commodity prices and their use in
valuing long-lived assets
Long-term commodity price forecasts are a key assumption in the
valuation of the Group’s long-lived assets. Historically, these have been
derived internally, using valuation techniques based on available external
data and then benchmarked against other third-party forecasts. In 2019,
following debate with the Committee, the Group has moved to using a
“P50” median price curve, derived from a collection of third-party
forecasts. The advantage of this approach is to more clearly align to
pricing that a reasonable market participant would use and so that other
external data points (e.g. consensus view of impact of climate change)
are factored into these prices.
Impairment of long-lived assets
The Group makes judgements and estimates in considering whether
the carrying amounts of its assets are recoverable. In particular, the main
assets under consideration are Goodwill, Upstream gas and oil fields,
the Nuclear investment, and Centrica Home Solutions’ and Centrica
Business Solutions’ non-current assets. These judgements include
primarily the achievement of Board-approved business plans, long-term
projected cash flows, generation and production levels (including reserve
estimates and life extensions) and macroeconomic assumptions such
as the growth and discount rates and long-term commodity and
capacity market auction prices used in the valuation process. When
deriving forecast cash flows, market prices are used for the period when
a commodity is liquid. For the longer-term illiquid period, the “P50”
median price curve is used (see “Determination of long-term commodity
prices and their use in valuing long-lived assets”, above).
At the year-end, pre-tax net exceptional impairment write-offs of
Upstream gas and oil fields of £476 million were booked, relating to UK,
Danish and Norwegian assets (including decommissioning cost
updates). Pre-tax exceptional impairments of £381 million in relation to
power assets (of which £372 million is against the Nuclear investment)
and £77 million in relation to Centrica Home Solutions (including
inventory and goodwill write-downs) were also booked. No impairment
was required for Centrica Business Solutions customer business.
Note that other impairments have also been reflected in exceptional
items as part of property rationalisation costs and net gain on disposals,
as well as within business performance (e.g. dry hole costs). These items
are generally not judgemental.
In previous periods, the Committee had observed the sensitivity of
long-lived asset valuations to long-term commodity prices and had
challenged proposed commodity curves in the context of external third
parties’ views. Accordingly, the move to a “P50” median curve approach
(derived from third parties) was welcomed by the Committee.
The Committee also noted that the “P50” long-term commodity price
forecasts had reduced year on year, in line with most external third-party
forecasts.
Deloitte provided detailed reporting and held discussions with the
Committee on the impact of the commodity curves.
As a result of the above, the Committee was comfortable the curves and
consequent valuations were appropriate.
Sensitivities of the asset impairment tests to changes in price forecasts
are provided in note 7 on pages 131 to 133.
The Committee reviewed management reports detailing the assets at
risk of impairment and the key judgements and estimates used. The
Committee observed the general year-on-year fall in both liquid and
“P50” commodity prices.
It noted that £198 million of the Upstream gas and oil asset write-offs
were primarily due to these price reductions. £310 million related to fields
where development was now deemed unlikely and there was a
£32 million write-back of decommissioning liabilities from updated
assumptions.
The Committee noted the Nuclear investment recoverable amount
continues to be based on a value-in-use (VIU) calculation rather than on a
sales basis, and that the held for sale criteria had not been met. It
observed that the impairment booked was primarily driven by the price
reductions noted above. The Committee requested that disclosure be
maintained in the Annual Report to note that any future sales proceeds
could still be lower than this VIU.
The Audit Committee challenged management and Deloitte on the key
inputs to the impairment models including price, outage rates, life
extensions and discount rates, and was comfortable with the conclusions
reached.
The Committee also noted the methodology used in valuing the Centrica
Home Solutions and Centrica Business Solutions businesses, which
included looking at sensitivities and benchmarking to external valuations.
The Committee concurred with management’s assessment of the level
of impairment required for the Centrica Home Solutions assets and that
no impairment was needed for Centrica Business Solutions customer
business.
Further detail on impairment arising and the assumptions used in
determining the recoverable amounts is provided in notes 7 and S2
on pages 131 to 133. and 167 to 169.
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Key judgements and financial reporting matter in 2019
Audit Committee reviews and conclusions
The Committee formally reviewed and approved the Group’s policy on
exceptional items in 2018 and, in the current year, it used this policy to
help inform the appropriateness of the proposed classifications.
The Committee challenged the items classified as exceptional items,
considering their size, nature and incidence and in the context of the
Group policy. The Committee concluded that separate disclosure of
these items as exceptional was appropriate in the Financial Statements.
The Committee also noted that the Group policy on certain
re-measurements classification remained unchanged from previous
periods and that this presentation allowed underlying performance to
be reflected on a consistent and comparable basis. It also noted the
grossing-up impact from the IFRIC re-presentation and concurred that
this was an appropriate response to the new guidance.
Further detail is provided in notes 1 and 7 on pages 119 to 121 and 131
to 133.
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The Committee noted that the Group’s policy and methodologies in
classifying and valuing energy derivatives were unchanged from
previous periods.
The Committee also reviewed and understood the breakdown by
business of the movement in IFRS 9 derivative valuations in the
Income Statement.
It reflected on the fact the Group is generally a net buyer of commodity
and that in a period of falling prices, contracts in the scope of IFRS 9 will
see a loss booked into the Income Statement.
The Committee noted and concurred with the specific judgement
around LNG.
Further detail is provided in notes 1 and 7 on pages 119 to 121 and 131
to 133.
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 (see “Energy derivatives – classification and valuation”
below) are subject to defined Group policies. These policies are reviewed
annually by management.
At the year-end, exceptional items included the impairments noted
above, as well as restructuring costs related to the Group’s cost
efficiency programme of £356 million, net pension change credit of
£152 million (see “Pensions” below) and net gains from disposals of
£35 million.
Certain re-measurements totalled a £647 million cost.
During the year, the Group changed the presentation of its Income
Statement following the IFRIC agenda decision on Physical Settlement of
Contracts to Buy or Sell a non-financial item. This saw the inclusion of a
“Re-measurement and settlement of energy contracts” line item within
gross margin and meant that the certain re-measurement column was
amended to facilitate this re-presentation.
Energy derivatives – classification and valuation
The Group enters into numerous commodity contracts in its ordinary
course of business. This can be to procure load for its downstream
business, sell output from its upstream assets, to trade around its other
commodity exposures or to make money from proprietary activities.
On entering into these contracts, the business assesses each of the
individual trades and classifies them as either:
(i) Out of scope of IFRS 9:
• for commodities with no active market and where contracts cannot
otherwise be net settled;
• for “own use” contracts (i.e. customer contracts, contracts to take
delivery and meet customer demand or sell upstream output); or
(ii) In scope of IFRS 9:
• contracts for commodities which have the ability to be and practice of
being net settled.
Energy contracts outside the scope of IFRS 9 are accruals accounted.
Those contracts deemed in scope of IFRS 9 are treated as derivatives
and are marked-to-market (fair valued). If the derivatives are for
proprietary energy trading, they are recorded in the business
performance column of the Income Statement. If they are entered into to
protect and optimise the value of underlying assets/contracts or to meet
the future downstream demand needs, they are recorded as certain
re-measurements.
The fair value of derivatives is estimated by reference to published liquid
price quotations for the relevant commodity. Where the derivative
extends into illiquid periods, valuation techniques are used based on
forecasts of long-term commodity prices.
Judgement is required in all aspects of both the classifications and
valuations.
One of the Group’s critical accounting judgements is that LNG contracts
are outside the scope of IFRS 9 because there is still no active market
(i.e. liquid prices are not available) and our LNG contracts cannot be
net settled.
Centrica plc Annual Report and Accounts 2019
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Governance | Committee Reports continued
Key judgements and financial reporting matter in 2019
Audit Committee reviews and conclusions
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.
At the year-end, unbilled energy income for the supply businesses was
£1,342 million (2018: £1,542 million).
Pensions
The assets and liabilities, and the cost associated with providing benefits
under defined benefit schemes, are determined separately for each of
the Group’s schemes. Judgement is required in setting the key
assumptions used for the actuarial valuation which determines the
ultimate cost of providing post-employment benefits, especially given
the length of the Group’s expected liabilities.
The net Group pension deficit was £163 million (2018: £79 million).
The UK defined benefit schemes used a nominal discount rate of 2.2%
(2018: 3.0%) and inflation of 2.9% (2018: 3.1%).
During the year, the Group renegotiated some of the terms and
conditions associated with the UK schemes (including contribution rates,
salary caps and pension in retirement options). The impact of these
changes has been reflected in the above deficit (and is part of the net
pension exceptional item).
Going concern, Viability Statement 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. The Group
also models various possible downside scenarios to show the longer-
term viability of the business and to support the Viability Statement.
The Committee has reviewed the level of unbilled revenue accrual and
provisions made during the year and discussed with management and
the external auditors.
The Committee noted that the unbilled accrual had followed the
same estimation process as in previous years and that Deloitte had
independently reperformed this calculation to within an immaterial
difference.
More details of accrued energy income and provision for credit loss are
provided in note 17 on pages 147 to 148.
The Committee received training on the Centrica Pension Schemes in
July 2018. The Committee noted the key assumptions and disclosures in
the Financial Statements. The Committee noted the negotiated changes
to the schemes and the link to exceptional items.
The Committee also noted the consistent year-on-year methodology
used to derive the key defined benefit assumptions and that the rates
were within comparator range.
It also recognised the role of the independent actuary, who is consulted
on the appropriateness of the assumptions, and discussions were also
held with the external auditors.
Further details on pensions are set out in note 22 on pages 162 to 166.
The Committee reviewed and challenged 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 2019 and concurred with the viability conclusion.
Further details on sources of finance are set out in note 24 on pages 158
to 160. The Going Concern section is in Other Statutory Information
on page 102 and the Viability Statement in Our Principal Risks and
Uncertainties on pages 44 to 45.
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Centrica plc Annual Report and Accounts 2019
Key judgements and financial reporting matter in 2019
Audit Committee reviews and conclusions
IFRS 16: Leases
The Group was required to adopt IFRS 16: Leases in 2019. This had the
effect of bringing all leases (excluding low value or short-term leases) on
balance sheet. Following a detailed review of the Group’s relevant
contractual positions, application resulted in the recognition of total lease
liabilities and right-of-use assets on 1 January 2019 of £620 million and
£463 million respectively. £402 million of the lease liability is incremental
to the previous position and so consequently increased net debt.
The Committee reviewed and challenged the Group’s assessment of the
accounting impact of IFRS 16 and also discussed the approach and
conclusions with the external auditors.
The Committee concurred with the conclusions reached on adoption of
this standard.
Further details on the new accounting standards are included in note [1]
on pages 119 to 121.
Judgement was required around the treatment of extension and
termination options and identifying the customer for arrangements
involving assets used in joint operations.
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 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 212 to 221.
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Governance | Committee Reports continued
Disclosure Committee
Iain Conn
Committee Chairman
Committee membership
Iain Conn, Group Chief Executive
Chris O’Shea, Group Chief Financial Officer
Justine Campbell, Group General Counsel
& Company Secretary (since 1 April 2019)
Grant Dawson, Group General Counsel
& Company Secretary (until 30 March 2019)
Meetings attended(1)
6/6
6/6
4/4
2/2
(1) Attendance is expressed as the number of meetings attended out of the
number eligible to be attended.
Committee focus in 2019
• Reviewed the Preliminary
Results announcement, the
Annual Report and Accounts,
the Interim Results and the
trading statements and
advised on the scope and
content of disclosure
• Reviewed announcements
regarding Board and key
management changes
• Specific projects – in relation
to confidential and inside
information
Areas of focus for the Committee in 2020
• Review results
announcements to determine
scope and content of
disclosure
• Keep Confidential Projects
under review in relation to
confidential and inside
information
• Keep under review the
systems and controls in
respect of management
and disclosure of inside
information
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Centrica plc Annual Report and Accounts 2019
Dear Shareholder
On behalf of the Board, I am pleased to present the Disclosure
Committee report for the year ended 31 December 2019
which explains the Committee’s focus and activities during
the year and for 2020.
Role of the Committee
The Disclosure Committee is responsible for the disclosure
controls and procedures of the Group and for ensuring that
Centrica meets the regulatory requirements when disclosing
information concerning the Company. It is therefore responsible
for the design, implementation, operation and monitoring of
systems and controls in respect of the management and
disclosure of inside information, keeping the adequacy of
Disclosure Procedures under review, and for ensuring that
regulatory announcements, shareholder circulars, prospectuses
and other documents issued by the Company comply with
applicable legal or regulatory requirements and specifically the
Market Abuse Regulation, the Listing Rules, and Disclosure
Guidance and Transparency Rules. The Committee resolves
questions about the materiality and treatment of information and
considers and determines whether certain issues or events give
rise to inside information about the Company which requires
disclosure and/or the creation of insider lists. The Committee, in
conjunction with its advisers, will also, in certain exceptional
circumstances, consider whether the conditions for delaying
disclosure of inside information about the Company are satisfied
and, where appropriate, will implement and monitor the delay
procedure.
The Committee has scheduled meetings each year to approve the
Interim and Preliminary Results announcements and trading
statements and meets as required to review other matters falling
under the Committee’s remit.
Membership and attendance at meetings
The Committee is comprised of the Group Chief Executive, Group
Chief Financial Officer and Group General Counsel & Company
Secretary. The Committee met six times during 2019, with each
meeting having a distinct agenda to reflect the particular matters
for the Committee’s consideration. Members of management are
invited to attend when required. The auditors, Deloitte, attended
the 20 February meeting.
Main activities of the Committee during 2019
During the year the Committee reviewed the Preliminary Results
announcement, the Annual Report and Accounts, the Interim
Results and the trading statements, and advised on the scope and
content of disclosure. The Committee also considered the release
of regulatory and industry announcements, reviewed
announcements regarding Board and key management changes,
and considered specific confidential projects to determine
whether there was inside information in relation to the Company.
Committee effectiveness
Read more about our Board and Committee evaluation process
on page 66.
Iain Conn
on behalf of the Disclosure Committee
Nominations Committee
Charles Berry
Committee Chairman
We continue to align
the Board and senior
leadership succession
planning with Centrica’s
strategy and culture.”
Committee membership
Meetings attended(1)
Charles Berry, Chairman (since 21 February 2019)(2)
Rick Haythornthwaite, Chairman (until 20 February 2019)
Joan Gillman, Non-Executive Director
Stephen Hester, Senior Independent Director
Pam Kaur, Non-Executive Director (since 1 February 2019)(2)
Kevin O’Byrne, Non-Executive Director (since 13 May 2019)
Carlos Pascual, Non-Executive Director
Steve Pusey, Non-Executive Director(2)
Scott Wheway, Non-Executive Director
Margherita Della Valle, Non-Executive Director
(until 12 May 2019)
4/5
1/1
5/5
5/5
3/5
4/4
5/5
4/5
5/5
1/1
(1) Attendance is expressed as the number of meetings attended out of the
number eligible to be attended.
(2) Absence due to unavoidable diary conflicts.
Heidi Mottram, Non-Executive Director, joined the Committee on
1 January 2020.
Committee highlights in 2019
• Succession planning
• Three new Non-Executive
Directors appointed
• One new Executive Director
appointed
• Committee membership
changes
Areas of focus for the Committee in 2020
• Succession planning
• Executive Director
of Executive Directors:
Recruitment and onboarding of
the Group Chief Executive to
succeed Iain Conn
and senior leadership
succession: enhancing the
talent development and
diversity pipeline
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Dear Shareholder
On behalf of the Board, I am pleased to present the
Nominations Committee’s report for 2019 which explains
the Committee’s focus and activities during the year and
looks ahead to 2020. I hope you will find the report that
follows interesting and informative.
The Nominations Committee continues to play a key
supporting role in Centrica’s strategy, maintaining a
balanced and effective leadership, to create and promote the
Group’s culture and values. This year the Committee has
continued to focus on succession planning and, specifically,
refreshing the executive and non-executive membership of
the Board. The Committee has also continued its internal
talent development, this year looking at its diversity pipeline,
and has conducted a rigorous internal review of its
performance.
Role of the Committee
The Nominations Committee is responsible for ensuring that the
Board and its Committees have the appropriate balance of skills,
knowledge and experience to effectively lead the Company both
now and in the future. This is achieved through effective
succession planning, the identification and development of
internal talent and a clear understanding of the competencies and
capabilities required to support the delivery of Centrica’s strategy.
The Committee undertakes comprehensive reviews of the
leadership needs of the Company, both executive and non-
executive, to ensure the continued ability of the organisation to
compete effectively in the marketplace and keeps informed of the
strategic issues and commercial changes affecting the Company
and the market in which it operates.
The Committee plays an important role in promoting diversity and
inclusion on the Board. In identifying and nominating candidates
to fill Board vacancies, the Committee considers candidates from
a wide range of backgrounds, assessing them on merit against
objective criteria and with due regard for the benefits of diversity
on the Board.
The Committee regularly undertakes reviews of its Terms of
Reference to ensure that it reflects the actual role carried out by
the Committee and is operating effectively. The Board reviewed
and approved new Terms of Reference for the Committee in July
2019. The Terms of Reference and operations of the Committee
already captured the bulk of the new requirements set out in the
2018 Code, and therefore only minor changes were required. The
membership requirement was altered to at least three members to
align with the other Committees; the definition of diversity was
extended more broadly than solely gender diversity; and in line
with best practice, a requirement for new Directors to disclose
other interests was added.
Centrica plc Annual Report and Accounts 2019
77
Non-Executive Directors
Following a formal and rigorous process for evaluating the
performance of the individual Board members, which gives due
regard to their time commitment, performance and ability to
continue to contribute to the Board taking account of the
knowledge, skills and experience required, the Nominations
Committee proposed all serving Directors for election or re-
election by shareholders at the AGM.
It is the role of the Committee to ensure 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 search process for
new Non-Executive Directors is to appoint search firms to secure
a strong and diverse list of candidates. A shortlist of candidates is
shared with the Committee, meetings scheduled and then once
the candidates have been identified, confirmation of the time
commitment required and disclosure of any other business
interests that may result in a conflict of interest.
During 2019, a search process was initiated, to identify three
new Non-Executive Directors. Pam Kaur joined the Board on
1 February 2019. Pam’s considerable experience of audit,
compliance, finance and risk management will be of significant
benefit to the Board. Kevin O’Byrne joined the Board on 13 May
2019 and brings a wealth of retail and finance experience; he was
also previously chair of the Audit Committee at Land Securities
Group PLC. In May, I engaged Korn Ferry to carry out a search
process to identify a suitable candidate for a further appointment
of a Non-Executive Director with operational utility experience. I
am delighted that Heidi Mottram joined the Board on 1 January
2020. She was selected for her considerable relevant strategic and
operational experience acquired in her current and previous roles
and her deep understanding of the importance of customer
service, delivered in complex multi-stakeholder environments with
a high public profile.
Executive Directors
In 2018, in line with our Executive Director succession planning,
the Nominations Committee recommended, and the Board
approved, the appointment of Sarwjit Sambhi as Chief Executive,
Centrica Consumer, who joined the Board on 1 March 2019.
Sarwjit joined the Group in 2001 and has held senior leadership
positions in retail, strategy, finance, trading, power generation,
exploration and production. Most recently, he was Managing
Director, UK Home.
In July 2019 it was announced that Iain Conn had agreed with
the Board to step down as Group Chief Executive and retire
from the Board in 2020. The Nominations Committee appointed
Korn Ferry to focus on identifying and assessing both internal
and external candidates for the role.
Governance | Committee Reports continued
Membership and attendance at meetings
The Committee is comprised solely of Non-Executive Directors:
Charles Berry (Chairman), Joan Gillman, Stephen Hester, Pam
Kaur, Heidi Mottram (since 1 January 2020), Kevin O’Byrne, Carlos
Pascual, Steve Pusey and Scott Wheway. The Board is satisfied
that the Committee has the resources and expertise to fulfil its
responsibilities.
During the year, the Group Chief Executive and Group HR Director
were invited to attend meetings, as and when the Committee
thought it appropriate and necessary. If required by the
Committee, other Senior Executives may be invited to attend to
provide information on matters being discussed which fall within
their area of responsibility.
The Committee met five times during 2019, with each meeting
having a distinct agenda to reflect the particular matters for the
Committee’s consideration.
Main activities for the Committee during 2019
• Ensured the Board and senior leadership succession planning is
aligned with Centrica’s strategy and culture;
• Reviewed Director elections and re-elections at the forthcoming
AGM following a formal and rigorous process for evaluating the
performance of individual Board members;
• Identified and recommended to the Board new Non-Executive
Directors. Pam Kaur replaced Lesley Knox; Charles Berry
succeeded Rick Haythornthwaite as Chairman; Kevin O’Byrne
was appointed to succeed Margherita Della Valle as Audit
Committee Chairman; and Heidi Mottram was appointed during
the year, joining the Board on 1 January 2020.
• Began the recruitment process for a successor to the Group
Chief Executive; and
• Recommended changes in membership of the Audit,
Nominations and Remuneration Committees and of the
SHESEC.
Board succession
Throughout the year, the Committee continued to focus on Board
succession. Succession planning within the Company is
continuous and pro-active and arrangements are in place to
ensure that changes to the membership of the Board are well
managed. The Committee keeps under review the leadership
needs of the organisation, both executive and non-executive, with
a view to ensuring the continued ability of the organisation to
compete effectively in the marketplace.
The Committee embraces the importance of diversity and
inclusion in all Board recruitment and supports the
recommendations of the Hampton-Alexander and Parker Reviews
in relation to gender and ethnic diversity. The Committee remains
committed to achieving a more diverse Board, with broad search
criteria used to encourage a diverse range of candidates.
The Committee also regularly reviews the structure, size and
composition (including the skills, experience, independence,
knowledge and diversity, including gender and ethnicity) of the
Board and its Committees to ensure they can discharge their
duties effectively. This planning is in alignment with the Company’s
values and culture and takes into account the challenges and
opportunities facing the Company.
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Committee memberships
During the year the Nominations Committee carried out a review
of the composition of the Committees to take into account the
new Board members and the skills that they bring to the Board
and made recommendations for changes to the membership of
four of the Committees. Kevin O’Byrne was appointed as
Chairman of the Audit Committee and Pam Kaur joined as a
member. Pam Kaur also joined the SHESEC on 21 August 2019,
and Joan Gillman joined the Remuneration Committee on the
same date. Heidi Mottram joined the Board on 1 January 2020 and
became a member of the SHESEC upon appointment. All
Non-Executive Directors are members of the Nominations
Committee.
Talent development
Internal talent development and the ability to attract, retain and
develop skilled, high potential individuals within Centrica are areas
on which the Committee continues to focus. The Nominations
Committee, supported by the Group HR Director, and in
partnership with Spencer Stuart, has developed a clear
understanding of how the requirements of our senior management
roles are changing in line with the evolving customer requirements,
with the aim of upgrading and realigning our leadership capability.
The review carried out identified key employees who were
considered to be, or could be developed to be, critical to the
success of the Group, and appropriate plans were put in place to
ensure there is an appropriate mix of employees within the Group
who could fill key roles in the short and longer term. The Group
Chief Executive and Group HR Director provide the Committee
with regular updates on succession planning for senior
management.
The Committee encourages the development of board-level skills
through senior executives taking on roles on subsidiary boards
and external directorships.
Senior Executives
The Senior Executives are members of the Centrica Executive
Committee, and are responsible for setting expectations, policies,
processes and an executive governance framework for strategy,
people, performance management, communications, and risk
management.
The Nominations Committee recommended the appointment of
Justine Campbell as Group General Counsel & Company
Secretary, which the Board approved with effect from 1 April 2019.
Justine has been with the Group since 2013 and has considerable
legal and regulatory experience in both the energy and
telecommunications sectors.
The Committee recognises the importance of and the benefits
to the Company of developing a diverse pipeline and it will continue
to work with senior management to develop internal talent.
Diversity, respect and inclusion
The Group operates in increasingly diverse communities, both in
the UK and internationally, and this diversity is evident in our
workforce, and among our customers, suppliers and other
stakeholders. We recognise the value that individuals from
different backgrounds and of different abilities can bring to our
business, and in an increasingly competitive environment this is
an important factor in the Company’s strategy, in particular our
customer obsession.
The Board Diversity Policy sets out the approach of the Group to
diversity and inclusion. Throughout the process of appointment of
Board members, due regard is given to ensuring fairness and
diversity through consideration of skills, experiences,
competencies and individual characteristics. The recruitment
process complies with Group HR recruitment processes around
diversity, respect and inclusion. The Chairman of the Board is
accountable for the implementation of the Board Diversity Policy
and considering and adopting a range of approaches to promote
diversity within the Board. For example, these may include but are
not limited to:
• Informal and formal Board discussions;
• Board agenda items relating to diversity;
• Raising awareness on the benefits of diversity;
• Board learning and development activities which promote
diversity; and
• Diversity impact assessments in respect of Board-related
projects or activities where relevant and appropriate.
Applying these principles ensures that the Board better reflects
the communities in which we operate. The Board periodically
monitors and measures Board diversity and drafts action plans
where improvements are required.
Senior managers are also required to support this policy in
developing diversity in the broader business and must also comply
with Group HR recruitment processes and the Centrica UK
Diversity, Respect and Inclusion Policy.
The Board has already met the Parker Review target, following
the appointment of Sarwjit Sambhi and Pam Kaur to the Board in
2019 in addition to Carlos Pascual who joined the Board in 2015.
The Board fully supports the recommendations of the Hampton-
Alexander Review and aspires to meet its goals by 2022 of having
33% women on our Board (and senior leaders). We recognise that
there is always more we can do and will continue to work to build
an inclusive workplace at all levels of the Company.
Board and Committee evaluation
For the 2019 Board evaluation, Independent Audit Limited, an
external provider, facilitated a self-assessment of the effectiveness
of the Company’s Board and Committees, including observing
Board and Committee meetings. The evaluation exercise was led
by the Chairman and supported by the Group General Counsel &
Company Secretary. Independent Audit Limited attended Board
and various Committee meetings and produced a report for the
Chairman which was discussed by the Board. Read more about
the Board evaluation process on page 66.
Committee effectiveness
Read more about our Board and Committee evaluation process
on page 66.
Charles Berry
on behalf of the Nominations Committee
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Governance | Committee Reports continued
Safety, Health, Environment, Security
and Ethics Committee
Steve Pusey
Committee Chairman
We’ve raised awareness
of our views on climate
change, set our climate change
Ambitions to 2030 and engaged
with key stakeholders, with
positive feedback.”
Committee membership
Dear Shareholder
On behalf of the Board, I am pleased to present the Safety,
Health, Environment, Security and Ethics Committee
(SHESEC) report for the year ended 31 December 2019 which
explains the Committee’s focus and activities during the year
and for 2020.
The SHESEC plays a supporting role in Centrica’s strategy by
providing constructive challenge to the management of risks
and reviewing the effectiveness of the control framework
related to safety, health, environment, security and ethics.
I hope that you find this report an interesting explanation
of our work during the year.
Role of the Committee
The Committee is responsible for keeping under review the
adequacy and effectiveness of the Company’s internal controls
and risk management systems related to safety, health,
environment, security and ethics in respect of:
• People: Engagement, Culture and Behaviours;
• Sourcing and Supplier Management;
• Infrastructure, Equipment and Practices affecting Health,
Meetings attended(1)
Safety, Environment and Security;
Steve Pusey, Chairman
Margherita Della Valle, Non-Executive Director
(until 12 May 2019)
Joan Gillman, Non-Executive Director
Pam Kaur, Non-Executive Director (since 21 August 2019)
Carlos Pascual, Non-Executive Director
Scott Wheway, Non-Executive Director
4/4
1/1
4/4
1/1
4/4
4/4
(1) Attendance is expressed as the number of meetings attended out of the
number eligible to be attended.
All current SHESEC members also attended the two joint SHESEC/
Audit Committee meetings held in 2019.
Heidi Mottram, Non-Executive Director, joined the Committee on
1 January 2020.
Committee highlights in 2019
• Cultural assessment across all
NA businesses and functions
– no systemic issues exist;
common themes and
opportunities for improvement
• Approved change to
environmental KPIs following
the Group’s outperformance
against the internal carbon
footprint KPI and the changes
to the Group’s assets
• Separately reviewed deep
dives on Centrica’s
Occupational and Process
Safety performance and the
key 2019 initiatives for each
of these areas
• Oversaw transition from
implementation of Ethics and
Compliance (E&C) structures
to embedding E&C into
business activities
Areas of focus for the Committee in 2020
• Information Systems and Security; and
• Legal, Regulatory and Ethical Standards Compliance.
The Committee regularly undertakes reviews of its Terms of
Reference to ensure that it reflects the actual role carried out by
the Committee, and is operating effectively. The Board reviewed
and approved new Terms of Reference for the Committee in July
2019 which incorporated only minor changes, to remove the
requirement for the Committee to meet at least twice a year with
only the Head of Internal Audit present and to amend references
to the Group’s Business Principles to Our Code.
Membership of the Committee and
attendance at meetings
The Committee comprises Steve Pusey (Chairman), Joan
Gillman, Pam Kaur (since 21 August 2019), Heidi Mottram (since
1 January 2020), Carlos Pascual and Scott Wheway. All of the
Committee’s members are independent Non-Executive Directors.
SHESEC members bring a wide range of sector experience,
insight and stakeholder perspectives which are used to challenge,
shape and provide oversight of the SHESEC’s agenda. Details of
the matters discussed at Committee meetings are set out later in
this report.
During the year, the Chairman of the Board, the Group Chief
Executive, the Group General Counsel & Company Secretary, the
Group HR Director, the Group HSES Director and the Group Head
of Internal Audit, Risk and Control attended all Committee
meetings, as did other key executives.
The Committee met four times during 2019, with each meeting
having a distinct agenda to reflect the particular matters for the
SHESEC’s consideration.
• Process safety
• Occupational safety
• Resilience and business
continuity
• Impact of transformation
activity on workforce
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At each meeting the Committee receives reports from Group
HSES, Group Ethics & Compliance and Group Internal Audit &
Enterprise Risk, in addition to deep dives on key areas of focus.
The SHESEC’s forward programme is developed with the Group
General Counsel & Company Secretary and is regularly reviewed.
The SHESEC and Audit Committee work together, through their
Chairmen and secretaries, to ensure that agendas do not overlap
or omit coverage of any key risks during the year.
Joint meetings of the Audit Committee and SHESEC
The Audit Committee and SHESEC hold joint meetings twice a
year to simplify reporting of key issues that are within the remit
of both Committees and to make more effective use of the
Committees’ time. At the joint meetings in 2019, the Committees
considered the Group’s systems 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 2020.
Each Committee retains discretion to require a full presentation
and discussion on any joint meeting topic at their respective
meeting if deemed appropriate. Further details are included in the
Audit Committee’s report.
Main activities of the Committee during 2019
The review of operational risk and performance forms a large part
of the Committee’s agenda. Group HSES, Group Internal Audit,
Risk & Control and Ethics & Compliance provided quarterly
reports on their assurance work, on operational risk, including on
the Group’s health, safety and environmental performance and
operational integrity. Further deep dives provided measures of
personal and process safety, environmental and regulatory
compliance, security and cyber risk analysis. The Committee
reviewed these risks and their management and mitigation in
depth with relevant executive management. The main activities of
the Committee in 2019 were:
• approved change to environmental KPIs following the Group’s
outperformance against the internal carbon footprint KPI and
the changes to the Group’s assets;
• reviewed Centrica’s adherence to FCA’s Market Conduct;
• reviewed the impact of transformation activity on the HSE
function and our overall HSE performance, as measured by our
key metrics;
• separately reviewed deep dives on Centrica’s Occupational and
Process Safety performance and the key 2019 initiatives for
each of these areas;
• oversaw transition from implementation of Ethics & Compliance
(E&C) structures to embedding E&C into business activities;
• GDPR programme reaching a ‘mature state’ with the adoption
of similar data privacy frameworks and controls in North
America drawing on the experience of the GDPR programme for
the UK and ongoing activity to raise employee awareness of the
importance of data as a key strategic asset;
• reviewed the work undertaken to ensure slavery and human
trafficking are not taking place within Centrica’s business or
supply chains and endorsed the proposal that Centrica’s 2019
Modern Slavery Act (MSA) Statement be recommended to the
Board for approval;
• discussion of an initiative for desired culture in North America
and the multi-year journey required to deliver the actions as a
result of the review. Cultural assessment across all NA
businesses and functions – no systemic issues exist; common
themes and opportunities for improvement;
• Our Code e-learning and certification launch;
• Ethics & Compliance – minimum standards had been reached
during 2018, progress to embed/build upon during 2019;
• audit of NEAS; and
• reviewed the developing governance arrangements for
subsidiary companies and in particular for Centrica’s
regulated entities.
Safety
The Committee continued to prioritise safety as a key focus area.
Whilst customer injury numbers remained low, our recordable
injury frequency rate increased slightly in 2019. Overall injury
numbers continue to reduce but our reorganisation has led to
lower worked hours year on year. We experienced two Tier 2
process safety events in 2019, a gas release on the J6A platform
within our Spirit Energy joint venture in April and a fire on a CHP
unit in Centrica Business Solutions in October. This compares to
one Tier 1 and one Tier 2 event in 2018. However, our process
safety incident frequency rate also increased as our worked
hours reduced year on year. The rate remains better than target.
Due to the previous year’s Tier 1 event, which also occurred on
J6A, the Committee discussed in detail the 2019 gas release, the
investigation findings and actions, also referring to the findings of
the previous event investigation. The final investigation report was
circulated to the Committee. The CBS event was discussed at the
CEC HSES Sub-committee.
Our Spirit Energy joint venture is required to comply with
Centrica’s HSES policies and is accountable to the Spirit
Energy Board for its HSES performance. Spirit Energy’s Board’s
assurance of policy compliance is provided through Spirit
Energy’s HSES and Internal Audit functions. Centrica assures
Spirit Energy’s HSES performance through: the Centrica-
appointed directors on the Spirit Energy Board; regular reviews
by Centrica Executive Management and Board; and, where
necessary, through the right to independently audit Spirit Energy’s
performance and compliance with our HSES policies.
Environmental review
Environmental Leadership was a core element of the Centrica HSE
plan for 2018-19 and will remain a core element for 2020. In 2019,
we made strong progress in raising awareness of our views on
climate change, introduced 2030 Responsible Business Ambitions
to tackle climate change and increased our engagements with key
stakeholders including customers and investors, with positive
feedback on our ambitions.
Committee effectiveness
Read more about our Board and Committee evaluation process
on page 66.
Steve Pusey
on behalf of the SHESEC
Read more about our
process safety performance
in our Key Performance
Indicators on
Pages 18 to 19
Read more about Our Code
and the Speak Up helpline
centrica.com/ourcode
See Page 54 or centrica.com/
assurance for more details.
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Centrica plc Annual Report and Accounts 2019
81
Governance
Remuneration Report
Scott Wheway
Committee Chairman
We continue to take a
disciplined approach to
executive remuneration that
seeks to ensure Executive
Directors are fairly and
appropriately rewarded while
ensuring alignment with the
expectations of all our
stakeholders.”
Committee membership
Scott Wheway, Chairman
Meetings attended(1)
4/4
Joan Gillman, Non-Executive Director (since 21 August 2019) 1/1
Stephen Hester, Senior Independent Director
Carlos Pascual, Non-Executive Director(2)
4/4
3/4
On behalf of the Board, I present the Remuneration
Committee’s report for 2019.
In summary
2019 was a very difficult year for Centrica with performance
outcomes that were disappointing in a number of areas. The
external environment continued to be challenging, with the
implementation of the UK default tariff cap, low wholesale gas
prices and nuclear outages. Adjusted earnings and adjusted
operating cash flow (AOCF) were down compared with the
previous year. However, net debt was in line with our 2019
target ranges and cost efficiency delivery was strong. For our
non-financial KPIs, brand NPS improvements and customer
complaint targets were met and process safety performance
was held at top quartile levels.
The Committee has carefully considered the many exceptional
contributions of the leadership team and the wider workforce with
the mitigation of external factors outside of management control,
alongside absolute performance outcomes and shareholder
experience in the year.
In this context we have made some tough decisions which reflect
our determination to demonstrate that a number of the financial
outcomes for 2019 were below expectations.
In summary the Committee has decided:
• to reduce the CEO and Executive Directors’ 2019 annual bonus
to zero;
• to use discretion to reduce to zero the 2017/19 LTIP outcome for
Executive Directors as a result of overall financial performance
over the three-year performance period;
• not to award any annual pay increases to Executive Directors;
and
• to reduce the 2020/22 LTIP grant from 300% to 250% in
(1) Attendance is expressed as the number of meetings attended out
recognition of the lower starting share price.
of the number eligible to attend.
(2) Absence due to unavoidable diary conflict.
Committee key activities in 2019
• Executive remuneration
• The CEO pay ratio
market updates and revised
investor guidelines
• 2019 performance metrics,
targets and award levels
• Executive Director and
Executive Committee
objectives for 2019
• Review of two significant
incentive plans operating
across the Group
• Executive and senior
manager pension benefits
• Business performance and
remuneration outcomes
• Pay, benefits, incentives
and policy across the
wider workforce
Areas of focus for the Committee in 2020
• Review of Executive
Remuneration Policy
• 2020 performance metrics,
targets and award levels
• Remuneration arrangements
for a new CEO
• Working with the employee
• Pay, benefits, incentives
and policy across the
wider workforce
champion to bring the
employee voice to our
meetings
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Centrica plc Annual Report and Accounts 2019
The effect of these decisions is that the CEO and Executive
Directors will receive no variable remuneration for 2019. This is an
unusual and far-reaching outcome but the Committee believes it
shows appropriate alignment with our key stakeholders, including
our shareholders and our workforce, all of whom have endured
a very difficult 2019.
Performance outcomes for the year
The Committee has carefully assessed performance against the
original targets that were set for the 2019 Annual Incentive Plan
(AIP). The formulaic outcome resulted in AOCF narrowly missing
the threshold level. Ordinarily, discretionary adjustments for
commodity price movements and other external factors would
have increased the AOCF result to midway through the award
range. However, Adjusted Operating Profit (AOP) failed to meet
the required threshold even with commodity price movements
and other external factors considered. Cost efficiency delivery was
strong, with an outcome midway between target and maximum for
this measure. In making its assessment of performance overall the
Committee took into full consideration the shareholder experience
over 2019 and as a result, concluded that irrespective of the
formulaic result, it was not appropriate to make an annual bonus
payment to any of the Executive Directors for the year.
Role of the Remuneration Committee
The role of the Committee continues to be ensuring that
the Directors, the Executive Committee and the Chairman
of the Board are appropriately rewarded, through making
recommendations regarding remuneration policy and framework.
The Terms of Reference further extend the Committee’s remit
to include greater responsibility for understanding how pay and
conditions align across the Group.
The Committee monitors and reviews the effectiveness of the
Remuneration Policy and considers its impact and compatibility
with remuneration policies across the wider workforce. To facilitate
this remit, the Committee is provided with information and context
on pay, benefits and incentive structures in place across the
Group to support its decision making.
Membership and attendance
The 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
to provide advice and guidance, other than in respect of their
own remuneration.
Joan Gillman, Non-Executive Director, became our Employee
Champion in 2018. Joan was appointed to the Remuneration
Committee in October 2019 to ensure the employee voice
is taken into consideration as it relates to decision making on
executive pay.
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The Committee also assessed the vesting outcome for the Long
Term Incentive Plan (LTIP) awards that were made in 2017. The
performance conditions were equally weighted between EPS
growth, absolute aggregate Economic Profit and non-financial
KPIs over the three-year period. The two financial targets were not
met, but performance against the non-financial KPIs across the
period resulted in a vesting of 40% for this element of the award,
mainly as a result of strong safety performance. However, given
the poor performance against the two financial measures, the
Committee decided to exercise its discretion and reduce the
overall outcome of the 2017/19 LTIP to zero.
Application of Policy for 2020
In 2020, no Executive Director 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
2020/22 LTIP cycle and as a result has decided to reduce the
award level to 250% of salary.
The Committee has reviewed the bonus measures and weightings
to apply for 2020, in line with the Group Annual Plan. 50% of the
financial measures will be based on adjusted operating profit,
30% of the financial measures will be based on free cash flow and
20% of the financial measures will be based on cost efficiency.
Remuneration Policy review
In accordance with the established three-year cycle of presenting
remuneration policy to shareholders, during 2020 the Committee
will review its Policy to ensure that it remains aligned with the
strategic objectives and long-term aims of the Group prior to
presentation at the 2021 AGM.
Conclusion
Overall, 2019 has been a challenging year for Centrica as a
business and for our shareholders. The Committee continues
to take a disciplined approach to executive remuneration that
seeks to ensure Executive Directors are fairly and appropriately
rewarded while ensuring alignment with the expectations of all
our stakeholders. We believe that the difficult decisions made in
respect of 2019 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.
Scott Wheway
on behalf of the Remuneration Committee
Centrica plc Annual Report and Accounts 2019
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Governance | Remuneration Report continued
Remuneration Summary for 2019
Total remuneration received in 2019
(£000)(1)
Iain Conn
£1,186
2018: £2,335
Richard Hookway
£744
2018: £206
Chris O’Shea
£752
2018: £394
Sarwjit Sambhi
£607
0
0
0
0
2019 Actual
2018 Actual
2019 Actual
2018 Actual
2019 Actual
2018 Actual
2019 Actual
N/A
1,000
2,000
3,000
4,000
5,000
6,000
7,000
£000
1,000
2,000
3,000
4,000
5,000
6,000
7,000
£000
1,000
2,000
3,000
4,000
5,000
6,000
7,000
£000
1,000
2,000
3,000
4,000
5,000
6,000
7,000
£000
Fixed remuneration
Short-term incentive
Long-term incentive
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 86.
Components of remuneration package in 2019
Fixed remuneration
Short-term incentive
Long-term incentive
25%
Individual performance
33.3%
Economic Profit (EP)
Pension
Base
pay/salary
Benefits
75%
Financial performance
40% adjusted operating
cash flow (AOCF)
40% adjusted operating profit (AOP)
20% cost efficiency
33.3%
Earnings
per share
(EPS)
33.3%
Non-financial KPIs
50% of award deferred into
shares for three years
Three-year performance period followed
by two-year holding period
Malus and clawback
Read more about our
Remuneration Policy
Pages 94 to 99
84
Centrica plc Annual Report and Accounts 2019
40%
20%
Cost efficiency
75%
25%
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33.3%
33.3%
Non-financial KPIs
40%
60%
Short-term incentive outcome
(Annual Incentive Plan)
Financial performance
AOCF
00%
40%
AOP
Maximum
Achieved
Not achieved
Irrespective of the formulaic result, due to the financial performance
of the business in 2019 the Committee exercised discretion resulting
in a zero bonus for Executive Directors.
Long-term incentive outcome
(Long Term Incentive Plan)
EPS
00%
33.3%
EP
Maximum
Achieved
Not achieved
Irrespective of the formulaic result, the Committee decided to use
its discretion to reduce to zero the 2017 LTIP outcome for Executive
Directors as a result of overall financial performance over the
three-year period.
2019 cash flow distribution to stakeholders
The Committee monitors the relationship between the Directors’ total
remuneration and cash outflows to other stakeholders. As demonstrated
by the chart, the Directors’ aggregate total remuneration for the year
equates to 0.10% (2018: 0.10%) of the Group’s operating cash flow.
To staff
To Directors
To government
To shareholders
Investing activities
45%
0.10%
20%
15%
20%
To staff
To Directors
To government
To shareholders
Investing activities
36%
0.10%
15%
14%
35%
2019
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Centrica plc Annual Report and Accounts 2019
85
Governance
Directors’ Annual Remuneration Report
Directors’ remuneration in 2019
This report sets out information on the remuneration of the Directors for the financial year ended 31 December 2019.
Single figure for total remuneration (audited)
£000
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018(2)
Salary/fees
Bonus (cash)
Bonus (deferred)
Benefits(1)
LTIPs(2)
Pension(3)(4)(5)
Total
Executives
Iain Conn
Jeff Bell(6)
Mark Hanafin(6)
Mark Hodges(7)
Richard Hookway(8)
Chris O’Shea(9)
Sarwjit Sambhi(10)
Total
953
–
–
106
600
620
517
940
479
584
638
100
191
–
–
–
–
–
–
–
–
388
198
235
–
41
79
–
–
–
–
–
–
–
–
388
198
235
–
41
79
–
31
–
–
4
34
25
21
31
35
23
25
4
7
–
–
–
–
–
–
–
–
306
182
207
–
–
–
–
202
–
–
27
110
107
69
282
101
163
159
20
38
–
1,186
–
–
137
744
752
607
3,426
2,335
1,193
1,447
822
206
394
–
6,397
(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). Both taxable and non-taxable benefits are included in the table.
(2) The values of the LTIP awards vesting in April 2019 have been recalculated based on the share price on the date of vest which was 113.6 pence. The previous
disclosure in the 2018 single figure table used an estimated share price. Iain Conn, Jeff Bell and Mark Hanafin’s total remuneration for 2018 has therefore been
restated to include the amended value of these awards.
(3) Notional contributions to the Centrica Unapproved Pension Scheme defined contribution section (CUPS DC) for Jeff Bell, Mark Hanafin, Richard Hookway and
Chris O’Shea 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 2.4% in 2019 (3.0% in 2018). CUPS DC contributions for Richard Hookway and Chris O’Shea were reduced to 15% from 1 June 2019
to move towards alignment with the wider workforce.
(4) Iain Conn and Mark Hodges were entitled to receive a salary supplement in lieu of a pension contribution. Iain Conn’s salary supplement was reduced to 15% from
1 June 2019 to move towards alignment with the wider workforce.
(5) The value of the increase in defined benefit (DB) pension accrual for Sarwjit Sambhi has been calculated using 20 times the increase in accrued pension over the
period, less the contributions paid by him over the year. He received a salary supplement of 10% of the difference between the earnings cap and base pay between
1 March and 31 December 2019.
(6) Jeff Bell stepped down from the Board on 31 October 2018 and Mark Hanafin stepped down from the Board on 30 November 2018. The remuneration in this table
includes their pro-rated salary, bonus, benefits and pension benefits earned up to the date they stepped down. The remuneration for the remainder of 2018, whilst
they were working their remaining notice periods, was disclosed in the payments for loss of office disclosure on page 94 of the Annual Report and Accounts 2018.
The full value of the LTIP awards that vested in April 2019 has been included in the single figure table above. Both Jeff Bell and Mark Hanafin were appointed as
non-executive directors of Spirit Energy during 2019.
(7) As Mark Hodges had tendered his resignation and agreed a leaving date of 28 February 2019, his AIP award relating to the 2018 year, and all unvested LTIP awards
as at his date of leaving, were forfeited.
(8) Richard Hookway was appointed to the Board on 1 December 2018.
(9) Chris O’Shea was appointed to the Board on 1 November 2018.
(10) Sarwjit Sambhi was appointed to the Board on 1 March 2019.
Single figure for total remuneration (audited)
£000
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
2019
2018
Salary/fees
Bonus (cash)
Bonus (deferred)
Benefits
LTIPs
Pension
Total
Non-Executives
Rick Haythornthwaite(1)
Charles Berry(2)
Margherita
Della Valle(3)
Joan Gillman
Stephen Hester
Pam Kaur(4)
Kevin O’Byrne(5)
Carlos Pascual
Steve Pusey
Scott Wheway
Total
71
392
36
93
93
67
62
73
93
93
495
12
98
73
93
–
–
73
93
93
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
71
392
36
93
93
67
62
73
93
93
1,073
495
12
98
73
93
–
–
73
93
93
1,030
(1) Rick Haythornthwaite stepped down from the Board on 20 February 2019.
(2) Charles Berry was appointed Chairman of the Board on 21 February 2019.
(3) Margherita Della Valle stepped down from the Board on 12 May 2019.
(4) Pam Kaur joined the Board on 1 February 2019.
(5) Kevin O’Byrne joined the Board on 13 May 2019.
Payments for loss of office (audited)
There were no payments for loss of office in 2019.
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Centrica plc Annual Report and Accounts 2019
Base salary/fees
Base salaries for Executives were reviewed in January 2019 and
the Committee determined that the salary for Iain Conn would be
increased by 1.9% to £957,500 with effect from 1 April 2019. As all
other Executives were new in post or were leaving the Company
during the year, there were no other salary increases for existing
Executives.
Base fees for Non-Executives, as well as the additional fee for
the Chairman of the Audit Committee, were last increased on
1 January 2016.
The CEC reviewed Non-Executive Director fee levels in December
2019 and it was agreed that no changes would be made to the
base fees or the Committee Chairman fees. However, it was
determined that the Employee Champion role would receive a
fee of £20,000 per annum, in line with the current Committee
Chairman fees, with effect from 1 January 2019.
Bonus – Annual Incentive Plan (AIP)
The charts on page 85 under short-term incentive outcome
indicate the extent of achievement against the financial measures
and targets that had been set for the AIP for 2019.
In line with the Remuneration Policy, 75% of the award was based
on a mix of financial measures based on the Company’s priorities
for 2019 and 25% was based on personal objectives. Half of any
AIP award is deferred into shares which are held for three years.
For the operation of the AIP in 2019, 40% of the financial measures
was based on adjusted operating cash flow (AOCF), 40% was
based on adjusted operating profit (AOP) and 20% was based on
cost efficiency, with targets aligning to the Group Annual Plan.
AOCF of £2,058 million was required for target achievement and
£2,264 million was required for maximum. The threshold level was
£1,852 million. AOCF of £1,830 million was generated in 2019,
resulting in an outcome of below threshold for this element of
the AIP.
AOP of £1,575 million was required for target achievement and
£1,733 million was required for maximum. The AOP result for 2019
was £901 million, below the threshold level of £1,418 million,
resulting in a zero outcome for this element of the AIP.
Cost efficiency of £300 million was required for target achievement
and £330 million was required for maximum. Cost efficiency
of £315 million was generated in 2019 resulting in an outcome
midway between target and maximum for this element of the AIP.
The Committee carefully assessed performance against the
measures and targets that had been set for the AIP in 2019.
Individual achievement against stretching personal strategic
objectives was also considered. However, taking into account
overall shareholder experience across the year the Committee
concluded that irrespective of the formulaic outcome, it was not
appropriate to make an annual bonus payment to any of the
Executives for the year. Therefore, all AIP bonus payments were
reduced to zero.
At this point in the report, we would typically provide a detailed
evaluation of individual achievement against strategic objectives.
The objectives for each Executive included both financial and
non-financial measures. Highlights included strong customer
account growth, improvements in brand NPS and materially
reduced customer complaints. Our process safety performance
remained at top quartile levels and occupational safety targets
were met or exceeded in the majority of business units. However,
whilst the significant contribution of management over the year
was recognised by the Committee, the financial performance of
the business and the shareholder experience outweighed the
progress made, and the Committee therefore exercised discretion
resulting in a zero outcome across all measures including the
individual strategic objectives.
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Governance | Directors’ Annual Remuneration Report continued
Long-term incentive awards due to vest in 2020
Performance conditions
The performance conditions relating to the three-year period ending in 2019 are set out below, together with an explanation of the
achievement against these performance conditions. The chart on page 85 under long-term incentive outcome indicates the extent
of achievement against each measure.
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
1/3 based on absolute aggregate EP over the 3-year period 2017/19
1/3 based on non-financial KPI dashboard over the 3-year period 2017/19
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.
EPS growth during the three-year period ending with 2019 did not
exceed RPI growth by 9%. Consequently, the EPS portion of the
2017 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.
Zero vesting if EPS growth does not exceed 9%
Vesting increases on a straight-line basis between these points
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
As disclosed below
Aggregate EP achieved during the three-year period ending
with 2019 was £1,243 million when compared to a threshold
level of £1,500 million and a maximum level of £3,500 million.
Consequently, the EP portion of the 2017 LTIP award will not vest.
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 2020
KPI performance under the LTIP
Set out below is the achievement against the KPI dashboard for the LTIP awards granted in 2017.
Performance period
– LTIP awards granted in 2017 and
due to vest in 2020
Measure
Year 1
Year 2
Year 3
2019 performance (compared with 2018)
Lost time injury frequency rate (LTIFR)
Significant process safety events (Tier 1)
British Gas net promoter score (NPS)(1)
Direct Energy NPS(1)
Employee engagement(1)
worsened from 0.49 to 0.58
improved from 1 to 0
worsened from +2 to -5.7
worsened from +41 to +40
worsened from 64% to 55%
(1) 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 Remuneration Policy was approved. They differ from the new NPS and employee engagement
metrics referenced elsewhere in the Annual Report and Accounts 2019.
Performance against the non-financial KPI dashboard during the
three-year performance period resulted in 40% of the KPI portion
of the 2017/19 LTIP award vesting.
However, as the financial performance targets were not met,
the Committee decided to exercise its discretion and reduce
the overall vesting level of the 2017 LTIP to zero.
Based on achievement against the LTIP performance conditions
over the three-year performance period, as set out above, an
overall vesting level of 13% of the original award was reached.
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Centrica plc Annual Report and Accounts 2019
Pension
With effect from 1 June 2019, it was agreed that the pension
contributions for existing Executives would reduce to a maximum
of 15% to move towards alignment with the wider UK workforce.
Prior to June, the pension contribution for the CEO was 30%,
for other Executives recruited prior to 2018 it was 25% and for
Executives recruited in 2018 it was 20%.
Iain Conn elected to receive a salary supplement in lieu of
participating in a Centrica pension plan. Richard Hookway and
Chris O’Shea participated in the Centrica Unapproved Pension
Scheme defined contribution section (CUPS DC).
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 for each Executive are disclosed below.
Sarwjit Sambhi has been employed by Centrica since 2001 and
participates in the Centrica Pension Plan (CPP), in line with his
existing contractual arrangement. The CPP is a registered defined
benefit plan which is closed to new members. Sarwjit participates
on the same basis as other plan members, subject to the CPP’s
earnings cap of £141,600. He receives a salary supplement of 10%
of the difference between the CPP’s earnings cap and his full base
salary (10% is aligned to the employer contribution rate available
for the majority of the wider workforce who participate in
Centrica’s defined contribution scheme).
The accrued pension disclosed below for Sarwjit Sambhi is that
which would be paid annually on retirement at age 62, based on
eligible service and pensionable earnings at 31 December 2019.
He accrued benefits within the Company’s defined benefit pension
arrangements prior to 1 March 2019; however, the figures shown
below relate only to benefits accrued after this date.
CUPS DC Scheme(1)
Richard Hookway(2)
Chris O’Shea(2)
(1) The retirement age for the CUPS DC scheme is 62.
(2) Richard Hookway joined Centrica on 1 November and Chris O’Shea joined on 10 September 2018.
Total notional
pension fund as at
31 December 2019
£
130,028
146,170
Total notional
pension fund as at
31 December 2018
£
20,000
38,233
Accrued pension as at
31 December 2019
£
Accrued pension as at
31 December 2018
£
1,982
–
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Centrica Pension Plan
Sarwjit Sambhi(1)(2)
(1) Sarwjit Sambhi was appointed to the Board on 1 March 2019.
(2) The pension accrual rate for 2019 was 1.67% of final pensionable earnings.
Executive Director recruitment and terminations
announced in 2019
Sarwjit Sambhi
Sarwjit Sambhi joined the Centrica Board as an Executive
Director on 1 March 2019, in the position of CEO, Centrica
Consumer. He has held a number of senior leadership positions
with Centrica since 2001.
Sarwjit’s remuneration package consists of base salary, benefits
and incentive arrangements that are in line with our Remuneration
Policy. There are no special arrangements in respect of his
appointment. The key elements of the remuneration package are:
Base salary – £620,000
As part of an existing contractual arrangement, continued pension
accrual in the CPP on the same basis as other plan members,
subject to an earnings cap of £141,600, plus a salary supplement
of 10% on the difference between capped salary and full base
salary, also aligned with the defined contribution available to the
wider workforce.
From the 2019 performance year, participation in the AIP and the
LTIP, with the initial LTIP award pro-rated for the period served on
the Board during the three-year performance period.
Iain Conn
In July it was announced that Iain Conn would step down as CEO
and retire from the Board in 2020.
Iain’s termination arrangements will be in line with the approved
Policy and his service contract.
In order to support an orderly succession before stepping down,
Iain will continue as CEO and his remuneration arrangements will
continue in line with his existing service contract. He will receive
salary, benefits and a pension salary supplement at the current
levels. All LTIP awards which are unvested at the point that Iain
leaves the Company will lapse in full and no further LTIP awards
will be granted.
Minimum shareholding requirement for new and
departing Executives
Executives are expected to build up and maintain a minimum
shareholding in the Company equivalent in value to 300% of
base salary, over a period of five years. Sarwjit Sambhi is subject
to this requirement from March 2019, the date he was appointed
to the Board.
Departing Executives are subject to a post-cessation shareholding
requirement of 150% of base salary (or their actual holding
if lower) for two years and this will apply to Iain Conn when he
leaves the Group.
Centrica plc Annual Report and Accounts 2019
89
Governance | Directors’ Annual Remuneration Report continued
Directors’ interests in shares (number of shares)
(audited)
The table below shows the interests in the ordinary shares of the
Company for all Directors on the Board at 31 December 2019.
For Executives only, the minimum shareholding requirement is
300% of base salary. The achievement against the requirement
is shown below.
Executives have a period of five years from appointment to the
Board, or from any material change in the minimum shareholding
requirement, to build up the required shareholding.
A post-cessation shareholding requirement of 50% of the
full shareholding requirement (or full actual holding if lower)
is applicable for two years post-cessation.
Executives
Iain Conn
Richard Hookway
Chris O’Shea
Sarwjit Sambhi
Non–Executives
Charles Berry
Joan Gillman
Stephen Hester
Pam Kaur
Kevin O’Byrne
Carlos Pascual
Steve Pusey
Scott Wheway
Shares
owned as at
31 December
Shares
owned as at
31 December
2018(1)
2019(1)
Minimum
shareholding
guideline
(% of salary)
Achievement
as at
31 December
2019
(% of salary)(2)
Shares owned
(subject to
continued
service) as at
31 December
2019(3)
1,896,978
–
219,000
n/a
2,664,912
37,886
385,399
398,995
300
300
300
300
249
6
56
57
770
264
264
–
Shares
owned as at
31 December
Shares
owned as at
31 December
2018(1)
2019(1)
Minimum
shareholding
guideline
(% of salary)
Achievement
as at
31 December
2019
(% of salary)
Shares owned
(subject to
continued
service) as at
31 December 2019
–
–
20,700
–
–
–
65,917
10,187
40,000
–
20,700
–
40,000
–
71,780
10,187
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(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, 2017 and 2019 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.
(2) The share price used to calculate the achievement against the guideline was 89.3 pence, the price on 31 December 2019.
(3) Shares owned subject to continued service include SIP matching shares that have not yet been held for the three-year holding period.
Executives’ interests in shares (number of shares)
subject to Company performance conditions
The table below shows the performance share awards that were
granted in 2017 and 2018 to Executives under the LTIP. These
awards are subject to the achievement of Company performance
conditions before vesting and there is a mandatory two-year
holding period following the vesting date before the shares can be
released.
Iain Conn
Richard Hookway
Chris O’Shea
Plan
LTIP
LTIP
LTIP
LTIP
Number
of shares
1,270,953
1,700,803
878,009
979,818
Vesting date
Release date
April 2020
April 2021
Nov 2021
Sept 2021
April 2022
April 2023
Nov 2023
Sept 2023
Share awards granted in 2019 (audited)
The table below shows the performance share awards that were
granted to Executives under the LTIP in 2019. These awards are
subject to the achievement of Company performance conditions
before vesting and there is a mandatory two-year holding period
following the vesting date before the shares can be released.
LTIP awards granted in 2019(1)
Iain Conn
Richard Hookway
Chris O’Shea
Sarwjit Sambhi
Number
of shares(2)(3)
2,057,900
1,289,546
1,332,530
1,258,501
Value
£000
2,394
1,500
1,550
1,464
Salary multiple
Vesting date
Release date
250%
250%
250%
236%
April 2022
April 2022
April 2022
April 2022
April 2024
April 2024
April 2024
April 2024
(1) The performance conditions relating to these awards are set out below. The performance period is 1 January 2019 to 31 December 2021.
(2) The share price used to calculate the number of shares granted was 116.32 pence, being the average closing share price over five business days immediately
preceding the grant date of 1 April 2019.
(3) The award for Sarwjit Sambhi was pro-rated based on the date he was appointed to the Board.
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Centrica plc Annual Report and Accounts 2019
LTIP performance conditions
Measures
Relative TSR
UAOCF growth
Absolute aggregate EP
Non-financial KPI improvement
(1) Compound annual growth rate.
Weightings
33.3%
22.2%
22.2%
22.2%
Targets
Threshold (25%)
Maximum (100%)
FTSE 100
median
CAGR 2%(1)
£1,625m
See below
FTSE 100
upper quartile
CAGR 5%(1)
£2,125m
See below
Vesting between stated points will be on a straight-line basis.
KPI improvement relates to closure of the gap between performance at the start of the period (baseline performance) and our long-term
aspirational goals which are generally aligned with upper quartile market performance:
Baseline 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 for the 2019/21 cycle are:
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
(1) Per 200,000 hours worked.
Baseline
performance
Threshold
Maximum
Long-term goal
Targets
1.02
0.06
+10
0.83
0.12
+12.05
0.45
0.1
+15
0.25
0.1
+20
3,453
3,059
2,665
1,877
55
60.5
66.0
77
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Comparison of the Group Chief Executive’s (CEO’s) remuneration with other employees
The chart below shows the percentage change in base salary,
taxable benefits and bonus (annual incentive) payments between
2018 and 2019 for Iain Conn, compared with a comparator group
of UK employees over the same period of time.
25th
percentile
The chart below shows the ratio of remuneration of the CEO to the
average UK employee of the Group for 2018 and 2019.
50th
percentile
75th
percentile
Change in Group Chief
Executive’s remuneration
Change in employee
remuneration
Salary and fees
1.88%
Taxable benefits
0.00%
Annual incentive
-100%
Salary and fees
2.76%
Taxable benefits
0.00%
Annual incentive
-27.23%
The percentage change in annual incentive for Iain Conn between
2018 and 2019 reflects the fact that he will not receive an annual
bonus payment relating to 2019 performance.
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 CEO). The employees selected have been employed
in their role throughout 2018 and 2019 to give a meaningful
comparison. The group has been chosen because the employees
have a remuneration package with a similar structure to the CEO,
including base salary, benefits and annual bonus.
CEO Pay Ratio
2019
2018
34:1
72:1
29:1
59:1
22:1
44:1
The Company has used its gender pay gap data (Option B in the
Directors’ Reporting Regulations) to determine the employees
whose remuneration packages sit at the lower, median and upper
quartile positions across the UK workforce. This is deemed the
most appropriate methodology for Centrica given the different
pension and benefit arrangements across the diverse UK
workforce. To ensure this data accurately reflects individuals at
each quartile position, a sensitivity analysis has been performed.
The approach has been to review the total pay and benefits for a
number of employees immediately above and below the identified
employee at each quartile within the gender pay gap analysis.
The annual remuneration relating to 2018 and 2019 for the three
identified employees has been calculated on the same basis as
the CEO’s total remuneration for 2018 and 2019 in the single figure
table on page 86 to produce the ratios.
The lower ratios in 2019 compared with 2018 reflect the fact that
Iain Conn’s total remuneration for 2019 does not include an annual
bonus or the value of a long-term share award vest.
Centrica plc Annual Report and Accounts 2019
91
Governance | Directors’ Annual Remuneration Report continued
Pay for performance
The table below shows the CEO’s total remuneration over the last
ten years and the achieved annual short-term and long-term
incentive pay awards as a percentage of the plan maximum.
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 2018
and 2019.
Group Chief
Executive single
figure for total
remuneration
£000
Annual short-term
incentive payout
against max
opportunity
%
Long-term incentive
vesting against max
opportunity
%
Dividends
Staff and employee costs(1)
2019
£m
471
2,027
2018
£m
551
2,019
%
Change
-14
-4
Iain Conn
2019
2018
2017
2016
2015
Sam Laidlaw
2014
2013
2012
2011
2010
1,186
2,335
1,678
4,040
3,025
3,272
2,235
5,709
5,047
5,322
0
41
0
82
63
34
50
61
50
91
0
18
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 ten-year
period to 31 December 2019. 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
250
200
150
100
50
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
Centrica Total return index
Source: Datastream from Refinitiv
FTSE 100 Total return index
Fees received for external appointments of
Executive Directors
In 2019, Iain Conn received £114,744 (£124,000 in 2018) as a
non-executive director of BT Group plc.
Richard Hookway represents Centrica as a non-executive
director of EDF Energy Nuclear Generation Group Limited and
Sarwjit Sambhi represents Centrica as a director of Energy UK.
Neither Executive receives any fees or remuneration relating to
these external appointments.
(1) Staff and employee costs are as per note 5 in the Notes to the Financial
Statements.
Payments to past Directors (audited)
During 2019, no payments were made to past Directors with the
exception of the payments disclosed in the single figure for total
remuneration table on page 86.
Funding of share schemes in 2019
During 2019, market purchased shares, held in an employee
benefits trust, were used to satisfy outstanding allocations under
the Restricted Share Scheme (a conditional share plan for Centrica
employees below the executive level). Treasury shares were used
to satisfy the release of awards or the exercise of options under
the Deferred and Matching Share Scheme, the Long Term
Incentive Scheme, the On Track Incentive Plan and Centrica’s
all-employee share plans. At 31 December 2019, 10,241,808
shares were held in treasury (2018: 31,277,124), following the share
repurchase programme throughout 2013 and 2014.
Advice to the Remuneration Committee
Following a competitive tender process, PwC was appointed as
independent external adviser to the Committee in May 2017.
PwC also provided advice to Centrica globally during 2019 in the
areas of employment taxes, regulatory risk and compliance issues
and additional consultancy services.
PwC’s fees for advice to the Committee during 2019 amounted to
£87,600 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 its consideration of matters relating to executive remuneration.
The Committee takes into account the Remuneration Consultants
Group’s (RCG) Code of Conduct when dealing with its advisers.
PwC is a member 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
in no way compromises their independence.
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Statement of voting
Shareholder voting on the resolutions to approve the Directors’
Remuneration Policy, put to the 2018 AGM, and the Directors’
Remuneration Report, put to the 2019 AGM, was as follows:
KPI improvement relates to closure of the gap between
performance at the start of the period (current performance) and
our long-term aspirational goals which are generally aligned with
upper quartile market performance:
Baseline performance
Long-term goal
Directors’ Remuneration Policy
Votes for
3,378,407,618
%
Votes against
95.43
161,656,874
KPI
%
4.57
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 are:
Current
performance Threshold Maximum
Long-term
goal
Targets
1.06
0.86
0.45
0.25
0.08
0.073
0.065
0.05
+15.1
+16.33
+17.55
+20
3,429
3,041
2,653
1,877
43% 51.5% 60.0%
77%
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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
(1) Per 200,000 hours worked.
Changes since 1 January 2020
Share Incentive Plan
During the period from 1 January 2020 to 12 February 2020
Iain Conn, Richard Hookway and Chris O’Shea each acquired
384 shares through the SIP.
The Remuneration Report has been approved by the Board of
Directors and signed on its behalf by:
Justine Campbell
Group General Counsel & Company Secretary
12 February 2020
1,705,945 votes were withheld.
Directors’ Remuneration Report
Votes for
3,048,524,287
%
Votes against
85.27
526,724,546
%
14.73
31,937,839 votes were withheld.
Implementation in the next financial year
Base salaries for Executives were reviewed in January 2020
and the Committee determined that current salaries were
competitive when compared against the market data. The
Committee therefore agreed that there would be no salary
increases for Executives in 2020.
No changes to benefits for 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 2020, 50% of the financial
measures will be based on adjusted operating profit, 30% of the
financial measures will be based on free cash flow and 20% of the
financial measures will be based on cost efficiency, 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 2020.
LTIP awards will be granted to three Executives, based on 250%
of base salary. This is below the maximum award level of 300% of
base salary set out in the Remuneration Policy. Iain Conn will not
receive an LTIP award as he will be leaving Centrica in 2020.
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
2020 LTIP awards:
Measures
Relative TSR
UAOCF growth
Absolute aggregate EP
Non-financial KPI improvement
(1) Compound annual growth rate.
Targets
Weightings
Threshold
(25%)
Maximum
(100%)
33.3%
FTSE 100
median
22.2% CAGR 2%(1)
£1,542m
22.2%
See below
22.2%
FTSE 100
upper quartile
CAGR 5%(1)
£2,042m
See below
Vesting between stated points will be on a straight-line basis.
Centrica plc Annual Report and Accounts 2019
93
Governance | Remuneration Policy
Remuneration Policy
Set out over the following pages is a summary of the
Remuneration Policy (Policy) that was approved by shareholders
on 14 May 2018. The full Policy can be found at centrica.com
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 Policy 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
to 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 95. Long-term incentive
is delivered through the Long Term Incentive Plan (LTIP) which
is described on page 96. 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 revised Group Priorities linked to the
LTIP measures. Our business model and Group Priorities are set
out in more detail on page 14.
Centrica’s strategy/Group priorities
Customer obsession
Empowered colleagues
Operational excellence
Most competitive provider
Cash flow growth
Centrica’s financial framework
Measure
Target
AOCF
Growth over the
medium term
Dividend
Progressive from 2019
rebased level linked to
growth in earnings and
AOCF
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)
LTIP
measures
33.3%
Relative TSR
Controllable
costs
£1bn of cost efficiency
delivery over 2019-22
22.2%
UAOCF growth
Capital
re-discipline
Annual capital
expenditure of around
£500m post Spirit
Energy and Nuclear
disposals
Credit rating
Strong investment
grade ratings
Return on
average capital
employed
(ROACE)
At least 10-12%
22.2%
EP
22.2%
Non-financial KPIs
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Summary of Policy design
Fixed remuneration
Short-term incentive
Long-term incentive
Pension
Base
pay/salary
Benefits
25%
Individual
performance
22.2%
UAOCF
growth
22.2%
Non-financial
KPIs
75%
Financial performance (mix of
measures based on priorities for year)
33.3%
Relative
TSR
22.2%
EP
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 separate components of the Policy that applies to Executives.
Purpose and
link to strategy
Operation and
clawback
Maximum
opportunity
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.
Maximum of 200% of base
salary. Half the maximum is
payable for on-target
performance.
This is consistent with the
previously approved policy.
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.
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.
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.
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 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).
Performance
measures
Not applicable.
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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.
Centrica plc Annual Report and Accounts 2019
95
Governance | Remuneration Policy continued
Purpose and
link to strategy
Operation and
clawback
Maximum
opportunity
Performance
measures
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%.
33.3% based on relative total
shareholder return (TSR) with the
remainder equally weighted and
based on 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.
The maximum benefit is 25% of
base salary.
Not applicable.
Long-term incentive
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.
Pension
Positioned to provide a
market-competitive post-
retirement benefit, in a way that
manages the overall cost to the
Company.
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.
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.
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Centrica plc Annual Report and Accounts 2019
Purpose and
link to strategy
Operation and
clawback
Maximum
opportunity
Performance
measures
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.
In late 2018, it was agreed that
the pension contributions for
existing Executives would
reduce to a maximum of 15%
with effect from 1 June 2019 to
move towards alignment with the
wider UK workforce.
Benefits
Positioned to support health
and wellbeing and to provide
a competitive package of
benefits that is aligned
with market practice.
The Group offers Executives
a range of benefits including
some or all of:
Cash allowance in lieu of
company car – £22,000
per annum.
• a company-provided car
and fuel, or a cash allowance
in lieu;
The benefit in kind value of
other benefits will not exceed
5% of base salary.
• life assurance and personal
accident insurance;
This is consistent with the
previously approved policy.
Not applicable.
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• health and medical insurance
for the Executive and their
dependants;
• health screening and
wellbeing services; and
• a contribution towards
financial planning advice.
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.
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.
Not applicable.
Relocation and
expatriate assistance
Enables 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
Provides an opportunity for
employees to voluntarily invest
in the Company.
Centrica plc Annual Report and Accounts 2019
97
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
All registered scheme benefits are subject to HMRC guidelines
and the Lifetime Allowance.
The Centrica Unapproved Pension Scheme (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.
The Centrica Pension Plan (CPP) is a registered defined benefit
plan which is closed to new members.
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.
Governance | Remuneration Policy continued
Policy table notes
The Committee reserves the right to make any remuneration
payments and payments for loss of office, notwithstanding that
they are not in line with the summary Policy set out above, where
the terms of the payment were agreed before the Policy came into
effect, at a time when the relevant individual was not an Executive
of the Company or, in the opinion of the Committee, the payment
was not in consideration for the individual becoming an Executive
of the Company. For these purposes payments include the
amounts paid in order to satisfy awards of variable remuneration
and, in relation to an award over shares, the terms of the payment
are agreed at the time the award is granted.
The Committee may make minor amendments to the Policy
(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 it reflects the
investment interests of our UK shareholder base.
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 addition, see
page 223 for an explanation of UAOCF.
Non-financial KPIs
Based on the Group’s non-financial KPIs, using three-year targets
for improvement.
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Performance
measures
Not applicable.
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Remuneration Policy table
Purpose and
link to strategy
Operation and
clawback
Maximum
opportunity
The maximum level of fees
payable to Non-Executives,
in aggregate, is set out in the
Articles of Association.
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.
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.
Current fee levels (applying from
1 January 2016):
Chairman of the Board – up to
£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.
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Governance
Other Statutory Information
Repurchase of shares
As permitted by the Articles, the Company obtained shareholder
authority at the 2019 AGM to purchase its own shares up to
a maximum of 569,713,608 ordinary shares. No shares were
purchased under this authority in 2019. As at 31 December 2019,
10,241,808 shares were held as treasury shares. These shares
held in treasury represent 0.17% 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, and
the Restricted Share Scheme. 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.
Scrip Dividend Programme termination
Historically, the vast majority of shareholders have chosen to
receive dividends in cash. Many of these shareholders have
advised the Company that they were concerned that the issue
of new shares under the Scrip Dividend Programme had a
dilutive effect on their shareholdings. The Company listened to
shareholders’ concerns and, having taken the feedback into
account, took the decision to terminate the Scrip Dividend
Programme with effect from the 2019 interim dividend. More
information, including frequently asked questions, can be found
on our website.
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 2019. The Directors’ Report required under the
Companies Act 2006 comprises this Directors’ and Corporate
Governance Report (pages 55 to 102) including the Delivering our
Responsible Business Ambitions section for disclosure of
our carbon emissions in the Strategic Report (pages 48 to 54).
The management report required under Disclosure Guidance and
Transparency Rule 4.1.5R comprises the Strategic Report (pages 2
to 54) (which includes the risks relating to our business),
Shareholder Information (page 222) and details of acquisitions and
disposals made by the Group during the year in note 12 (pages
140 to 141). This Directors’ and Corporate Governance Report
fulfils the requirements of the corporate governance statement
required under Disclosure Guidance and Transparency Rule 7.2.1.
Articles of Association (Articles)
The Company’s Articles were adopted at the 2019 AGM. They may
only be amended by a special resolution of the shareholders.
Centrica shares
Substantial shareholdings
At 31 December 2019, Centrica had received notification of the
following interests in voting rights pursuant to the Disclosure and
Transparency Rules:
Schroders Investment Management Limited
BlackRock, Inc.
Majedie Asset Management Limited
Newton Investment Management Limited
% of share capital(1)
10.53
6.59
4.99
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. On 27 January 2020,
Standard Life Aberdeen notified the Company of its interest in 5.06% of the
voting rights of the issued share capital. On 4 February 2020, Schroders
Investment Management Limited notified the Company that it had increased
its interest in the voting rights of the issued share capital to 11.033%. As at
12 February 2020, there were no further changes notified to the Company.
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 2019 AGM to allot up to 1,899,045,361 ordinary
shares as permitted by the Act. A renewal of a similar authority will
be proposed at the 2020 AGM. The Company’s issued share
capital as at 31 December 2019, 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.
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Index to Directors’ Report and other disclosures
68
100
104
58 to 61
14 to 15
50 to 51
65
101
61 and 65
90
102
52
Note 11
Page 39
Note 26
Page 161
Notes 19, S2 and S6
on pages 149, 163
and 182
AGM
Articles of Association
Audit Information
Board of Directors
Business Model
Carbon emissions
Conflicts of Interest
Directors’ indemnities and insurance
Directors’ service contracts and letters
of appointment
Directors’ share interests
Disclosure required under Listing Rule
9.8.4R
Diversity
Dividends
Events after the balance sheet date
Financial instruments
2 to 54
Future developments
101
70
100
52
101
Note S8
Page 186
49 to 50
2
34
12
100
48
Human rights
Internal control over financial reporting
Material shareholdings
People
Political donations and expenditure
Related party transactions
Research and development activities
Results
Risk management
Section 172(1) statement (Directors’ Duty)
Share capital
Sustainability
Employee participation in share schemes
The Company’s all-employee share schemes are a long-
established and successful part of our total reward package,
encouraging the involvement of UK employees in the Company’s
performance through 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, 42% of
eligible employees participate in Sharesave and 30% of eligible
employees participate in the SIP.
Workforce
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 for each company in the
Group. Qualifying third-party indemnity provisions (as defined
by section 234 of the Act) were in force during the year ended
31 December 2019 and remain in force. The Company also
maintains directors’ and officers’ liability insurance for its
Directors and officers.
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Employee involvement
We remain committed to employee involvement throughout the
Group. Employees are kept well informed of the performance and
strategy, including financial and economic, of the Group and other
matters of concern through personal briefings, regular meetings,
town halls, email and broadcasts by the Group Chief Executive
and members of the Board at key points in the year.
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.
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. We are proud to support The Valuable
500 initiative and champion disability inclusion throughout
Centrica. Launched at the World Economic Forum’s Annual
Summit this year, The Valuable 500 seeks 500 global businesses
to place disability inclusion on their board agenda as the first step
to full inclusion for disabled people in business.
Human rights
As an international company we have a responsibility and are
committed to upholding and protecting 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 of human rights abuses 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.
Other information
Political donations
The Company 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 the Company 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 2019,
contributions to DEEPAC by employees amounted to $37,106, and
DEEPAC made 63 political donations totalling $48,640.
Centrica plc Annual Report and Accounts 2019
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Governance | Other Statutory Information continued
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 agreements of
this kind relate to 2009, when the Company 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 the Company to offtake power from these
nuclear power stations. As part of the arrangements, on a change
of control of the Company, 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.
Payments policy
We recognise the importance of good supplier relationships to
the overall success of our business. We manage dealings with
suppliers in a fair, consistent and transparent manner.
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 2019 Annual Report and Accounts:
Information
Location in Annual Report
Page(s)
Directors’ compensation
Capitalised interest
(borrowing costs)
Details of long-term
incentive schemes
Remuneration Report
Financial Statements
82 to 99
134, note 8
Remuneration Report
96
Directors’ statements
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 11 and the Business
Reviews on pages 20 to 28. After making enquiries, the Board has
a reasonable expectation that Centrica and the Group as a whole
have adequate resources to continue in operational existence and
meet their liabilities as they fall due, for the foreseeable future. For
this reason, the Board continues to adopt the going concern basis
in preparing the Financial Statements. Additionally, the Directors’
Viability Statement – which assesses the prospects for the Group
over a longer period than the 12 months required for the going
concern assessment – is set out on pages 44 to 45. Further details
of the Group’s liquidity position are provided in notes 24 and S3 to
the Financial Statements.
Statement of Directors’ responsibilities
The Directors, who are named on pages 58 to 61, 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 UK Generally
Accepted Accounting Practice including FRS 101 ‘Reduced
Disclosure Framework’ (United Kingdom Accounting Standards
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and applicable law). Under company law, the Directors must not
approve the Financial Statements unless they are satisfied that
they give a true and fair view of the state of affairs of the Group
and the Company and of the profit or loss of the Group for that
period. In preparing these Financial Statements, the Directors are
required to:
• select suitable accounting policies and then apply them
consistently;
• make judgements and accounting estimates that are reasonable
and prudent;
• state whether IFRS as adopted by the EU and applicable UK
Accounting Standards have been followed, subject to any
material departures disclosed and explained in the Group and
Company Financial Statements respectively; and
• prepare the Financial Statements on the going concern basis
unless it is inappropriate to presume that the Company will
continue in business.
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time
the financial position of the Company and the rest of 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 2019,
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 confirms 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 54, together with
the Directors’ and Corporate Governance Report on pages 55
to 102, 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;
• 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.
This confirmation is given and should be interpreted in accordance
with the provisions of section 418 of the Companies Act 2006.
Deloitte LLP have expressed their willingness to continue in office
as auditors and a resolution to re-appoint them will be proposed at
the forthcoming AGM.
By order of the Board
Justine Campbell
Group General Counsel & Company Secretary
12 February 2020
Financial
Statements
Independent Auditor’s Report
104
114 Group Income Statement
115 Group Statement of Comprehensive Income
116 Group Statement of Changes in Equity
117 Group Balance Sheet
118 Group Cash Flow Statement
119 Notes to the Financial Statements
196 Company Financial Statements
198 Notes to the Company Financial Statements
208 Gas and Liquids Reserves (Unaudited)
210 Ofgem Consolidated Segmental Statement
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Financial Statements
Financial Statements | Independent Auditor’s Report
Independent Auditor’s Report
Report on the audit of the financial statements
Opinion
In our opinion:
• the Financial Statements of Centrica plc (the ‘parent company’)
and its subsidiaries (the ‘Group’) give a true and fair view of the
state of the Group’s and of the parent company’s affairs as at 31
December 2019 and of the Group’s loss for the year then ended;
• the Group Financial Statements have been properly prepared in
accordance with International Financial Reporting Standards
(IFRSs) as adopted by the European Union;
• the parent company Financial Statements have been properly
prepared in accordance with United Kingdom Generally
Accepted Accounting Practice, 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 which comprise:
• the Group Income Statement;
• the Group Statement of Comprehensive Income;
• the Group and Company Balance Sheets;
• the Group and Company Statements of Changes in Equity;
• the Group Cash Flow Statement; and
• the related notes 1 to 26 and the supplementary notes S1 to S11
of the Group Financial Statements and notes I to XVIII of the
Company Financial Statements.
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 parent 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 parent company in
accordance with the ethical requirements that are relevant to our
audit of the Financial Statements in the UK, including the Financial
Reporting Council’s (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. The
non-audit services provided to the Group and parent company for
the year are disclosed in note S9 to the Financial Statements. We
confirm that the non-audit services prohibited by the FRC’s Ethical
Standard were not provided to the Group or the parent 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:
• Presentation of the Group Income Statement;
• Impairment of long-life assets;
• Revenue and cost recognition for derivatives; and
• Estimation of accrued energy revenue.
All key audit matters are consistent with the prior year.
Materiality
Scoping
Significant
changes in
our approach
The materiality that we used for the Group Financial Statements was £42 million which was determined on the basis of 5%
of forecast 2019 pre-tax profit, adjusted for exceptional items and certain re-measurements as defined in note 7 to the
Financial Statements. Our materiality represents 6.5% of the final pre-tax profit adjusted for exceptional items and certain
re-measurements.
All components 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 component other than Centrica Business Solutions (within the Centrica Business
segment) and Direct Energy Services (US and Canada) within the Centrica Consumer segment, both of which were
subject to specified audit procedures.
• There are no significant changes in our approach for 2019.
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Conclusions relating to going concern, principal risks and viability statement
Going concern
We have reviewed the Directors’ statement on page 245 to 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.
Going concern is the basis of preparation of the
Financial Statements that assumes an entity will
remain in operation for 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 considered as part of our risk assessment the nature of the Group, its business model
and related risks including where relevant the impact of Brexit, the requirements of the
applicable financial reporting framework and the system of internal control. We evaluated
the Directors’ assessment of the Group’s ability to continue as a going concern, including
challenging the underlying data and key assumptions used to make the assessment, and
evaluated the Directors’ plans for future actions in relation to their going concern
assessment.
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 34-43 that describe the principal risks, procedures to identify
emerging risks, and an explanation of how these are being managed or mitigated;
• the Directors’ confirmation on page 37 that they have carried out a robust assessment
of the principal and emerging risks facing the Group, including those that would
threaten its business model, future performance, solvency or liquidity; or
• the Directors’ explanation on page 44 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.
Viability means the ability of the Group to continue
over the time horizon considered appropriate by the
Directors.
We confirm that we have nothing material to report, add or
draw attention to in respect of these matters.
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 for 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 2019
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Financial Statements | Independent Auditor’s Report continued
Key audit
matter description
How the scope of our audit
responded to the key audit matter
Presentation of the Group Income Statement
The Group Income Statement set out on page 124 of the Annual Report & Accounts
segregates Business performance from Exceptional items and certain re-measurements
(the ‘Middle column’) in arriving at the results for the year with additional information
disclosed in Note 7. The Group’s policy on the presentation of exceptional items and certain
re-measurements can be found in notes 2(a) and 2(b). The Audit Committee also discuss this
area in their report on pages 70 to 75.
Business performance is a critical measure for stakeholders and underpins the Group’s
segmental analysis and description of business results, and therefore the classification of
items between Business performance and the Middle column is important for users of the
accounts.
The key items included within the Middle column are as follows:
• Re-measurement and settlement of certain energy contracts (£646 million);
• Impairment of certain assets (£925 million);
• Restructuring costs (£356 million);
• Pension change costs and credits (£152 million);
• Net gain on disposals programmes (£35 million); and
• Related tax charges and credits (£217 million).
The Group has an established policy which governs which items should be recognised in the
Middle column. However, judgement is applied in the application of this policy. This is a key
area of focus for our audit. We identified a potential fraud risk in respect of the presentation
of exceptional items, in particular restructuring costs.
The valuation and recording of the impairment of certain assets and the valuation and
recording of the re-measurement of certain energy contracts are separate key audit matters.
Please see pages 107 and 108 for further detail. The presentation of these items within either
Business performance or the Middle column is, however, addressed within this key audit
matter.
Significant restructuring costs were incurred in 2019 in relation to Group’s strategic review and
efficiency programme as set out on page 30. The costs of restructuring arising from the
strategic review are included within the Middle Column.
The presentation of the Group’s revenue and cost of sales in the results for the period column
has been amended and the comparative period results have been represented to comply with
the requirements of the IFRIC agenda decision on the Physical Settlement of Contracts to Buy
or Sell a non-Financial Item which was issued in March 2019. Please see pages 121 and 163
for further details.
Audit procedures applicable to all items
• We obtained an understanding of key controls
around the presentation of items within either
Business performance or the Middle column.
• We evaluated the Group’s policy on the recording of
items within Business performance or the Middle
column and considered whether that policy was
appropriate. We also evaluated the Group’s policy
against guidance issued by the Financial Reporting
Council (FRC) and the European Securities and
Markets Authority (ESMA).
• We challenged Management on the presentation of
items within the Middle column and whether these
items had been correctly presented within the
appropriate column and properly disclosed in line
with the Group’s policy.
Audit procedures applicable to specific items
• On impairment of certain assets, we challenged
Management on the factors that caused any
significant movement in value on each asset by
interrogating the underlying impairment models and
whether the impairment had been recorded within
the correct column.
• For restructuring costs we evaluated the costs
recorded by Management within the Middle column
and challenged whether those costs were being
correctly reported in line with the Group’s policy.
• We evaluated the income statement amendments
and the presentation of certain revenue streams
following the IFRIC agenda decision on the recycling
of derivative movements.
• We reviewed the presentation and disclosure of
Management’s conclusions in the Annual Report &
Accounts to assess whether the disclosures are fair,
balanced and understandable and consistent with
the Group’s policy and relevant accounting
standards.
Key observations
• The exploration and production assets impairments arise from both operating performance of certain projects and a reduction in forecast energy
prices, and are material in size, while the Nuclear impairments arise from changes in forecast future energy prices therefore under the Group’s
policy these impairments are appropriately recorded within the Middle column.
• Where the impairment involves a change in forecast future energy prices combined with factors such as operational performance or available
reserves, a judgement is taken by the Group whether this should be reported in the Middle column. We believe these judgements are reasonable.
• The majority of restructuring costs relate to clearly defined projects (see 30). However, there are certain smaller costs incurred in the year which
relate to restructuring activities in other areas of the business, and which have been treated as exceptional items and presented within the Middle
column in the income statement. Whilst the treatment of these costs as exceptional is subjective, the costs incurred are not material to the
Financial Statements.
• We are satisfied with the income statement amendments and the presentation of certain revenue streams following the IFRIC agenda decision.
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Key audit
matter description
Impairment of long-life assets
The total book value of exploration and production assets is £2,396 million and the total book
value of the investment in Nuclear is £1,289 million. Management have recorded a pre-tax
impairment charge of £848 million for these assets, including £476 million on exploration and
production assets and £372 million on the investment in Nuclear, primarily due to lower
forecast long term prices and operational performance, as disclosed in note 7. Further details
on the key sources of estimation certainty underpinning the impairment of long life assets can
be found in note 3(b). Details on the sensitivity of the above impairment reviews to changes in
key assumptions such as commodity prices are disclosed in Note 7(d). The matter is also
considered by the Audit Committee in their report on pages 69 to 75.
The Group owns significant upstream exploration and production assets and certain power
generation assets, which are required to be reviewed for indicators of impairment and tested
for impairment as appropriate.
These assets are subject to the greatest estimation uncertainty, as set out below.
Consequently they represent the highest risk of impairment. We therefore identified a risk
of material misstatement that these long-life assets are not recoverable. The impairments
recorded in the year were primarily because of a change in the estimation of long term
commodity prices.
The impairment assessment involves management judgement in considering whether the
carrying value of those assets or cash generating units are recoverable. The key assumptions
and judgements underpinning the impairment reviews include:
• forecast future cash flows;
• forecast future production or generation profiles;
• forecast future commodity prices;
• estimates of oil and gas reserves;
• availability forecast;
• useful life estimates and life extensions; and
• determining an appropriate discount rate.
How the scope of our audit
responded to the key audit matter
Procedures on the overall impairment review
• We have understood management’s process for
identifying indicators of impairment and for
performing their impairment assessment. We
assessed and obtained an understanding of the key
controls relating to the asset impairment models, the
underlying forecasting process 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
evaluated the current year changes to the key
assumptions and retrospectively assessed whether
prior year assumptions were appropriate.
• We audited the arithmetical accuracy of the
impairment models. We recalculated the impairment
charges and headroom and agreed these to
financial records.
• We evaluated the impairment judgements taken,
with reference to our assessment of the key
assumptions as outlined above and the outcome of
the sensitivities performed.
Procedures relating to forecast future cash flows
• 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 confirmed estimates of oil and gas reserves
to third party reserve reports, assessing the skills,
qualifications and independence of those third party
experts.
• We evaluated the Group’s determination of future
commodity prices using our own internal experts,
who benchmarked against externally available future
commodity price estimates and performed
sensitivity analysis with alternative future prices.
• We assessed the reasonableness of the nuclear
plants’ availability forecast and life extensions and
sensitised the impact of change in assumptions on
the overall impairment charge.
Procedures relating to the discount rate
• We involved our internal valuation specialists to
evaluate management’s discount rates, which
involved benchmarking against available market
views and analysis.
Key observations
• We are satisfied that the key assumptions used to determine the recoverable amount of long-life assets are appropriate, including estimates of
reserves, production and generation profiles.
• We are also satisfied that the Group’s discount rate assumptions are determined based on acceptable valuation methodologies. These
assumptions are towards the higher end when compared to the ranges determined by our internal valuation specialists but are considered
reasonable, consistent with the prior year.
• The Group’s future commodity price estimates are within the middle of the acceptable range of external sources. In the prior year the Group’s
future commodity price estimates were towards the higher end of the acceptable range.
• Based on the procedures performed we are satisfied that the Group’s impairment charge is appropriate.
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Key audit
matter description
How the scope of our audit
responded to the key audit matter
Revenue and cost recognition for derivatives
Details on the Group’s derivative activities can be found in note 19 and note S3 (a). The key
sources of estimation uncertainty associated with derivatives can be found in note 3(b) with
further details on the presentation of certain re-measurement arising on derivatives disclosed
in note 2(b).The matter is also considered by the Audit Committee in their report on pages 69
to 75. As disclosed in note 7 to the Financial Statements, certain re-measurements of
£647 million pre-tax have been recognised in the current year. The critical accounting
judgement in respect of Liquefied Natural Gas (‘LNG’) is disclosed in note 3(a) and the long
term LNG commitments are disclosed in note 23.
In addition to proprietary trading activities, the Group enters into forward commodity
contracts to optimise the value of its production, generation 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, all of which were identified as fraud risks:
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 and accruals accounting
We have understood the Group’s processes and
controls for authorising and recording commodity
trades.
In the Group’s Energy, Marketing and Trading (‘EM&T’)
business, we used data analytics to trace commodity
trades from initiation through to confirmation,
settlement (where relevant) and recording in the
Group’s accounting systems. This included an
assessment of whether the accounting recognition
was in line with the Group’s accounting policies and
relevant accounting standards.
Valuation of complex trades
• We used financial instrument specialists to assist
the audit team in valuing material complex trades,
which included auditing the Group’s valuation
models by creating an independent valuation, or by
assessing the inputs, verifying the reasonableness
of the model methodology and assessing the
movement in the fair value from the change in
significant inputs.
• Certain commodity contracts have been entered into for the purposes of securing
commodities for the energy supply businesses. Where contracts have been entered into to
satisfy Centrica’s normal business activities, these have been determined to be own-use
contracts and consequently are not recorded at fair value. Due to the size and value of
these contracts we have identified the appropriateness of the own-use treatment as a key
audit matter.
Own-use treatment
• We reviewed all the Group’s material ‘own use’
contracts which were entered into during the year to
determine whether the application of the own-use
treatment was appropriate.
• The Group does not consider its long term LNG supply contracts to be derivatives because
of a lack of market liquidity and the inability or lack of history of net settlement. Such
contracts are therefore not marked to market. These contracts are significant commitments
and therefore this judgement is important to the Group’s Financial Statements.
• We assessed whether there is liquidity in the LNG
market or the Group has the ability or practice of
net settling of contracts, including reviewing
contractual terms.
Allocation of optimisation and hedging trading activity in the Middle column
• 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.
• 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.
Allocation of optimisation and hedging trading activity
in the Middle column
• We audited the principles management use to
determine whether a trade should be recognised as
part of on-going 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 counter-party was another Group
business, to determine whether profits and losses
within the Middle column reflect only market-related
movements.
Key observations
• We are satisfied that commodity trades are valued on a reasonable basis and that the accounting classification and valuation of trades is
appropriate.
• We are satisfied with the appropriateness of the Group’s own use accounting.
• We agree with the conclusion that LNG contracts should not be accounted for at fair value.
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Key audit
matter description
How the scope of our audit
responded to the key audit matter
Estimation of accrued energy revenue
Details on the Group’s accrued energy income can be found in note 17. Total accrued energy
income at 31 December 2019 was £1,342 million (2018: £1,542 million). The key source of
estimation uncertainty associated with accrued energy income is disclosed in note 3(b). The
matter is also considered by the Audit Committee in their report on pages 69 to 75.
The recognition of energy supply revenue requires the Group to estimate customer energy
usage between the date of the last meter read and the year end, known as accrued or unbilled
energy revenue.
Our risk was focused on the accuracy and valuation of accrued energy revenue in the UK and
North American Home and Business, being the businesses with the most significant accrued
energy revenue. We have pinpointed the risk to the estimates underpinning the recognition
and valuation of accrued energy revenue and the potential for management override of related
controls. We also identified this as a fraud risk.
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Our audit approach for unbilled revenue was a
combination of tests of internal control and data
analytics work, together with substantive analytical
procedures. This included understanding controls in
the UK and North American revenue processes, from
meter reading to cash collection, and controls over the
period end revenue reconciliation process. In the UK,
we tested the key controls relied on to estimate
accrued energy revenue.
• We used data analytics in UK Home and Business
to reperform the calculation of the accrued energy
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 the last meter read.
• In North America, we focused on creating an
independent estimate of accrued energy revenue
and compared this to the estimate determined by
management.
• In the UK and North America we 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.
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Key observations
• We are satisfied that the estimation of the Group’s accrued energy revenue is materially correct. We were able to rely on certain controls around
the estimation process in the UK and whilst some improvements were made to processes in North America, the controls are not yet at a stage
where we were are able to rely on them. This is discussed further in the Audit Committee’s report on pages 69 to 75.
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Our application of materiality
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:
Group Financial Statements
Parent company Financial Statements
Materiality
£42 million (2018: £60 million)
£40 million (2018: £50 million)
Basis for determining
materiality
Rationale for the
benchmark applied
We determined Group materiality on the basis on 5% of forecast
2019 pre-tax profit, adjusted for exceptional items and certain
re-measurements as defined in note 7 to the Financial Statements
(2018 - 5%). Our materiality represents 6.5% of the final pre-tax
profit adjusted for exceptional items and certain re-measurements
(2018: 5.4%).
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 determined company materiality based
on 1% (2018: 1%) of estimated net assets.
Our materiality represents 0.7% of final net
assets (2018: 0.9%).
We considered net assets to be the most
appropriate benchmark given the primary
purpose of the Company is a holding
company.
Pre-tax profit
adjusted for
exceptional
items and certain
re-measurements
£646m
Adjusted PBT
Group materiality
*Component materiality range excludes parent company materiality
Group
Component
materiality
range*
£17m to £27m
Audit Committee
reporting
threshold £5m
Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and undetected
misstatements exceed the materiality for the Financial Statements as a whole. Group performance materiality was set at 70% of Group
materiality for the 2019 audit (2018: 70%). In determining performance materiality, we considered factors including our ability to rely on
internal controls across a number of areas of the audit including payroll, expenditure, meter to cash and revenue, and the willingness to
make process improvements as well as management’s willingness to correct errors identified and the stability of the finance team.
Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all individual audit differences in excess of £5 million (2018:
£5 million) and collectively all other errors above £2 million (2018: £3 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.
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An overview of the scope of our audit
Identification and scoping of components
The Group is organised by its different segments as outlined
in note 4. These segments contain a number of individual
businesses, and we use those businesses 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:
Centrica Consumer
• UK Home
• North America Home
• Connected Home Solutions
• Ireland
Centrica Business
• UK Business
• North America Business
• Energy Marketing & Trading
• Central Power Generation
Upstream
• Spirit Energy
• Centrica Storage
• Nuclear
Centrica Business Solutions (within the Centrica Business
segment) and Direct Energy Services US and Direct Energy
Services Canada (within the Centrica Consumer segment) were
individually not financially significant and as such we performed
specified audit procedures over relevant audit risks.
This scoping resulted in 96% of Group revenue, 90% of Group
profit before tax and 95% of Group net assets being subject
to audit.
The materiality levels of the components ranged from £17 million
to £27 million (excluding parent company materiality) depending
on the contribution of the component’s operations to the Group
and our assessment of risk relevant to each location.
Working with other auditors
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 throughout the year by the lead audit partner
or other senior members of the engagement team. Throughout
the year, the Group audit team has been directly involved in
overseeing the component audit planning and execution, through
frequent conversations, team meetings, 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 lead 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.
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 Financial
Statements 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, 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.
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 parent 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 parent company or to cease operations, or have
no realistic alternative but to do so.
Centrica plc Annual Report and Accounts 2019
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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.
Details of the extent to which the audit was considered capable of
detecting irregularities, including fraud and non-compliance with
laws and regulations are set out below.
A further description of our responsibilities for the audit of the
Financial Statements is located on the FRC’s website at: www.frc.
org.uk/auditorsresponsibilities. This description forms part of our
auditor’s report.
Extent to which the audit was considered capable
of detecting irregularities, including fraud
We identify and assess the risks of material misstatement of the
Financial Statements, whether due to fraud or error, and then
design and perform audit procedures responsive to those risks,
including obtaining audit evidence that is sufficient and
appropriate to provide a basis for our opinion.
Identifying and assessing potential
risks related to irregularities
In identifying and assessing risks of material misstatement in
respect of irregularities, including fraud and non-compliance
with laws and regulations, we considered the following:
• the nature of the industry and sector, control environment and
business performance including the design of the Group’s
remuneration policies, key drivers for Directors’ remuneration,
bonus levels and performance targets;
• Group’s own assessment of the risks that irregularities may
occur either as a result of fraud or error that was approved by
those charged with governance on 11 February 2019 and 10
February 2020;
• results of our enquiries of management, internal audit and the
Audit Committee about their own identification and assessment
of the risks of irregularities;
• any matters we identified having obtained and reviewed
the Group’s documentation of their policies and procedures
relating to:
– identifying, evaluating and complying with laws and
regulations and whether they were aware of any instances
of non-compliance;
– detecting and responding to the risks of fraud and whether
they have knowledge of any actual, suspected or alleged
fraud;
– the internal controls established to mitigate risks of fraud or
non-compliance with laws and regulations.
• the matters discussed among the audit engagement team
including significant component audit teams and involving
relevant internal specialists, including tax, valuations, pensions
and IT regarding how and where fraud might occur in the
Financial Statements and any potential indicators of fraud.
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As a result of these procedures, we considered the opportunities
and incentives that may exist within the organisation for fraud and
identified the greatest potential for fraud in the following areas:
(i) The presentation of the Group income statement, (ii) Revenue
and cost recognition for derivatives and (iii) Estimation of unbilled
energy supply revenue. In common with all audits under ISAs (UK),
we are also required to perform specific procedures to respond to
the risk of management override.
We also obtained an understanding of the legal and regulatory
framework that the Group operates in, focusing on provisions of
those laws and regulations that had a direct effect on the
determination of material amounts and disclosures in the Financial
Statements. The key laws and regulations we considered in this
context included the UK Companies Act, Listing Rules, Pensions
and Tax legislation.
In addition, we considered provisions of other laws and regulations
that do not have a direct effect on the Financial Statements but
compliance with which may be fundamental to the Group’s ability
to operate or to avoid a material penalty. These included the Office
of Gas and Electricity Markets (Ofgem) and Regulations levied by
the UK Financial Conduct Authority and Prudential Regulatory
Authority.
Audit response to risks identified
As a result of performing the above, we identified the presentation
of the Group income statement, revenue and cost recognition for
derivatives and estimation of unbilled energy supply revenue as
key audit matters related to the potential risk of fraud. The key
audit matters section of our report explains the matters in more
detail and also describes the specific procedures we performed in
response to those key audit matters.
In addition to the above, our procedures to respond to risks
identified included the following:
• reviewing the financial statement disclosures and testing to
supporting documentation to assess compliance with relevant
laws and regulations described above as having a different
effect on the Financial Statements;
• enquiring of management, the Audit Committee and in-house
legal counsel concerning actual and potential litigation and
claims;
• performing analytical procedures to identify any unusual or
unexpected relationships that may indicate risks of material
misstatement due to fraud;
• reading minutes of meetings of those charged with governance,
reviewing internal audit reports and reviewing correspondence
with relevant authorities where matters identified were
significant;
• in addressing the risk of fraud through management override of
controls, testing the appropriateness of journal entries and other
adjustments; assessing whether the judgements made in
making accounting estimates are indicative of a potential bias;
and evaluating the business rationale of any significant
transactions that are unusual or outside the normal course
of business.
We also communicated relevant identified laws and regulations
and potential fraud risks to all engagement team members
including internal specialists and significant component audit
teams, and remained alert to any indications of fraud or non-
compliance with laws and regulations throughout the audit.
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 the parent 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.
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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 parent company,
or returns adequate for our audit have not been received from branches
not visited by us; or
• the parent 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 by the Shareholders on 13 May 2019 to audit the Financial
Statements for the year ending 31 December 2019 and subsequent financial periods. The period of total uninterrupted engagement
including previous renewals and reappointments of the firm is three years, covering the years ending 31 December 2017, 31 December
2018 and 31 December 2019.
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).
Use of our report
This report is made solely to the Company’s members, 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 members 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 members as a body, for our audit work, for this report, or for the opinions we
have formed.
James Leigh FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP
Statutory Auditor
London, United Kingdom
12 February 2020
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Financial Statements
Group Income Statement
Year ended 31 December
Group revenue (i)
Cost of sales (i)
Re-measurement and settlement of energy contracts (i)
Gross profit/(loss)
Operating costs before exceptional items and credit
losses on financial assets
Credit losses on financial assets
Exceptional items – (impairment)/write-back of retained
exploration and production assets
Exceptional items – impairment of power assets and
provision for onerous power contracts
Exceptional items – impairment of Centrica
Home Solutions
Exceptional items – net gain/(loss) on disposal (ii)
Exceptional items – net pension change credit/(cost)
Exceptional items – restructuring costs
Operating costs
Share of (losses)/profits of joint ventures and associates,
net of interest and taxation
Group operating profit/(loss)
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
Notes
4
5
7
5
5, 17
7
7
7
7
7
7
5
6, 7
4
7, 8
7, 9
10
10
11
11
2019
Business
performance
£m
Exceptional
items and certain
re-measurements
£m
Results for
the year
£m
Business
performance
£m
26,825
(22,973)
–
3,852
(2,742)
(197)
–
–
–
–
–
–
(4,151)
7,178
(3,673)
(646)
–
–
22,674
(15,795)
(3,673)
3,206
(2,742)
(197)
(476)
(476)
(381)
(381)
(77)
35
152
(356)
(77)
35
152
(356)
27,381
(23,128)
–
4,253
(2,721)
(143)
–
–
–
–
–
–
(2,939)
(1,103)
(4,042)
(2,864)
(12)
901
(255)
646
(218)
428
419
9
(1)
(1,750)
–
(13)
(849)
(255)
(1,750)
(1,104)
219
1
(1,531)
(1,103)
(1,442)
(1,023)
(89)
(80)
3
1,392
(273)
1,119
(461)
658
631
27
2018 (restated) (i)
Exceptional
items and certain
re-measurements
£m
(4,077)
6,808
(2,931)
(200)
–
–
90
(46)
–
(16)
(41)
(170)
(183)
(22)
(405)
(139)
(544)
128
(416)
(448)
32
Pence
(17.8)
(17.8)
1.50
3.50
Results for
the year
£m
23,304
(16,320)
(2,931)
4,053
(2,721)
(143)
90
(46)
–
(16)
(41)
(170)
(3,047)
(19)
987
(412)
575
(333)
242
183
59
Pence
3.3
3.2
3.60
8.40
(i) The Group has amended the presentation of energy derivative contracts following an IFRIC agenda decision in March 2019 and a review of its trading businesses. Prior year results have
been restated accordingly. See note 1 for further details.
(ii) Gains and losses on disposals include any impairments and write-backs associated with the assets and businesses disposed of or classified as held for sale.
The notes on pages 119 to 195 form part of these Financial Statements.
114
Centrica plc Annual Report and Accounts 2019
Group Statement of Comprehensive Income
Year ended 31 December
(Loss)/profit for the year
Other comprehensive (loss)/income
Items that will be or have been reclassified to the Group Income Statement:
Impact of cash flow hedging (net of taxation)
Exchange differences on translation of foreign operations
Exchange differences reclassified to Group Income Statement on disposal
Items that will not be reclassified to the Group Income Statement:
Net actuarial (losses)/gains on defined benefit pension schemes (net of taxation)
Notes
S4
12
S4
Gains/(losses) on revaluation of equity instruments measured at fair value through other comprehensive
income (net of taxation)
Share of other comprehensive income/(loss) of joint ventures and associates, net of taxation
14, S4
Other comprehensive (loss)/income, net of taxation
Total comprehensive (loss)/income for the year
Attributable to:
Owners of the parent
Non-controlling interests
The notes on pages 119 to 195 form part of these Financial Statements.
2019
£m
(1,103)
(4)
(126)
(18)
2018
£m
242
10
106
–
(387)
657
2
(1)
29
(504)
(1)
771
(1,607)
1,013
(1,511)
(96)
953
60
S11
Centrica plc Annual Report and Accounts 2019
115
Financial Statements
Group Statement of Changes in Equity
1 January 2018
Adjustment on adoption of IFRS 9
Profit for the year
Other comprehensive income
Employee share schemes
Scrip dividend
Dividends paid to equity holders (note 11)
Other
31 December 2018
Loss for the year
Other comprehensive loss
Employee share schemes and other share
transactions
Scrip dividend (note 11)
Dividends paid to equity holders (note 11)
Distributions to non-controlling interests
Share
capital
£m
348
Share
premium
£m
2,121
Retained
earnings
£m
1,184
–
–
–
–
6
–
–
–
–
–
–
119
–
–
354
2,240
–
–
–
6
–
–
–
–
–
90
–
–
28
183
–
3
–
(673)
–
725
(1,023)
–
(10)
–
(561)
–
(869)
Other
equity
£m
(950)
(28)
–
770
27
–
–
7
(174)
–
(488)
53
–
–
–
Total
£m
2,703
–
183
770
30
125
(673)
7
3,145
(1,023)
(488)
43
96
(561)
–
(609)
1,212
Non-controlling
interests
£m
729
–
59
1
–
–
–
14
803
(80)
(16)
–
–
–
(124)
583
Total
equity
£m
3,432
–
242
771
30
125
(673)
21
3,948
(1,103)
(504)
43
96
(561)
(124)
1,795
31 December 2019
360
2,330
The notes on pages 119 to 195 form part of these Financial Statements.
116
Centrica plc Annual Report and Accounts 2019
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, and contract-related assets
Derivative financial instruments
Retirement benefit assets
Securities
Current assets
Trade and other receivables, and contract-related assets
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, and contract-related liabilities
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, and contract-related liabilities
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
2019
£m
31 December
2018
£m
Notes
13
14
15
15
16
17
19
22
24
17
18
19
24
24
12
19
20
21
24
12
16
19
20
21
22
24
25
S4
S11
3,133
1,306
1,455
2,578
553
154
493
56
131
9,859
4,839
431
1,320
115
124
1,342
8,171
124
8,295
18,154
(1,854)
(5,533)
(339)
(284)
(857)
(8,867)
(18)
(8,885)
(151)
(291)
(152)
(2,175)
(219)
(4,486)
(7,474)
4,124
1,661
1,720
2,736
532
119
537
223
239
11,891
5,543
459
1,141
187
68
1,268
8,666
–
8,666
20,557
(1,136)
(6,207)
(360)
(305)
(374)
(8,382)
–
(8,382)
(384)
(430)
(191)
(2,540)
(302)
(4,380)
(8,227)
(16,359)
(16,609)
1,795
360
2,330
(869)
(609)
1,212
583
1,795
3,948
354
2,240
725
(174)
3,145
803
3,948
The Financial Statements on pages 114 to 195, of which the notes on pages 119 to 195 form part, were approved and authorised for issue by
the Board of Directors on 12 February 2020 and were signed below on its behalf by:
Iain Conn
Group Chief Executive
Chris O’Shea
Group Chief Financial Officer
Centrica plc Annual Report and Accounts 2019
117
Financial Statements
Group Cash Flow Statement
Year ended 31 December
Group operating (loss)/profit including share of results of joint ventures and associates
Add back share of losses of joint ventures and associates, net of interest and taxation
Group operating (loss)/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
Cash contributions to defined benefit schemes in excess of service cost income statement charge
Employee share scheme costs
Unrealised losses arising from re-measurement of energy contracts
Exceptional charges reflected directly in operating profit
Operating cash flows before movements in working capital relating to business performance and payments relating to taxes
and exceptional charges
Increase in inventories
Decrease/(increase) in trade and other receivables and contract-related assets relating to business performance
(Decrease)/increase in trade and other payables and contract-related liabilities relating to business performance
Operating cash flows before payments relating to taxes and exceptional charges
Taxes paid
Payments relating to exceptional charges in operating costs
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
Receipt of sub-lease capital payments
Interest received
Sale/(purchase) of securities
Net cash flow from investing activities
Payments for own shares
Proceeds from sale of forfeited share capital
Distribution to non-controlling interests
Financing interest paid
Repayment of borrowings and capital element of leases
Equity dividends paid
Net cash flow from financing activities
Net decrease 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 119 to 195 form part of these Financial Statements.
118
Centrica plc Annual Report and Accounts 2019
Notes
6
S4
9
4
14
24
24
S4
24
24
24
2019
£m
(849)
13
(836)
2,299
(159)
–
(493)
41
432
237
2018
£m
987
19
1,006
1,019
(13)
(29)
(34)
43
241
56
1,521
2,289
(14)
518
(385)
1,640
(92)
(298)
1,250
(30)
236
(781)
8
(1)
1
3
11
50
(43)
(834)
831
2,243
(61)
(248)
1,934
(85)
20
(926)
26
(3)
22
–
15
(76)
(503)
(1,007)
–
2
(124)
(243)
(241)
(471)
(1,077)
(330)
1,128
(4)
794
1,342
(548)
(11)
–
–
(305)
(1,673)
(551)
(2,540)
(1,613)
2,737
4
1,128
1,268
(140)
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 S11).
In addition, for clarity, each note begins with a simple
introduction outlining its purpose.
1. Basis of preparation and 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 2019 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: certain oil and gas inventory, derivative
financial instruments, financial instruments designated at fair value
through profit or loss on initial recognition or required to be measured
at fair value through profit or loss or other comprehensive income 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 2019
From 1 January 2019, the following standards and amendments
are effective in the Group’s consolidated Financial Statements:
• IFRS 16: ‘Leases’;
• Amendments to IAS 19: ‘Plan amendment, curtailment or
settlement’;
• Amendments to IFRS 9, IAS 39 and IFRS 7: ‘Interest rate
benchmark reform’ (early adopted);
• Amendments to IFRS 9: ‘Prepayment features with negative
compensation’;
• Amendments to IAS 28: ‘Long-term interests in associates and
joint ventures’;
• Annual improvements to IFRS Standards 2015 – 2017 cycle; and
• IFRIC 23: ‘Uncertainty over income tax treatments’.
The impact of adoption of IFRS 16 and the key changes to the
accounting policies are disclosed below. Amendments to IAS 19
resulted in the re-measurement of pension scheme assets and
liabilities subsequent to the plan amendments during the year, as
reflected and detailed further in note 22.
Amendments to IFRS 9, IAS 39 and IFRS 7: ‘Interest rate benchmark
reform’ was issued in September 2019 and endorsed by the EU on
16 January 2020. The amendments modify specific hedge accounting
requirements to allow hedge accounting to continue for affected
hedges during the period of uncertainty before the affected hedging
instruments are amended as a result of the ongoing interest rate
benchmark reforms. The amendment impacts only hedging
instruments in fair value hedge relationships, as detailed further
at note S5.
Other amendments effective during the year did not impact the
consolidated Financial Statements.
IFRS 16
The Group adopted IFRS 16: ‘Leases’ from 1 January 2019. Adoption
represents a significant change in accounting for lease arrangements
in which the Group is a lessee as the standard mandates the on-
balance sheet recognition of all lease liabilities and a corresponding
right-of-use asset.
In accordance with the transition provisions of IFRS 16, for contracts
entered into before 1 January 2019, the requirements of the standard
have been applied only to contracts previously identified as leases in
accordance with IAS 17: ‘Leases’ or IFRIC 4: ‘Determining Whether
an Arrangement Contains a Lease’. For contracts entered into or
modified after that date, the definition of a lease in IFRS 16 has
been applied.
On application of IFRS 16 comparative information has not
been restated.
The Group utilised the recognition exemptions for both short-term
leases applicable to machinery, property and exploration and
production assets that have a lease term of 12 months or less and
for leases of low value assets, including IT equipment. The lease
payments associated with those leases are recognised as an expense
on a straight-line basis over the lease term. The Group has also
applied wherever applicable the following transition allowances:
• C10(a) application of a single discount rate to a portfolio of leases
with reasonably similar characteristics;
• C10(b) reliance on previous assessment of whether leases are
onerous in accordance with IAS 37: ‘Provisions, Contingent
Liabilities and Contingent Assets’ immediately before the date of
initial application as an alternative to performing an impairment
review;
• C10(c) election not to apply the measurement requirements of the
standard to leases where the term ends within 12 months of the
date of initial application;
• C10(d) exclusion of initial direct costs from the measurement of the
right-of-use asset at the date of initial application.
Centrica plc Annual Report and Accounts 2019
119
Financial Statements | Notes to the Financial Statements continued
1. Basis of preparation and summary of significant
new accounting policies and reporting changes
On transition, the Group measured lease liabilities for leases previously
assessed as operating at the present value of the remaining lease
payments and elected to measure the associated right-of-use assets
at an amount equal to the lease liability, adjusted by the amount of any
prepaid or accrued lease payments. For arrangements previously
assessed as finance leases, the asset and liability balances at
31 December 2018 were carried forward as the opening IFRS 16
balances and subsequently measured in accordance with the
new standard.
Application resulted in the recognition of total lease liabilities and right-
of-use assets on 1 January 2019 of £620 million and £463 million
respectively. £402 million of the lease liability is incremental to the IAS
17 position. An £8 million sub-lease asset was also recognised
on transition.
Right-of-use assets are presented in Property, plant and equipment
on the Group Balance Sheet. Lease liabilities are included in Current
and Non-current Borrowings.
The difference between the value of the lease liability and the right-of-
use asset predominantly relates to the Spalding tolling contract. The
legacy finance lease position reflected a lease liability of £99 million and
a fully impaired asset. An incremental £65 million lease liability was
recognised post transition on re-measurement of the contract to reflect
lease payments as defined under IFRS 16 and the associated asset
impaired to its recoverable amount of £31 million. The current year
impairment charge is offset by the release of the onerous contract
provision previously recognised in respect of this arrangement.
A reconciliation of the operating lease commitment at 31 December
2018 to the opening IFRS 16 lease liability is shown below, along with
a summary of the key judgements applied by the Group in
determining these opening positions:
Operating lease commitment at 31 December 2018
Finance lease liabilities at 31 December 2018
Net extension and termination options reasonably certain
to be exercised
Recognition of lease arrangements within joint operations
Re-measurement of Spalding tolling contract
Effect of discounting
IFRS 16 lease liability at 1 January 2019
£m
343
218
(2)
24
65
648
(28)
620
The weighted average incremental borrowing rate used by the Group
for IFRS 16 is 2%.
Extension and termination options
The existence and assessment of whether a renewal or termination
option is ‘reasonably certain’ to be exercised is particularly relevant
to the Group’s significant property portfolio. The Group considers,
amongst other factors, the type of property and its purpose, the
location of the property, the strategic direction of the business the
property is used by and how far into the future the option arises
when determining whether exercise is reasonably certain, along
with consideration of whether economic incentive to exercise the
option exists.
Where exercise of an option is considered to be reasonably certain,
the termination period or renewal period is excluded or included in the
lease term, respectively, when calculating the lease liability.
120
Centrica plc Annual Report and Accounts 2019
Identifying the customer for arrangements involving assets used
in joint operations
The Group holds interests in a number of joint operations within
its exploration and production business. The Group has applied
judgement in identifying the customer where a lease arrangement
is to be used by a jointly controlled operation.
If the leased asset is dedicated to a specific joint operation and its
usage is dictated by the joint operating agreement, the joint operation
is deemed the customer. In such instances:
• When the Group signs a lease agreement on behalf of a joint
operation and has primary responsibility for payments to the lessor,
the Group recognises 100% of the lease liability and a right-of-use
asset on its balance sheet. When the partner is obliged to
reimburse the Group for its share of lease payments, a sub-lease
receivable is recognised and an equal adjustment to the right-of-
use asset is made.
• When the partner has the primary responsibility for payments to the
lessor and the Group is obliged to reimburse its share of the lease
payments, a lease liability due to the partner and equal right-of-use
asset are recognised.
If the leased asset is not dedicated to a specific joint operation or
its usage is not dictated by the joint operating agreement of a joint
operation to which it is dedicated, the signatory to the lease
agreement is deemed the customer. If this is the Group, the lease
liability and right-of-use asset are recognised in full. If it is the partner,
no lease liability or right-of-use asset is recognised.
The comparative information continues to be reported in accordance
with IAS 17 and IFRIC 4.
Significant changes in the Group’s accounting policy applicable
from 1 January 2019
The Group recognises a right-of-use asset and a lease liability at
the lease commencement date. The right-of-use asset is initially
measured at cost, which comprises the initial amount of the lease
liability adjusted for any lease payments made at or before the
commencement date, plus any initial direct costs incurred and an
estimate of costs to dismantle and remove the underlying asset or
to restore the underlying asset or the site on which it is located, less
any lease incentives received.
The right-of-use asset is subsequently depreciated using the straight-
line method from the commencement date to the earlier of the end of
the useful life of the right-of-use asset or the end of the lease term.
The estimated useful lives of right-of-use assets are determined on the
same basis as those of property and equipment. In addition, the right-
of-use asset is periodically reduced by impairment losses, if any, and
adjusted for certain re-measurements of the lease liability.
The lease liability is initially measured at the present value of the lease
payments that are not paid at the commencement date, discounted
using the interest rate implicit in the lease or, if that rate cannot be
readily determined, the Group’s incremental borrowing rate.
Lease payments included in the measurement of the lease liability
comprise: fixed payments (including in-substance fixed payments),
variable lease payments that depend on an index or a rate (initially
measured using the index or rate as at the commencement date),
amounts expected to be payable under a residual value guarantee, the
exercise price under a purchase option that the Group is reasonably
certain to exercise, lease payments in an optional renewal period if the
Group is reasonably certain to exercise an extension option, and
penalties for early termination of a lease unless the Group is reasonably
certain not to terminate early. Variable lease payments that do not
depend on an index or rate are recognised in profit or loss in the period
in which the event or condition that triggers those payments occurs.
1. Basis of preparation and summary of significant
new accounting policies and reporting changes
re-measurements column) and reflected instead in a new ‘Re-
measurement and settlement of energy contracts’ line item.
In addition to the above, the new line item in the exceptional items and
certain re-measurements column of the Income Statement includes
fair value movements on those unrealised commodity derivative trades
that are prohibited from being treated as ‘own use’ (primarily due to
net settlement terms) but are economically related to our upstream
assets, capacity/off-take contracts or downstream demand, in line
with the policy detailed at note 2.
The effect of this re-presentation for 2018 is a reduction in revenue
and cost of sales of £4.1 billion and £6.8 billion respectively. There
is no impact on gross profit.
The exercise to determine the above restatement required the Group
to perform a detailed review of revenue and cost of sales across its
wider business. During this review, the Group specifically considered
the presentation of certain European commodity trades in the
business performance column. These trades (both purchases and
sales) have historically been presented gross as revenue or cost of
sales, however, as the primary purpose of the book is speculative,
and to ensure consistency with other similar activities undertaken by
the Group, net presentation is deemed more appropriate and
accordingly, trades are now presented net within revenue in the
business performance column. The prior year comparative has been
restated and whilst there is no impact on gross profit, business
performance revenue and business performance cost of sales have
been reduced by £2.3 billion.
The restatement arising from the IFRIC determination has been
applied to the business performance revenue and business
performance cost of sales results as adjusted for the presentation
of European commodity trades noted above.
The Group has redefined its operating segments during the year to
reflect the way in which the business is now organised. Operating
segments are now defined as:
• Centrica Consumer;
• Centrica Business; and
• Upstream.
The revised operating segments incorporate similar products and
services, as well as the major factors that influence the performance of
these products and services, such as regulatory environments within
Centrica Consumer, and access to commodity markets and trading
counterparties within Centrica Business, across different geographical
locations in which the Group operates. Further information on the
operating segments of the Group is shown at note 4.
The lease liability is subsequently measured at amortised cost using
the effective interest method. It is re-measured when there is a change
in future lease payments arising from a change in an index or rate, if
there is a change in the Group’s estimate of the amount expected to
be payable under a residual value guarantee, or if the Group changes
its assessment of whether it will exercise a purchase, lease-term
extension or termination option.
When the lease liability is re-measured in this way, a corresponding
adjustment is made to the carrying amount of the right-of-use asset
or is recorded in profit or loss if the carrying amount of the right-of-use
asset has been reduced to zero.
The Group recognises the lease payments associated with short-term
leases (leases expiring within twelve months from commencement)
and leases of low value assets (underlying asset value less than
£5,000) on a straight-line basis over the lease term.
(c) Standards and amendments that are issued but not
yet applied by the Group
The Group has not applied the following standards and amendments
in the consolidated Group Financial Statements as they are not yet
effective, and have not yet been endorsed by the EU:
• IFRS 17: ‘Insurance contracts’, effective from 1 January 2021; and
• Amendments to IFRS 3: ‘Business Combinations’, effective
1 January 2020.
IFRS 17: ‘Insurance contracts’, issued in May 2017, will not be
effective before 1 January 2021. 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, there is an accounting policy choice to account for these
contracts under IFRS 17 or IFRS 15, which is being evaluated as part
of the implementation project. Work is ongoing to determine the full
impact of application.
Management does not expect the future application of the IFRS 3
amendments, or other issued but not effective amendments to have
a material impact on the consolidated Financial Statements.
(d) Restatements
In March 2019, the International Financial Reporting Interpretations
Committee (IFRIC) issued an agenda decision on the Physical
Settlement of Contracts to Buy or Sell a Non-Financial Item. The
committee concluded that, for physical commodity trades within the
scope of IFRS 9: ‘Financial instruments’, entities should not transfer
previously recognised, unrealised marked-to-market movements to
different income statement line items upon realisation. As the Group
previously recognised fair value movements on the re-measurement
of certain energy contracts net within cost of sales up to the point of
realisation (when the underlying contract would be recognised, either
in revenue or cost of sales), presentation of the Group’s revenue and
cost of sales in the results for the year column has been amended
to comply with the requirements of the IFRIC agenda decision.
Comparative results have been represented with no impact on
gross profit.
The Group will continue to present the impact of realised positions
(and any unrealised fair value movements on proprietary trades) in
the scope of IFRS 9 in the business performance column as either
revenue or cost of sales, as this better reflects the underlying
economic performance of the Group’s trading, however the effect
of these positions will then be removed from revenue or cost of
sales through a separate column (the exceptional items and certain
Centrica plc Annual Report and Accounts 2019
121
Financial Statements | Notes to the Financial Statements continued
number of forward energy trades to protect and optimise the value of
its underlying production, generation, storage and transportation assets
and contracts (and similar capacity or off-take arrangements), 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 IFRS 9 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.
The effects of these certain re-measurements are presented within
either revenue or cost of sales when recognised in business
performance depending on the nature of the contract. They are
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 revenue in
the business performance column of the Group Income Statement.
The Group’s result for the year presents both realised and unrealised
fair value movements on all derivative energy contracts within the
‘Re-measurement and settlement of energy contracts’ line item.
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 (including
property rationalisation costs), significant onerous contract
charges/releases, debt repurchase costs, certain pension past service
credits/costs, asset impairments/write-backs, the tax effects of these
items and the effect of changes in UK upstream tax rates.
The Group distinguishes between business performance asset
impairments/write-backs and exceptional impairments/write-backs
on the basis of the underlying driver of the impairment, as well as the
magnitude of the impairment. Drivers that are deemed to be outside
of the control of the Group (e.g. commodity price changes) give rise
to exceptional impairments. Additionally, impairment charges that are
of a one-off nature (e.g. reserve downgrades or one-time change in
intended use of an asset) and significant enough value to distort the
underlying results of the business are considered to be exceptional.
Other impairments that would be expected in the normal course of
business, such as unsuccessful exploration activity (dry holes), are
reflected in business performance.
2. Centrica specific accounting measures
This section sets out the Group’s specific accounting
measures applied in the preparation of the consolidated
Financial Statements. These measures enable the users of the
accounts to understand the Group’s underlying and statutory
business performance separately.
(a) Use of adjusted performance measures
The Directors believe that reporting adjusted measures (margin, profit,
earnings per share and operating cash flow) provides additional useful
information on business performance and underlying trends. These
measures are used for internal performance purposes, are not defined
terms under IFRS and may not be comparable with similarly titled
measures reported by other companies.
Management uses adjusted gross margin and adjusted operating
profit to evaluate segment performance. They are defined as gross
margin/operating profit before:
• exceptional items; and
• certain re-measurements.
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 section (b) of this note
for further details.
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
• movements in variation margin and cash collateral that are included
in net debt;
but including:
• dividends received from joint ventures and associates.
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
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Centrica plc Annual Report and Accounts 2019
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
In addition to the judgements described above, 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.
Spirit Energy consolidation
During 2017, the Group acquired Bayerngas Norge’s exploration
and production business and combined this with the Group’s
existing exploration and production business to form the Spirit
Energy business (SE). The Group, through its board majority, can
control decisions that represent Board Reserved Matters and the
Directors consider that these rights provide control over the relevant
activities that most significantly influence the variable returns of the
SE business. The Group has concluded that it controls SE and
consequently SE is fully consolidated with a non-controlling interest
of 31%.
Metering contracts
In 2015, as part of the smart meter roll-out, the Group renewed meter
rental arrangements with third parties, with a further extension of one
contract in 2018. The Group assessed that these were not leases
under IAS 17 and IFRIC 4 because at inception of the contract there
were no specified assets, the Group did not have the right to
physically or operationally control the smart meters and other parties
took more than an insignificant amount of the output from the assets.
This assessment was grandfathered on adoption of IFRS 16.
One of the meter rental arrangements was renegotiated during 2019
and a reassessment of the contract was performed in accordance
with IFRS 16. On the basis that the asset has a predetermined use
and the Group neither has the right to operate the asset, nor was
involved in its design, the conclusion that these arrangements are
not leases continues to be appropriate.
LNG contracts
The Group is active in the liquified natural gas (LNG) market, both
procuring long-term LNG supply arrangements, and transacting in
shorter-term LNG cargoes. Contracts to buy and sell LNG are not
considered to meet the definition of a derivative as there is currently
no active market for LNG and contracts are not capable of being net
settled. As a result, they are accounted for on an accruals basis.
(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. Estimated revenue is
restricted to the amount the Group expects to be entitled to in
exchange for energy supplied. 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 Group Balance Sheet within Trade and other
receivables at 31 December 2019 was £1,342 million (2018:
£1,542 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 2019 are not significant. Changes
resulting from these management estimates can be material with
adjustments of up to £30 million having been made in the last few
years, although it could possibly be higher than these amounts
in the future.
Decommissioning costs
The estimated cost of decommissioning at the end of the producing
lives of gas and oil fields 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
the 2040s.
The level of provision held is also sensitive to the discount rate used to
discount the estimated decommissioning costs. The real discount rate
used to discount the decommissioning liabilities at 31 December 2019
is unchanged at 1.2%. A 1% change in this discount rate would
change the decommissioning liability by approximately £160 million.
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 208.
Centrica plc Annual Report and Accounts 2019
123
Financial Statements | Notes to the Financial Statements continued
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, along
with associated sensitivities, are 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. The Group is permitted to
recognise a pension scheme asset because it has an unconditional
right to a refund on any winding up of the schemes or if gradual
settlement of liabilities over time is assumed. Further details, including
sensitivities to these assumptions, are provided in note 22.
Brexit
The Group has considered the potential impact of a no-deal Brexit
as noted in the Strategic Report on page 38. Economists have
suggested that failure to agree a satisfactory trade deal could lead
to lower base interest rates and higher inflation, following a likely
weakening of sterling against other currencies. This would have an
impact on the Group’s pension scheme discount rate assumptions
(if high quality corporate bond yields follow base rates) and could
change forward energy prices (particularly in sterling terms). The
sensitivity of the Group’s pension schemes to a change in key
assumptions is disclosed in note 22.
The sensitivity of a change in forward energy prices and the impact
this would have on impairment of the Group’s assets is disclosed
in note 7. Macroeconomic impacts on existing trade receivable
recoverability are expected to be immaterial but could have a greater
impact on future trade receivable recoverability.
3. Critical accounting judgements and key sources
of estimation uncertainty
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 makes judgements in considering whether the carrying
amounts of its long-lived assets (principally Upstream gas and oil
assets, Nuclear investment (20% economic interest accounted for
as an investment in associate) and goodwill) or cash generating units
(CGUs) are recoverable and estimates their recoverable amounts.
Upstream 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 consider 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 the median price of a collection of third-
party comparator curves.
Further details of the assumptions used in determining the recoverable
amounts, the impairments booked during the year and sensitivity to the
assumptions are provided in note 7. Note that Spirit Energy was not
considered to be an asset held for sale as at the reporting date as its
disposal was not deemed to be highly probable within one year.
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 pre-tax cash flows derived from
the stations based on forecast power generation and power prices,
whilst taking account of outages and the possibility of life extensions.
Further details of the methodology, assumptions, impairment booked
during the year and related sensitivities are provided in note 7. Note
that the Nuclear investment was not considered to be an asset held
for sale as at the reporting date as its disposal was not deemed to
be highly probable within one year.
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 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, assumptions used in
determining the recoverable amounts and impairment booked during
the year are provided in notes 7, 15(b) and S2. Sensitivity to the
assumptions is also found in note 7 for goodwill allocated to impaired
CGUs in the year.
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Centrica plc Annual Report and Accounts 2019
4. Segmental analysis
The Group’s reporting segments are those used internally by management to run the business and make decisions. The Group’s
segments are based on products and services as well as the major factors that influence the performance of these products and
services across the geographical locations in which the Group operates.
(a) Segmental structure
During the year the Group’s reportable operating segments have been amended due to a change in the way management review and make
decisions about the business. Previously reported segments have now been amalgamated into the higher-level Centrica Consumer, Centrica
Business or Upstream areas (as shown below). The exception to this was Central Power Generation, where the Nuclear investment was
reallocated to Upstream, whilst the Spalding power station tolling contract remained within Centrica Business.
The types of products and services from which each reportable segment derived its income during the year are detailed below. Income sources
are reflected in Group revenue unless otherwise stated:
Segment
Centrica Consumer
Centrica Business
Upstream
(b) Revenue
Description
(i) The supply of gas and electricity to residential customers in the UK, North America and to residential and
commercial and industrial customers in the Republic of Ireland;
(ii) the installation, repair and maintenance of domestic central heating and cooling systems and related appliances
in the UK, North America and the Republic of Ireland, and the provision of fixed-fee maintenance/breakdown service
and insurance contracts in the UK and North America;
(iii) power generation in the Republic of Ireland; and
(iv) the supply of new technologies and energy efficiency solutions in all geographies in which the Group operates.
(i) The supply of gas and electricity and provision of energy-related services to business customers and trading
counterparties in the UK and North America;
(ii) 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;
(iii) the generation of power from the Spalding combined cycle gas turbine tolling contract and other thermal assets
in the UK; and
(iv) the procurement, trading and optimisation of energy in the UK and North America. This income stream is included
in re-measurement and settlement of energy contracts.
(i) The production and processing of gas and oil and the development of new fields, principally within Spirit Energy,
to maintain reserves in the UK and Europe; and
(ii) the generation of power from nuclear assets in the UK.
Gross segment revenue includes revenue generated from the sale of products and services 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
Centrica Business
Upstream
Group revenue included in business performance
Less: revenue arising on contracts in scope of IFRS 9 included in
business performance
Group Revenue
2019
Less
inter-
segment
revenue
£m
–
(217)
(963)
(1,180)
Gross
segment
revenue
£m
11,956
13,759
2,290
28,005
Group
revenue
£m
11,956
13,542
1,327
26,825
(4,151)
22,674
2018 (restated) (i)
Less
inter-
segment
revenue
£m
–
(211)
(1,418)
(1,629)
Gross
segment
revenue
£m
11,870
14,492
2,648
29,010
Group
revenue
£m
11,870
14,281
1,230
27,381
(4,077)
23,304
(i) Segmental revenues have been restated to reflect the new operating structure of the Group. Group revenue has been restated to exclude revenue from contracts in the scope of IFRS 9.
Group revenue and group revenue included in business performance have also been restated to include the net result of certain commodity purchases and sales trades that are deemed
to be speculative in nature. See note 1 for further details.
Centrica plc Annual Report and Accounts 2019
125
Financial Statements | Notes to the Financial Statements continued
4. Segmental analysis
The table below shows the Group revenue arising from contracts with customers, and therefore in the scope of IFRS 15, and revenue arising
from contracts in the scope of other standards. The key economic factors impacting the nature, timing and uncertainty of revenue and cash
flows are considered to be driven by the type and broad geographical location of the customer. The analysis of IFRS 15 revenue below reflects
these factors.
Year ended 31 December
Energy supply – UK and Republic of Ireland
Energy supply – North America
Energy services
Centrica Consumer
Energy supply – UK and Republic of Ireland
Energy supply – North America
Energy sales to trading and energy procurement counterparties
Other
Centrica Business
Oil and gas production
Upstream
Year ended 31 December
Energy supply – UK and Republic of Ireland
Energy supply – North America
Energy services
Centrica Consumer
Energy supply – UK and Republic of Ireland
Energy supply – North America
Energy sales to trading and energy procurement counterparties
Other
Centrica Business
Oil and gas production
Upstream
2019
Revenue from
fixed-fee service
and insurance
contracts in
scope of IFRS 4,
and leasing
contracts in
scope of IFRS 16
£m
Revenue from
contracts with
customers in
scope of IFRS 15
£m
Revenue in
business
performance
arising from
contracts in
scope of IFRS 9
£m
Group Revenue
included in
business
performance
£m
Group Revenue
£m
7,398
2,307
1,023
10,728
1,110
11,838
118
11,956
1,574
6,927
1,237
300
10,038
779
779
21,545
Revenue from
contracts with
customers in
scope of IFRS 15
£m
7,416
2,079
1,011
19
10,057
3,485
13,542
–
1,129
779
22,674
548
4,151
1,327
26,825
2018 (restated) (i)
Revenue from
fixed-fee service
and insurance
contracts in
scope of IFRS 4,
and leasing
contracts in
scope of IFRS 16
£m
Revenue in
business
performance
arising from
contracts in
scope of IFRS 9
£m
Group Revenue
included in
business
performance
£m
Group Revenue
£m
10,506
1,134
11,640
230
11,870
1,421
7,449
1,565
236
10,671
984
984
9
–
22,161
1,143
10,680
3,601
14,281
984
23,304
246
4,077
1,230
27,381
(i) Segmental revenues have been restated to reflect the new operating structure of the Group. Group revenue has been restated to exclude revenue from contracts in the scope of IFRS 9.
Group revenue and group revenue included in business performance have also been restated to include the net result of certain commodity purchases and sales trades that are deemed
to be speculative in nature. See note 1 for further details.
The Group applies the practical expedient in paragraph 121 of IFRS 15 and therefore does not disclose information related to the transaction
price allocated to remaining performance obligations on the basis that the Group recognises revenue from the satisfaction of the performance
obligations within energy supply contracts in accordance with Paragraph B16.
126
Centrica plc Annual Report and Accounts 2019
4. Segmental analysis
Geographical analysis of revenue and non-current assets
The Group monitors and manages performance by reference to its operating segments and not solely on a geographical basis. However,
provided below is an analysis of revenue and certain non-current assets by geography.
Year ended 31 December
UK
Republic of Ireland
Norway
United States of America
Canada
Rest of the world
Group revenue
(based on location of customer)
(restated) (i)
Non-current assets
(based on location of assets) (ii)
2019
£m
2018
£m
10,437
10,494
777
322
8,613
1,272
1,253
679
603
8,918
1,170
1,440
2019
£m
4,860
135
1,474
1,524
379
214
2018
£m
5,814
124
1,768
1,774
360
478
22,674
23,304
8,586
10,318
(i) Prior year revenue has been restated to exclude revenue arising from contracts in the scope of IFRS 9 and to include the net result of certain commodity purchases and sales trades that
are deemed to be speculative in nature. See note 1 for further details.
(ii) Non-current assets comprise goodwill, other intangible assets, PP&E, interests in joint ventures and associates and non-financial assets within trade and other receivables, and contract-
related assets.
(c) Adjusted gross margin and adjusted operating profit
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 business performance results of equity-accounted interests.
This note also details adjusted gross margin. Both measures are reconciled to their statutory equivalents.
Adjusted Gross Margin
Adjusted Operating Profit
(restated) (i)
Year ended 31 December
Centrica Consumer
Centrica Business
Upstream
Adjusted gross margin/adjusted operating profit
Certain re-measurements
Share of re-measurement of certain associates’ energy contracts (net of taxation)
Gross profit
Exceptional items in operating profit
Share of associates’ exceptional operating cost (net of taxation)
Total exceptional items and certain re-measurements included in operating profit
Operating (loss)/profit after exceptional items and certain re-measurements
(i) Segmental results have been restated to reflect the new operating structure of the Group. See note 1 for further details.
2019
£m
2,315
1,030
507
3,852
(646)
–
3,206
2018
£m
2,606
882
765
4,253
(200)
–
4,053
2019
£m
505
217
179
901
(646)
(1)
(1,103)
–
(1,750)
(849)
2018
£m
750
75
567
1,392
(200)
(20)
(183)
(2)
(405)
987
Centrica plc Annual Report and Accounts 2019
127
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 a summary of impairments of property, plant
and equipment and write-downs relating to exploration and evaluation assets.
Year ended 31 December
Centrica Consumer
Centrica Business
Upstream
Other (ii)
Depreciation and impairments of
property, plant and equipment
Amortisation, write-downs and
impairments of intangibles
2019
£m
(70)
(69)
(690)
(51)
(880)
2018 (restated) (i)
£m
(64)
(21)
(639)
(12)
(736)
2019
£m
2018 (restated) (i)
£m
(148)
(76)
(63)
(39)
(326)
(168)
(73)
(59)
(22)
(322)
(i) Segmental results been restated to reflect the new operating structure of the Group. See note 1 for further details.
(ii) The Other segment includes corporate functions, subsequently recharged.
(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
Centrica Business
Upstream
Other
Capital expenditure
Capitalised borrowing costs
Inception of new leases and movements in payables and prepayments related
to capital expenditure
Purchases of emissions allowances and renewable obligation certificates
Net cash outflow
Capital expenditure on property,
plant and equipment (note 13)
Capital expenditure on intangible
assets other than goodwill (note 15)
2019
£m
35
53
328
23
439
(11)
(41)
–
387
2018 (restated) (i)
£m
45
114
367
44
570
(14)
18
–
574
2019
£m
2018 (restated) (i)
£m
512
593
218
26
1,349
(2)
(20)
(933)
394
469
594
118
84
1,265
(4)
(55)
(854)
352
(i) Segmental results have been restated to reflect the new operating structure of the Group. See note 1 for further details.
(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
Centrica Business
Upstream
Adjusted operating cash flow
Dividends received from joint ventures and associates
UK pension deficit payments (note 22)
Payments relating to exceptional charges
Movements in margin and cash collateral included in net debt (note 24)
Net cash flow from operating activities
(i) Segmental results have been restated to reflect the new operating structure of the Group. See note 1 for further details.
128
Centrica plc Annual Report and Accounts 2019
2019
£m
2018 (restated) (i)
£m
913
282
635
1,830
(1)
(235)
(298)
(46)
1,019
214
1,012
2,245
(22)
(98)
(248)
57
1,250
1,934
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, capacity market and metering costs
Commodity costs
Depreciation, amortisation, impairments and write-downs
Employee costs (ii)
Other direct costs (ii)
Cost of
sales and
settlement of
certain energy
contracts
£m
(5,228)
(14,409)
(674)
(597)
(2,065)
2019
2018
Operating
costs
£m
Total
costs
£m
Cost of
sales and
settlement of
certain energy
contracts
(restated) (i)
£m
Operating
costs (restated)
(ii)
£m
–
–
(5,228)
(4,671)
(14,409)
(15,000)
(532)
(1,291)
(919)
(1,206)
(1,888)
(2,984)
(661)
(689)
(2,107)
–
–
(397)
(1,265)
(1,059)
Total
costs
£m
(4,671)
(15,000)
(1,058)
(1,954)
(3,166)
Costs included within business performance before credit
losses on financial assets
(22,973)
(2,742)
(25,715)
(23,128)
(2,721)
(25,849)
Credit losses on financial assets (net of recovered amounts) (note 17)
–
(197)
(197)
–
(143)
(143)
Total costs included within business performance
(22,973)
(2,939)
(25,912)
(23,128)
(2,864)
(25,992)
Adjustment for gross cost of settled energy contracts in the
scope of IFRS 9 (i)
Exceptional items and re-measurement and settlement of energy
contracts (note 7)
Total costs within Group operating profit
7,178
–
7,178
6,808
–
6,808
(3,673)
(19,468)
(1,103)
(4,042)
(4,776)
(2,931)
(183)
(3,114)
(23,510)
(19,251)
(3,047)
(22,298)
(i) Prior year results have been restated to exclude costs related to certain commodity trades that are deemed to be proprietary in nature. These costs are now presented net in revenue
within business performance. Comparatives have also been restated to present net costs arising from the settlement of all energy contracts in the scope of IFRS 9 in the Group Income
Statement and in the above analysis.
(ii) Employee costs and other direct costs have been restated to reflect amounts charged to exceptional items and amounts capitalised.
(b) Employee costs
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 included in exceptional items (ii)
Employee costs recognised in business performance in the Group Income Statement
2019
£m
2018 (restated) (i)
£m
(1,630)
(1,618)
(165)
(191)
(41)
(151)
(207)
(43)
(2,027)
(2,019)
40
99
44
21
(1,888)
(1,954)
(i) Employee costs have been restated to reflect amounts charged to exceptional items. As part of this exercise, the Group has also restated capitalised employee costs.
(ii) Employee costs included in exceptional items includes £65 million for one-off payments to facilitate pension scheme changes. See note 7.
(c) Average number of employees during the year
Year ended 31 December
Consumer
Business
Upstream
Group Functions
(i) Comparatives have been restated to reflect the new operating structure of the Group. See note 1 for further details.
2019
Number
2018 (restated) (i)
Number
21,127
23,521
4,116
909
2,995
4,239
913
3,107
29,147
31,780
Centrica plc Annual Report and Accounts 2019
129
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%.
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 2019 principally arises from its interest in Nuclear
- Lake Acquisitions Limited, an associate, reported in the Upstream segment.
Year ended 31 December
Income
Expenses before exceptional items and
certain re-measurements
Exceptional items and re-measurement of certain contracts
Operating (loss)/profit
Financing costs
Taxation on profit/(loss)
Share of post-taxation results of joint ventures
and associates
2019
Share of
exceptional
items and
certain re-
measurements
£m
Share of
business
performance
£m
505
(508)
–
(3)
(10)
1
(12)
–
–
(1)
(1)
–
–
(1)
Share of
results for
the year
£m
505
Share of
business
performance
£m
489
(508)
(486)
(1)
(4)
(10)
1
(13)
–
3
(3)
3
3
2018
Share of
exceptional
items and
certain re-
measurements
£m
–
–
(23)
(23)
–
1
(22)
Share of
results for
the year
£m
489
(486)
(23)
(20)
(3)
4
(19)
Further information on the Group’s investments in joint ventures and associates is provided in notes 14 and S10.
130
Centrica plc Annual Report and Accounts 2019
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, pension change costs or credits, significant debt
repurchase costs and asset write-downs/impairments and write-backs.
(a) Exceptional items
Year ended 31 December
(Impairment)/write-back of retained exploration and production assets (i)
Impairment of power assets and provision for onerous power contracts (ii)
Impairment of Centrica Home Solutions (formerly Connected Home) (iii)
Restructuring costs (iv)
Net pension change credit/(costs) (v)
Net gain/(loss) on significant disposals (including impairment of assets sold or held for sale) (vi)
Exceptional items included within Group operating profit
Debt repurchase costs included within financing costs
Exceptional items included within Group profit before taxation
Net taxation on exceptional items (note 9)
Net exceptional items after taxation
2019
£m
(476)
(381)
(77)
(356)
152
35
(1,103)
–
(1,103)
116
(987)
2018
£m
90
(46)
–
(170)
(43)
(16)
(185)
(139)
(324)
89
(235)
(i)
(ii)
(iii)
In the Upstream segment, impairments of exploration and production assets have been booked relating to the value of certain UK, Norwegian and Danish gas and oil fields. Predominantly
due to the impact of a reduction in near-term liquid prices and long-term price forecasts, together with the conclusion that certain field reserve levels were not sufficient for development, there
has been a write-off of £508 million (post-tax £406 million). Also included is the reduction of decommissioning provisions (pre-tax £32 million, post-tax £20 million) related to assets previously
impaired through exceptional items. Separately, in the taxation line, the net write-off of a deferred tax asset associated with exploration and production investment allowance,
decommissioning carry back and PRT has also been recorded (post-tax £35 million) related to these exceptional items.
In the Upstream segment, an impairment of the nuclear investment has been booked as a result of a reduction in price forecasts, and availability issues at Hunterston and Dungeness.
The pre and post-tax impact was £372 million. Similarly, in the Centrica Business segment, an impairment of a battery storage asset has also been recorded as a result of forecast price
reductions. This gave rise to a charge of £9 million (post-tax £7 million).
In the Consumer segment, following the strategic decision to refocus Centrica Home Solutions activity to the UK and Ireland and an updated profitability forecast, the Group has reflected
a charge of £77 million, including inventory write-downs of £22 million, asset impairments (including goodwill) of £48 million and onerous contract provisions and other costs of £7 million.
The post-tax impact was £69 million.
(iv) The continuation of phase 2 of the Group’s cost efficiency programme has seen the Group recognise restructuring costs principally related to redundancy (excluding pension strains), change
resource, consultancy, property rationalisation and other transformational activity, including member compensation payments from renegotiating the UK defined benefit pension arrangements
to update contribution rates, salary caps and benefits, in the first half of 2019. The post-tax impact was £288 million.
(v) A pension past service credit of £260 million (post-tax £216 million) has been recognised predominantly related to a rule amendment to the UK defined benefit pension scheme arrangements
to offer members an option to level up their ongoing pension if they retire before the statutory retirement age. This has been offset by pension strain costs associated with redundancy of
£108 million (post-tax £89 million). In 2018, £2 million of the pension past service cost related to the Nuclear associate schemes.
(vi) The disposals of Clockwork, and Valemon and Sindre, together with the King’s Lynn power station transfer to held for sale, resulted in a net gain of £5 million (post-tax £13 million). Trinidad
and Tobago exploration and production assets formerly owned by the Group have passed the final investment decision hurdle under their new owner. This has resulted in the receipt of
previously unrecognised contingent consideration. The pre and post-tax impact was £30 million. See note 12 for further details.
Centrica plc Annual Report and Accounts 2019
131
Financial Statements | Notes to the Financial Statements continued
7. Exceptional items and certain re-measurements
(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 gains/(losses) arising on delivery of contracts
Net losses arising on market price movements and new contracts
Net re-measurements included within gross profit
Net losses arising on re-measurement of certain associates’ contracts (net of taxation)
Net re-measurements included within Group operating profit
Taxation on certain re-measurements (note 9)
Net re-measurements after taxation
Year ended 31 December
Total re-measurement and settlement of derivative energy contracts
Less: IFRS 9 business performance revenue
Less: IFRS 9 business performance cost of sales
Unrealised certain re-measurements recognised in relation to energy contracts included in gross profit
2019
£m
63
(709)
(646)
(1)
(647)
103
(544)
2019
£m
(3,673)
(4,151)
7,178
(646)
2018
£m
(127)
(73)
(200)
(20)
(220)
39
(181)
2018
£m
(2,931)
(4,077)
6,808
(200)
(c) Impairment accounting policy, process and sensitivities
The information provided below relates to the assets and CGUs (or groups of CGUs) that have been subject to impairment during the year.
Details of the Group’s wider impairment assessment and measurement policy are provided in note S2.
Exceptional impairments of assets measured on a FVLCD basis
Segment
Upstream
Asset/CGU (or group of CGUs)
Basis for impairment
UK Shale Assets and Danish fields Further field development deemed uneconomic
UK and Norwegian fields
Significant deterioration in forecast NBP
Valemon, Sindre (i)
Reclassification to disposal group held for sale
Centrica Business King’s Lynn power station
Reclassification to disposal group held for sale
Other
Property
Change in usage of assets (including right-of-use assets)
Centrica Consumer
Software intangible asset
Sale of business (Clockwork) to which intangible
asset relates
(i) The recoverable amounts are stated prior to disposal.
Recoverable
amount
£m
FV hierarchy
Impairment
£m
–
157
33
101
31
5
N/A
L3
N/A
L2
L2/L3
L3
310
198
49
14
34
59
Fair value less costs of disposal (FVLCD) is determined by discounting the post-tax cash flows expected to be generated by the assets or CGU,
net of associated selling costs, taking into account those assumptions that market participants would use in estimating fair value. Post-tax cash
flows used in the FVLCD calculation are based on the Group’s Board-approved business plans and strategic shape assumptions, together with,
where relevant, long-term production and cash flow forecasts.
Upstream oil and gas assets
For Upstream oil and gas assets 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 (i.e. outside the active period for each
commodity), prices are determined based on the median of third-party market comparator curves. 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. Price assumptions are critical and use
liquid market prices for 2020 to 2022, blended over a two-year period to long-term price forecasts. Long-term price assumptions derived from
third-party market comparator median curves are deemed best aligned with pricing that a reasonable market participant would use, due to
inclusion of certain data points, e.g. the impact of climate change.
The future post-tax cash flows are discounted using a post-tax nominal discount rate of 9.0% (2018: 9.5%).
132
Centrica plc Annual Report and Accounts 2019
7. Exceptional items and certain re-measurements
As forward commodity prices are a key assumption in the valuations, average prices and associated impairment sensitivities for the Group’s
upstream oil and gas assets for the relevant periods are shown below.
Five-year liquid and blended-
period price (i)
Ten-year long-term
average price (i)
2020 – 2024
2019 – 2023
2025 – 2034
2024 – 2033
2019
43
62
2018
53
62
2019
58
81
2018
67
96
Change in post-tax headroom/(impairment) (ii)
+10%
-10%
2019
£m
180
2018
£m
128
2019
£m
2018
£m
(197)
(97)
NBP (p/th)
Brent ($/bbl)
(i) Prices are shown in real terms.
(ii) Sensitivity relates to Upstream exploration and production assets and CGUs, there is no impact on goodwill.
Exceptional impairments of assets measured on a VIU basis
Segment
Upstream
Asset/CGU (or group of CGUs) Basis for impairment
Nuclear
Reduction in baseload power prices and outages at Hunterston/Dungeness
Centrica Consumer Centrica Home Solutions
Strategic refocusing of activity onto UK and Ireland and reduction in profitability
Centrica Business Battery storage
Decline in forecast prices
(i)
Impairment of Centrica Home Solutions CGU includes £31 million impairment of goodwill.
Recoverable
amount
£m
Impairment (i)
£m
1,289
123
20
372
48
9
Nuclear
A VIU calculation has been used to determine the recoverable amount of the Group’s investment in Nuclear. The post-tax cash flows
incorporated in the valuation are derived from board approved forecasts, based on the expected generation profile of the fleet for its remaining
life. Assumptions include forward commodity prices, capacity rates, transportation and fuel costs and balancing system charges. Price
assumptions are based on liquid market prices for 2020 to 2022 and then blended over a two-year period to long-term price forecasts. Long-
term price assumptions derived from third-party market comparator median curves are used due to alignment with pricing that a reasonable
market participant would use, and the inclusion of certain data points (e.g. impact of climate change).
The VIU calculation assumes that the life of Sizewell is extended to 2055, reflecting a 20-year extension. In the absence of this extension,
the Group’s investment in Nuclear would be impaired by a further £311 million.
The asset is particularly sensitive to changes in commodity price and the table below details average prices for the relevant periods and
associated sensitivities.
Five-year liquid and blended-
period price (i)
Ten-year long-term
average price (i)
2020 – 2024
2019 – 2023
2025 – 2034
2024 – 2033
Change in pre/post-tax headroom/(impairment)
+10%
-10%
2019
£/MWh
47
2018
£/MWh
51
2019
£/MWh
59
2018
£/MWh
63
2019
£m
376
2018
£m
365
2019
£m
(376)
2018
£m
(365)
Baseload power
(i) Prices are shown in real terms.
The VIU calculation is also sensitive to changes in output assumptions. A 1% increase in unplanned outages across the nuclear fleet would
increase impairment by £32 million.
The future pre-tax cash flows generated by the investment in the associate are discounted using a pre-tax nominal discount rate of 8.4%
(2018: 9.2%).
Centrica Home Solutions
The VIU calculation for the Centrica Home Solutions CGU incorporates growth assumptions to generate positive cash inflows of £21 million
in 2024, and includes a terminal value based on this final year. If the 2024 cash flow reduced by 10%, with a consequent fall in terminal value,
a further impairment of £14 million would be required.
The discount rate and inflation rate used in the above calculations are determined in the same manner as the rates used in the VIU calculations
described in note S2.
Other impairments
Other impairments totalling £99 million (2018: £54 million) have been recognised in the business performance column of the Group Income
Statement within the Upstream segment. These relate to oil and gas field impairments incurred in the ordinary course of business, such as
dry hole write-offs, and fields where no further development is planned.
The recoverable amounts of these assets have been calculated as £nil on the basis of FVLCD.
Centrica plc Annual Report and Accounts 2019
133
Financial Statements | Notes to the Financial Statements continued
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
Interest cost on lease liabilities (2018: finance leases)
Net gains on revaluation
Notional interest arising from discounting
Capitalised borrowing costs (i)
Financing (cost)/income before exceptional items
Exceptional items (note 7)
(Cost)/income
Financing
costs
£m
2019
Investment
income
£m
–
(236)
(15)
(251)
–
(34)
(285)
13
(272)
–
(272)
17
–
–
17
–
–
17
–
17
–
17
Financing
costs
£m
2018
Investment
income
£m
–
(250)
(12)
(262)
–
(56)
(318)
18
(300)
(139)
(439)
20
–
–
20
7
–
27
–
27
–
27
Total
£m
17
(236)
(15)
(234)
–
(34)
(268)
13
(255)
–
(255)
Total
£m
20
(250)
(12)
(242)
7
(56)
(291)
18
(273)
(139)
(412)
(i) Borrowing costs have been capitalised using an average rate of 4.77% (2018: 4.75%).
134
Centrica plc Annual Report and Accounts 2019
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 the Group’s 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 (i)
Total current tax
Deferred tax
Origination and reversal of temporary differences – UK
UK petroleum revenue tax
Origination and reversal of temporary differences – non-UK
Adjustments in respect of prior years – UK
Adjustments in respect of prior years – non-UK
Total deferred tax
Total taxation on profit/(loss) (ii)
2019
Exceptional
items
and certain
re-measurements
£m
Business
performance
£m
Results for
the year
£m
Business
performance
£m
2018
Exceptional
items
and certain
re-measurements
£m
Results for
the year
£m
(37)
17
(147)
16
(9)
(160)
15
(5)
(28)
(34)
(6)
(58)
(218)
37
–
(32)
(34)
–
(29)
15
22
163
34
14
248
219
–
17
(179)
(18)
(9)
(189)
30
17
135
–
8
190
1
(44)
50
(278)
17
(16)
(271)
(70)
(1)
(120)
(11)
12
(190)
(461)
49
–
9
2
1
61
51
(14)
32
(3)
1
67
128
5
50
(269)
19
(15)
(210)
(19)
(15)
(88)
(14)
13
(123)
(333)
(i) The net adjustments in respect of prior years include uncertain tax provision credits of £nil (2018: £13 million).
(ii) Total taxation on profit/(loss) excludes taxation on the Group’s share of profits of joint ventures and associates.
UK tax rates
Most activities in the UK are subject to the standard rate for UK corporation tax of 19% (2018: 19%). Upstream gas and oil production activities
are taxed at a rate of 30% (2018: 30%) plus a supplementary charge of 10% (2018: 10%) to give an overall rate of 40% (2018: 40%). Certain
upstream assets in the UK under the petroleum revenue tax (PRT) regime have a current rate of 0% (2018: 0%).
The UK corporation tax rate is scheduled to reduce to 17% from 1 April 2020. At 31 December 2019, the relevant UK deferred tax assets and
liabilities included in these consolidated Group Financial Statements were based on this substantively-enacted reduced rate having regard to
their reversal profiles.
Non-UK tax rates
Norwegian upstream profits are taxed at the standard rate of 22% (2018: 23%) plus a special tax of 56% (2018: 55%) resulting in an aggregate
tax rate of 78% (2018: 78%). Profits earned in the US are taxed at a Federal rate of 21% (2018: 21%) together with state taxes at various rates
dependent on the state. Taxation for other jurisdictions is calculated at the rate prevailing in those respective jurisdictions, with rates ranging
from 12.5% in the Republic of Ireland to 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.
Centrica plc Annual Report and Accounts 2019
135
Financial Statements | Notes to the Financial Statements continued
9. Taxation
(b) Factors affecting the tax charge
The Group is expected to continue carrying out the majority of its business activities 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
Add back/(deduct) share of losses/(profits) of joint
ventures and associates, net of interest and taxation
Tax on profit at standard UK corporation tax rate of 19%
(2018: 19%)
Effects of:
Depreciation/impairment on non-qualifying assets
(including write-backs)
Higher rates applicable to upstream profits/losses
Non-UK tax rates
Upstream investment incentives
Movements in uncertain tax provisions
Other
Taxation on profit/(loss)
Less: movement in deferred tax
Total current tax
2019
Exceptional
items
and certain
re-measurements
£m
Business
performance
£m
Results for
the year
£m
Business
performance
£m
646
12
658
(1,750)
(1,104)
1,119
1
13
(1,749)
(1,091)
(3)
1,116
2018
Exceptional
items
and certain
re-measurements
£m
(544)
22
(522)
Results for
the year
£m
575
19
594
(125)
332
207
(212)
99
(113)
(31)
(107)
15
37
8
(15)
(218)
58
(160)
(229)
42
112
(32)
–
(6)
219
(248)
(29)
(260)
(65)
127
5
8
(21)
1
(190)
(189)
(34)
(269)
(27)
47
(12)
46
(461)
190
(271)
(3)
6
4
33
–
(11)
128
(67)
61
(37)
(263)
(23)
80
(12)
35
(333)
123
(210)
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 Group has applied IFRIC 23: ‘Uncertainty over income tax treatments’ during the year. The interpretation requires consideration of the
likelihood that the relevant taxing authority will accept an uncertain tax treatment in order to determine the measurement basis. The value
is calculated in accordance with the rules of the relevant tax authority when acceptance is deemed probable.
The principal element of the Group’s uncertain tax position 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 and therefore in order to reflect the effect of uncertainties, the provisions represent
management’s assessment of the most likely outcome of each issue. The assessment is reviewed and updated on a regular basis.
136
Centrica plc Annual Report and Accounts 2019
9. Taxation
(c) Factors that may affect future tax charges
The Group’s effective tax rates are impacted by changes to the mix of activities and production across the territories in which it operates.
Effective tax rates may also fluctuate where profits and losses cannot be offset for tax purposes. 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: 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.
The Group’s US profits are subject to a Federal rate of 21% plus applicable state taxes.
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. The Group does not expect its tax position to be impacted materially. Local tax laws and rates are
subject to change, which may have a significant impact on the Group’s future tax charges.
In the medium term, the Group’s effective tax rate is expected to remain above the UK statutory rate, reflecting higher rates applicable to 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
Included in the following lines of the Group Cash Flow Statement:
Taxes paid in cash flows from operating activities
Sale of businesses in cash flows from investing activities
UK
£m
18
(17)
1
(43)
(68)
(111)
2019
Non-UK
£m
188
–
188
239
–
239
Total
£m
206
(17)
189
196
(68)
128
92
36
2018
Non-UK
£m
284
–
284
99
–
99
UK
£m
(24)
(50)
(74)
18
(56)
(38)
Total
£m
260
(50)
210
117
(56)
61
61
–
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 (2018 and 2019 saw net refunds in the UK); and
• PRT refunds are based on results in the preceding six-monthly PRT period, therefore PRT cash movements will reflect refunds on
a six-month delay.
Centrica plc Annual Report and Accounts 2019
137
Financial Statements | Notes to the Financial Statements continued
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 loss attributable to equity holders of the Company for the year of
£1,023 million (2018: £183 million profit) by the weighted average number of ordinary shares in issue during the year of 5,758 million
(2018: 5,623 million). The number of shares excludes 22 million ordinary shares (2018: 40 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.
Information presented for diluted and adjusted diluted earnings per ordinary share uses the weighted average number of shares as adjusted for
44 million (2018: 48 million) potentially dilutive ordinary shares as the denominator, unless it has the effect of increasing the profit or decreasing
the loss attributable to each 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 losses after taxation (notes 2 and 7) (i)
Earnings – adjusted basic
Earnings – diluted
Earnings – adjusted diluted
2019
2018
Pence per
£m
ordinary share
(1,023)
862
580
419
(17.8)
15.0
10.1
7.3
(1,023)
(17.8)
£m
183
266
182
631
183
Pence per
ordinary share
3.3
4.7
3.2
11.2
3.2
419
7.2
631
11.1
(i) Net exceptional loss after taxation and certain re-measurement losses after taxation are adjusted to reflect the share attributable to non-controlling interests.
138
Centrica plc Annual Report and Accounts 2019
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
2019
Pence per
share
Date of
payment
8.40 27 Jun 2019
1.50 21 Nov 2019
£m
474
87
561
2018
Pence per
share
Date of
payment
8.40 28 Jun 2018
3.60 22 Nov 2018
£m
470
203
673
(i)
Included within the prior year final dividend are forfeited dividends of £5 million (2018: £1 million) older than 12 years that were written back in accordance with Group policy.
The Directors propose a final dividend of 3.50 pence per ordinary share (totalling £204 million) for the year ended 31 December 2019. The
dividend will be submitted for formal approval at the Annual General Meeting to be held on 11 May 2020 and, subject to approval, will be paid
on 22 June 2020 to those shareholders registered on 11 May 2020.
In prior years the Company offered a scrip dividend alternative to its shareholders. £96 million of the £474 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 94 pence per share resulting in the issue of 102 million new shares and £90 million of share premium. The scrip dividend alternative is no
longer offered.
The Group has sufficient distributable reserves to pay dividends to its ultimate shareholders. Distributable reserves are calculated on an
individual legal entity basis and so, despite the consolidated Group Balance Sheet containing negative retained earnings, 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 197. At 31 December 2019, Centrica plc’s company-only distributable reserves were
c.£2.7 billion. On an annual basis, the distributable reserve levels of the Group’s subsidiary undertakings are reviewed and dividends paid
up to Centrica plc to replenish its reserves.
Centrica plc Annual Report and Accounts 2019
139
Financial Statements | Notes to the Financial Statements continued
12. Acquisitions, disposals and disposal groups classified as held for sale
This section details acquisitions and disposals made by the Group.
(a) 2019 business combinations and asset acquisitions
On 1 July 2019 the Group acquired SmartWatt Energy Inc., a leading energy services and solutions company in North America, for
consideration of $37 million (£29 million).
Acquisition-related costs have been charged to ‘operating costs before exceptional items and credit losses on financial assets’ in the Group
Income Statement for an aggregated amount of £1 million.
(b) 2018 business combinations – measurement period adjustments
There have been no material updates to the fair value of assets and liabilities recognised for businesses acquired in 2018.
(c) Disposals
On 30 April 2019 the Group disposed of Clockwork Home Services in North America. The business comprised a series of franchises, company-
owned stores and brands, including One Hour Heating & Air Conditioning, Benjamin Franklin Plumbing and Mister Sparky, to Apax Partners and
was part of the Centrica Consumer segment.
Gross consideration of $300 million (£231 million) has predominantly been reduced by working capital and transaction costs, to generate net
consideration of $279 million (£215 million). The cash inflow from the disposal is presented net of tax paid in the Group Cash Flow Statement.
Property, plant and equipment
Brand intangible asset
Other net assets
Attributable goodwill
Net assets disposed of
Consideration received
Recycling of foreign currency translation reserves on disposal
Impairment of intangible asset
Other directly-attributable costs of disposal
Profit on disposal before taxation
Taxation
Profit on disposal after taxation
Clockwork Home
Services
£m
7
12
9
76
104
215
111
18
(59)
(2)
68
(27)
41
The Group also disposed of Norwegian exploration and production assets, Valemon and Sindre, part of the Upstream segment, during the year.
Proceeds of £33 million were equal to the carrying value of the assets disposed of subsequent to the recognition of a pre-tax impairment charge
of £49 million. The impairment charge is included in net gain on significant disposals within exceptional items.
None of the disposals are shown as discontinued operations on the face of the Group Income Statement as they do not represent a separate
major line of business or geographical area of operation that is material to the Group’s results.
The Group received £30 million of previously unrecognised contingent consideration in respect of the historic disposal of Trinidad and
Tobago assets.
There were no other material disposals.
140
Centrica plc Annual Report and Accounts 2019
12. Acquisitions, disposals and disposal groups classified as held for sale
(d) Assets and liabilities of disposal groups held for sale
On 23 December 2019 the Group agreed to sell its 382MW King’s Lynn combined cycle gas turbine (CCGT) power station to RWE Generation
for headline consideration of £105 million, adjusted for final working capital, based on a valuation date of 31 December 2019. These interests
are currently reported in the Centrica Business segment. An impairment charge of £14 million was recorded against the assets of the disposal
group and is included in net gain on significant disposals within exceptional items. The transaction completed on 12 February 2020.
Also included in assets and liabilities of disposal groups held for sale is a net amount of £5 million related to an exploration and production field.
Non-current assets
Current assets
Assets of disposal groups classified as held for sale
Current liabilities
Non-current liabilities
Liabilities of disposal groups classified as held for sale
Net assets of disposal groups classified as held for sale
Exploration and
production field
£m
King’s Lynn
power station
£m
11
–
11
(1)
(5)
(6)
5
111
2
113
(5)
(7)
(12)
101
Total
£m
122
2
124
(6)
(12)
(18)
106
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.
Centrica plc Annual Report and Accounts 2019
141
Financial Statements | Notes to the Financial Statements continued
13. Property, plant and equipment
PP&E includes significant investment in power stations and gas and liquid production assets. Once operational, all assets are
depreciated over their useful lives.
(a) Carrying amounts
Cost
2019
2018
Land and
buildings
£m
Plant,
equipment
and vehicles
£m
Power
generation
£m
Gas
production
and storage
£m
Land and
buildings
£m
Plant,
equipment
and vehicles
£m
Power
generation
£m
Gas
production
and storage
£m
Total
£m
Total
£m
1 January prior to adoption of IFRS 16
75
568
1,059
15,476
17,178
64
566
950
15,428
17,008
Right-of-use assets recognised on adoption
of IFRS 16 (note 1)
Lease modifications and re-measurements
Additions and capitalised borrowing
costs (note 4)
Acquisitions
Transfers
Disposals, retirements and transfers to
disposal groups held for sale
Decommissioning liability and dilapidations
revisions and additions (note 21)
Exchange adjustments
31 December
Accumulated depreciation and
impairment
1 January
Charge for the year
Impairments/(write-backs)
Disposals, retirements and transfers
to disposal groups held for sale
Exchange adjustments
31 December
NBV at 31 December
254
15
19
1
–
–
1
(4)
26
(39)
49
–
(24)
65
–
44
–
–
33
–
327
–
5
378
(24)
439
1
(19)
(45)
(209)
(510)
(764)
–
(7)
–
(6)
(127)
(278)
(126)
(295)
–
–
10
–
–
–
–
1
–
–
79
2
–
–
–
114
–
–
–
–
367
3
36
–
–
570
5
36
(84)
(8)
(427)
(519)
–
5
2
1
44
25
46
32
361
528
953
14,926
16,768
75
568
1,059
15,476
17,178
23
45
23
–
(1)
90
271
211
91
11
(30)
(4)
279
249
782
12,038
13,054
21
27
57
(103)
(1)
762
191
644
478
(479)
(177)
807
569
(612)
(183)
12,504
13,635
2,422
3,133
2
–
–
–
23
52
179
86
–
(57)
3
211
357
761
11,915
12,876
10
18
(7)
–
782
277
638
(105)
(427)
17
736
(87)
(491)
20
12,038
13,054
3,438
4,124
(b) Assets in the course of construction included in above carrying amounts
31 December
Plant, equipment and vehicles
Gas production
Power generation
2019
£m
30
177
20
(c) Additional information relating to right-of-use assets included in the above
Additions
Depreciation charge for the year
NBV at 31 December
2019 (i)
Plant,
equipment
and
vehicles
£m
Land and
buildings
£m
Gas
production
and
storage
£m
Power
generation
£m
16
(43)
231
15
(34)
83
–
(11)
20
37
(13)
56
Plant,
equipment
and
vehicles
£m
Land and
buildings
£m
2018 (i)
Power
generation
£m
Gas
Production
and
storage
£m
–
–
–
36
24
118
–
–
–
–
15
1
Total
£m
68
(101)
390
(i) 2019 reflects right-of-use assets recognised in accordance with IFRS 16. 2018 reflects assets held under finance leases in accordance with IAS 17 and to which title was restricted.
Further information on the Group’s leasing arrangements is provided in note 23.
2018
£m
45
605
99
Total
£m
36
39
119
142
Centrica plc Annual Report and Accounts 2019
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
Impairment
Share of loss for the year
Share of other comprehensive income/(loss)
Dividends
Other movements
31 December
(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
Interests in joint ventures and associates
Net cash included in share of net assets
2019
2018
Investments in
joint ventures
and associates
£m
Investments in
joint ventures
and associates
£m
1,661
(372)
(13)
29
(1)
2
1,699
–
(19)
(1)
(22)
4
1,306
1,661
Associates
Nuclear
£m
2019
Other
£m
4,414
684
5,098
(135)
(2,716)
(2,851)
(958)
1,289
56
11
13
24
(3)
(1)
(4)
(3)
17
–
Total
£m
4,425
697
5,122
(138)
(2,717)
(2,855)
(961)
1,306
2018
Total
£m
3,811
660
4,471
(139)
(2,082)
(2,221)
(589)
1,661
56
83
Further information on the Group’s investments in joint ventures and associates is provided in notes 6 and S10.
Centrica plc Annual Report and Accounts 2019
143
Financial Statements | Notes to the Financial Statements continued
15. Other intangible assets and goodwill
The Group Balance Sheet contains significant intangible assets. Goodwill, customer relationships and brands usually 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/Renewable Energy Certificates
(ROCs/RECs) 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
Write-downs
Transfers
Exchange adjustments
31 December
Accumulated amortisation
1 January
Amortisation (iii)
Disposals/retirements
and surrenders
Impairments
Exchange adjustments
31 December
NBV at 31 December
2019
2018
Customer
relation-
ships and
brands
£m
Application
software
(i) (ii)
£m
EUA/
ROC/RECs
£m
Exploration
and
evaluation
expenditure
£m
Goodwill
£m
Total
£m
Customer
relation-
ships and
brands
£m
Application
software
(i) (ii)
£m
EUA/
ROC/RECs
£m
Exploration
and
evaluation
expenditure
£m
Goodwill
£m
Total
£m
830
1,837
321
304
3,298
6,590
749
1,570
323
324
3,212
6,178
–
7
200
6
933
–
(43)
(28)
(1,068)
–
–
(30)
–
24
(18)
–
–
(7)
216
–
(14)
(178)
(5)
(3)
–
10
1,349
23
(76)
(1,229)
–
–
(178)
19
12
33
–
–
–
(61)
(119)
36
281
(7)
854
–
(26)
(869)
–
–
19
764
2,021
179
320
3,171
6,455
830
1,837
596
38
(31)
–
(23)
580
184
859
228
(22)
76
(9)
1,132
–
–
–
–
–
–
889
179
117
562
2,134
–
–
–
–
–
–
31
–
266
(53)
107
(32)
117
203
593
2,422
2,578
4,033
514
52
–
–
30
596
234
659
216
(23)
–
7
859
978
118
–
–
(102)
(36)
–
–
26
–
–
–
60
1,265
52
(895)
(102)
(36)
128
304
3,298
6,590
117
562
1,852
–
–
–
–
–
–
–
–
268
(23)
–
37
117
187
562
2,134
2,736
4,456
–
–
13
321
–
–
–
–
–
–
321
(i) Application software includes assets under construction with a cost of £259 million (2018: £302 million).
(ii) The remaining amortisation period of individually material application software assets, which had a carrying value of £270 million (2018: £260 million), is between five and six years.
(iii) Amortisation of £266 million (2018: £268 million) has been recognised in operating costs before exceptional items.
144
Centrica plc Annual Report and Accounts 2019
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:
2019
Carrying
amount of
indefinite-
lived
intangible
assets (i)
£m
Carrying
amount of
goodwill
£m
2018
Carrying
amount of
indefinite-
lived
intangible
assets (i)
£m
Total
£m
Carrying
amount of
goodwill
£m
Total
£m
UK Home (Residential energy
and services)
AlertMe/Dyno-Rod
63
57
120
63
57
120
Ireland
Bord Gáis Energy
North America (Home energy
and services)
Direct Energy/ATCO/
CPL/WTU/FCP/Bounce/Residential Services
Group/Clockwork/Astrum Solar (i)
Centrica Home Solutions
AlertMe/FlowGem
Centrica Business:
UK Business (Energy supply
and services)
Enron Direct/Electricity Direct
North America Business
(Energy supply and trading)
Direct Energy/ATCO/Strategic
Energy/FCP/HEM
Centrica Business Solutions ENER-G/Panoramic
Power/REstore/SmartWatt
Energy Marketing & Trading Neas Energy
Upstream:
Exploration & Production
Newfield/Heimdal/Venture/Bayerngas
15
974
–
181
550
178
142
–
4
–
–
–
2
–
15
978
16
1,061
–
14
16
1,075
–
31
181
550
181
567
180
174
142
151
–
–
–
–
–
31
181
567
174
151
475
2,578
–
63
475
2,641
492
2,736
–
71
492
2,807
(i) The indefinite-lived intangible assets relate mainly to the Dyno-Rod brand. In the prior year amounts also relate to the Mr Sparky and Benjamin Franklin brands acquired as part of the
Clockwork business combination, which have now been disposed of.
Centrica plc Annual Report and Accounts 2019
145
Financial Statements | Notes to the Financial Statements continued
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 2018
(Charge)/credit to income
Credit/(charge) to equity
Disposal of businesses
Exchange and other adjustments
31 December 2018
Credit/(charge) to income
(Charge)/credit to equity
Disposal of businesses
Exchange and other adjustments
31 December 2019
Accelerated tax
depreciation
(corporation tax)
£m
Net
decommissioning
(i)
£m
Losses carried
forward (ii)
£m
Other timing
differences
£m
Marked to
market positions
£m
Net deferred
PRT (iii)
£m
Retirement
benefit
obligation and
other provisions
£m
(931)
(115)
–
(5)
(5)
864
16
–
–
–
(1,056)
880
142
–
(32)
22
(924)
(2)
–
–
(11)
867
335
(12)
–
–
–
323
(70)
–
–
2
255
8
(29)
1
–
24
4
24
(1)
–
(12)
15
(80)
40
(2)
–
(1)
(43)
159
2
–
16
134
136
(9)
–
–
–
127
11
–
–
–
138
62
(14)
(135)
–
–
(87)
(74)
78
–
–
(83)
Total
£m
394
(123)
(136)
(5)
18
148
190
79
(32)
17
402
(i) Net decommissioning includes deferred tax assets of £1,040 million (2018: £1,215 million) in respect of decommissioning provisions.
(ii) The losses arise principally from accelerated allowances for upstream investment expenditure, for which equivalent deferred tax liabilities are included under accelerated tax depreciation.
(iii) 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.
31 December
Gross deferred tax balances
Offsetting deferred tax balances
Net deferred tax balances (after offsetting for financial reporting purposes)
2019
Assets
£m
1,820
(1,267)
553
Liabilities
£m
(1,418)
1,267
(151)
2018
Assets
£m
2,029
(1,497)
532
Liabilities
£m
(1,881)
1,497
(384)
Deferred tax assets arise typically 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 £3,537 million (2018: £3,165 million),
of which £2,620 million (2018: £2,294 million) related to carried forward tax losses available for utilisation against future taxable profits. Some
£44 million (2018: £59 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 (2018: £nil).
146
Centrica plc Annual Report and Accounts 2019
17. Trade and other receivables, and contract-related assets
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. Contract-related assets are balances arising as a result of the Group’s contracts with customers in
the scope of IFRS 15.
31 December
Financial assets:
Trade receivables
Unbilled downstream energy income
Other accrued energy income
Other accrued income
Cash collateral posted (note 24)
Other receivables (including loans and contract assets)
Less: provision for credit losses
Non-financial assets: prepayments, other receivables and costs to obtain or fulfill a contract
with a customer
2019
2018
Current
£m
Non-current
£m
Current
£m
Non-current
£m
2,138
1,342
1,003
131
155
301
5,070
(589)
4,481
358
4,839
2
–
–
–
–
38
40
–
40
114
154
2,043
1,542
1,323
116
446
292
5,762
(569)
5,193
350
5,543
3
–
–
–
–
39
42
–
42
77
119
The amounts above include gross amounts arising from the Group’s IFRS 15 contracts with customers of £2,019 million (2018: £1,913 million).
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
2019
2018
Current
£m
Non-current
£m
Current
£m
Non-current
£m
1,722
2,104
1,244
5,070
(589)
4,481
12
26
2
40
–
40
1,700
2,321
1,741
5,762
(569)
5,193
8
28
6
42
–
42
Receivables from residential and business customers are generally considered to be credit impaired when the payment is past the contractual
due date. Contractual due dates range from falling due upon receipt to falling due in 30 days from receipt.
The table below shows the change in gross receivables between credit impaired balances (those that are past due) and receivables that are not
yet due and therefore not considered to be credit impaired.
Gross financial assets within trade and other receivables
31 December
Balances that are not past due
Balances that are past due
2019
£m
3,718
1,352
5,070
2018
£m
4,418
1,344
5,762
Centrica plc Annual Report and Accounts 2019
147
Financial Statements | Notes to the Financial Statements continued
17. Trade and other receivables, and contract-related assets
The IFRS 9 impairment model is applicable to the Group’s financial assets including trade receivables, contract assets and other financial assets
as described in note S3. As the majority of the relevant balances are trade receivables and contract assets to which the simplified model
applies, this disclosure focuses on these balances.
The provision for credit losses for trade receivables, contract assets and finance lease receivables is based on an expected credit loss model
that calculates the expected loss applicable to the receivable balance over its lifetime. Credit losses on receivables due from treasury, trading
and energy procurement counterparties are not significant (see note S3 for further analysis of this determination). For residential and business
customers default rates are calculated initially by operating segment considering historical loss experience and applied to trade receivables
within a provision matrix. The matrix approach allows application of different default rates to different groups of customers with similar
characteristics. These groups will be determined by a number of factors including; the nature of the customer, the payment method selected
and where relevant, the sector in which they operate. The characteristics used to determine the groupings of receivables are the factors that
have the greatest impact on the likelihood of default. The rate of default increases once the balance is 30 days past due and subsequently in
30-day increments.
Receivables from residential and business customers are generally considered to be credit impaired when the payment is past the contractual
due date. The Group applies different definitions of default for different groups of customers, ranging from 60 days past the due date to six to
twelve months from the issuance of a final bill. Receivables are generally written off only once a period of time has elapsed since the final bill.
Contractual due dates range from falling due upon receipt to falling due in 30 days from receipt.
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
Net impairment of trade receivables (predominantly
related to credit impaired trade receivables) (i) (ii) (iii)
Receivables written off (iv)
31 December
2019
2018
Residential
customers
£m
Business
customers
£m
(343)
(222)
(145)
101
(387)
(58)
82
(198)
Treasury,
trading
and energy
procurement
counterparties
£m
(4)
–
–
(4)
Total
£m
(569)
(203)
183
(589)
Residential
customers
£m
Business
customers
£m
(347)
(248)
(85)
89
(343)
(64)
90
(222)
Treasury,
trading
and energy
procurement
counterparties
£m
(4)
(1)
1
(4)
Total
£m
(599)
(150)
180
(569)
Includes £190 million (2018: £135 million) of credit losses related to trade receivables resulting from contracts in the scope of IFRS 15.
(i)
(ii) All loss allowances reflect the lifetime expected credit losses on trade receivables, contract assets and finance lease receivables.
(iii) Excludes recovery of previously written-off receivables of £6 million (2018: £7 million).
(iv) Materially all write-offs relate to trade receivables where enforcement activity is ongoing.
Enforcement activity continues in respect of balances that have been written off unless there are specific known circumstances (such as
bankruptcy) that render further action futile.
Sensitivity to changes in assumptions
The most significant assumption included within the expected credit loss provisioning model that gives rise to estimation uncertainty is that
future performance will be reflective of past performance and there will be no significant change in the payment profile or recovery rates within
each identified group of receivables. To address this risk, the Group reviews and updates default rates, by group, on a regular basis to ensure
they incorporate the most up to date assumptions along with forward-looking information where available and relevant. The Group also
considers regulatory changes and customer segment specific factors that may have an impact, now or in the future, on recoverability of the
balance. While forward-looking information is usually considered to be immaterial, the exception to this could be the forecast occurrence of
a significant one-off event. The Group does not believe that Brexit will have a material impact on the outstanding receivables balance during the
transition period or beyond.
This approach is considered appropriate as the Group’s outstanding trade receivable balance is made up of a high volume of individually low
value balances relative to the total outstanding debt. As a result, impairment losses on trade receivables are more sensitive to macroeconomic
events, rather than customer specific future events, which are unlikely to have a material impact. The Group’s receivables are predominantly
short term and the rate of default increases significantly when a balance is more than 90 days past due. In order to test the sensitivity to
changes in the debt profile, the Group has considered the impact of further credit deterioration of these balances and determined that if all
balances were to remain unpaid for a further 30 days, the additional credit loss recognisable by the Group would be up to £35 million.
148
Centrica plc Annual Report and Accounts 2019
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 and oil in storage and transportation (i)
Other raw materials and consumables
Finished goods and goods for resale
2019
£m
157
190
84
431
2018
£m
210
169
80
459
(i)
Includes oil inventory and gas in storage held at fair value of £43 million (2018: £76 million).
The Group consumed £854 million of inventories (2018: £768 million) during the year. Write-downs amounting to £28 million (2018: £8 million)
were charged to the Group Income Statement in the year.
19. Derivative financial instruments
The Group uses derivative financial instruments to manage the risk arising from fluctuations in the value of certain assets or liabilities associated with treasury
management, energy sales and procurement. These derivatives are held at fair value and are predominantly unrealised positions, expected to unwind in future
periods. The Group also uses derivatives for proprietary energy trading purposes.
Purpose
Accounting treatment
Proprietary energy trading
and treasury management
Energy procurement/
optimisation
Carried at fair value, with changes in fair value recognised in the Group’s business performance results for the year. (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.
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 IFRS 9:
Energy derivatives – for procurement/optimisation
Energy derivatives – for proprietary trading
Interest rate derivatives
Foreign exchange derivatives
Derivative financial instruments in hedge accounting relationships:
Interest rate derivatives
Foreign exchange derivatives
Total derivative financial instruments
Included within:
Derivative financial instruments – current
Derivative financial instruments – non-current
2019
Assets
£m
Liabilities
£m
2018
Assets
£m
Liabilities
£m
553
917
3
104
105
131
(1,245)
(769)
(23)
(104)
(2)
(2)
567
837
–
30
59
185
(704)
(787)
(26)
(38)
(10)
(1)
1,813
(2,145)
1,678
(1,566)
1,320
493
(1,854)
(291)
1,141
537
(1,136)
(430)
Centrica plc Annual Report and Accounts 2019
149
Financial Statements | Notes to the Financial Statements continued
19. Derivative financial instruments
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
Other derivative contracts
Net total
Net (losses)/gains on derivative financial instruments due to re-measurement
31 December
Financial assets and liabilities measured at fair value:
Derivative financial instruments – held for trading
Derivative financial instruments in hedge accounting relationships
20. Trade and other payables, and contract liabilities
2019
£m
249
(165)
(628)
(544)
2018
Income
Statement
£m
(144)
(60)
(204)
2018
£m
(236)
65
84
(87)
Equity
£m
–
37
37
2019
Income
Statement
£m
(551)
55
(496)
Equity
£m
–
(53)
(53)
Trade and other payables include accruals and are principally amounts we owe to our suppliers. Financial deferred income
represents monies received from customers in advance of the delivery of goods or services that may be returned to the customer
if future delivery does not occur. For example, downstream customers with a credit balance may request repayment of the
outstanding amount in cash, rather than taking delivery of commodity. By contrast, contract liabilities arise when the Group
receives consideration from a customer in advance of performance, and has a non-financial liability to deliver future goods
or services in return.
31 December
Financial liabilities:
Trade payables
Deferred income
Capital payables
Cash collateral received (note 24)
Other payables
Accruals:
Commodity costs
Transportation, distribution and metering costs
Operating and other accruals
Non-financial liabilities:
Other payables and accruals
Contract liabilities
Deferred income
2019
2018
Current
Non-current
£m
£m
Current
£m
Non-current
£m
(571)
(328)
(181)
(35)
(327)
(1,866)
(401)
(783)
(3,050)
(4,492)
(850)
(55)
(136)
(1)
–
(96)
–
(36)
–
–
–
–
(133)
(1)
(15)
(3)
(578)
(287)
(166)
(157)
(403)
(2,475)
(384)
(825)
(3,684)
(5,275)
(774)
(54)
(104)
(5,533)
(152)
(6,207)
–
–
(124)
–
(21)
–
–
–
–
(145)
(14)
(22)
(10)
(191)
2018
£m
Maturity profile of financial liabilities within current trade and other payables
31 December
2019
£m
Less than 90 days
90 to 182 days
183 to 365 days
(4,245)
(5,005)
(140)
(107)
(165)
(105)
(4,492)
(5,275)
150
Centrica plc Annual Report and Accounts 2019
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.
(8)
(2,071)
(36)
(60)
(2,175)
–
42
3
(1)
44
2018
Current
£m
Non-current
£m
(22)
(85)
(107)
(7)
(129)
(136)
Current
Restructuring costs
Decommissioning costs (iii)
Sale/purchase contract
loss provision (iv)
Other (v)
Non-current
Restructuring costs
Decommissioning costs (iii)
Sale/purchase contract
loss provision (iv)
Other (v)
1 January
2019
£m
Acquisitions and
disposals
£m
Charged in
the year
£m
Notional interest
£m
Unused and
reversed in
the year
£m
Utilised (i)
£m
Transfers
(ii)
£m
Exchange
adjustments
£m
31 December
2019
£m
(22)
(194)
(40)
(49)
(305)
–
–
–
–
–
(225)
(2)
(14)
(158)
(399)
–
–
–
–
–
16
–
22
2
40
66
156
21
162
405
111
(113)
(18)
(5)
(25)
(2)
1
1
–
–
(56)
(152)
(28)
(48)
(284)
1 January
2019
£m
Acquisitions and
disposals (vi)
£m
Charged in
the year
£m
Notional interest
£m
Unused and
reversed in
the year
£m
Revisions
and
additions
£m
Transfers
(ii)
£m
Exchange
adjustments
£m
31 December
2019
£m
(7)
(2,401)
(75)
(57)
(2,540)
–
45
–
–
45
(1)
(11)
–
(6)
(18)
–
(31)
–
–
(31)
–
45
18
–
63
–
127
–
(1)
126
–
113
18
5
136
Included within the above liabilities are the following financial liabilities:
Financial liabilities
31 December
Restructuring costs
Provisions other than restructuring costs
2019
Current
£m
(56)
(71)
(127)
Non-current
£m
(8)
(86)
(94)
(i) Utilisation of provisions includes £88 million (2018: £145 million) of payments relating to exceptional charges. The remainder of the total £298 million (2018: £248 million) of payments
relating to exceptional charges shown in the Group Cash Flow Statement was paid directly during the year, without first giving rise to a provision.
(ii) Includes transfers to/from other balance sheet accounts including post-retirement benefit obligations.
(iii) Provision has been made for the estimated net present cost of decommissioning gas production 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 payment dates of decommissioning costs are dependent on the lives of the facilities, but utilisation of the provision is expected
to occur until the 2040s.
(iv) The sale/purchase contract loss provision relates mainly to North America Business wind farm power purchase agreements. The majority of the provision is expected to be utilised
by 2021.
(v) Other provisions have been made for dilapidations, insurance, legal and various other claims.
(vi) Includes amounts transferred to disposal groups held for sale.
Centrica plc Annual Report and Accounts 2019
151
Financial Statements | Notes to the Financial Statements continued
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
Name of scheme
Centrica Engineers
Pension Scheme
Type of benefit
Status
Country
Defined benefit final salary pension
Closed to new members in 2006
Defined benefit career average pension
Open to service engineers only
Centrica Pension Plan
Defined benefit final salary pension
Closed to new members in 2003
Centrica Pension Scheme
Defined benefit final salary pension
Closed to new members in 2003
Bord Gáis Energy Company
Defined Benefit Pension Scheme
Bord Gáis Energy Company
Defined Contribution Pension Plan
Direct Energy Marketing Limited
Pension Plan
Defined benefit career average pension
Closed to new members in 2008
Defined contribution pension
Open to new members
Defined benefit final salary pension
Closed to new members in 2014
Defined contribution pension
Open to new members
Defined benefit final salary pension
Closed to new members in 2004
Canada
Direct Energy Marketing Limited
Post-retirement benefits
Closed to new members in 2012
Canada
UK
UK
UK
UK
UK
UK
Republic
of Ireland
Republic
of Ireland
Number of
active members
as at
31 December
2019
Total
membership
as at
31 December
2019
2,699
3,223
2,219
2
1,051
12,873
126
246
6
7
8,503
5,579
8,506
10,421
4,103
19,204
173
316
361
270
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 2018, the Bord Gáis
Energy Company Defined Benefit Pension Scheme at 1 January 2017 and the Direct Energy Marketing Limited Pension Plan at 1 January 2018.
These have been updated to 31 December 2019 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 2018 valuation.
152
Centrica plc Annual Report and Accounts 2019
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
risk tolerances (which were updated in 2019) 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 past service liabilities in respect of active employees. The trustees have significantly reduced their risk
tolerance in 2019, increasing inflation and interest rate hedges from one third to two thirds. This has resulted in a significant reduction of return-
seeking assets within the portfolio, as well as a higher weighting to assets that better manage downside risk. This can be seen in the change
of asset portfolio mix in section (f) of this note.
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. The trustees took action to materially reduce this risk in 2019.
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, and in 2019 a similar change took place for CEPS. All of the 2011, 2016 and 2019 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 2019.
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
2019
%
18
4
6
33
39
100
Centrica plc Annual Report and Accounts 2019
153
Financial Statements | Notes to the Financial Statements continued
22. Post-retirement benefits
(c) Accounting assumptions
The accounting assumptions for the Registered Pension Schemes are 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
2019
%
2018
%
1.6
2.1
2.9
1.9
2.9
2.2
1.7
2.2
3.1
2.0
3.1
3.0
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
2019
Male
Years
22.6
23.9
Female
Years
24.1
25.6
2018
Male
Years
22.9
24.3
Female
Years
24.5
26.0
The other demographic assumptions have been set having regard to the latest trends in scheme experience and other relevant data. The
assumptions are reviewed and updated as necessary as part of the periodic actuarial valuations of the pension schemes.
For the Registered 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
2019
2018
Increase/
decrease in
assumption
Indicative effect
on scheme
liabilities
%
Increase/
decrease in
assumption
Indicative effect
on scheme
liabilities
%
0.25%
0.25%
0.25%
0.25%
1 year
+/-0
+/-5
-/+6
+/-5
+/-3
0.25%
0.25%
0.25%
0.25%
1 year
+/-0
+/-5
-/+6
+/-5
+/-3
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 assets
Retirement benefit liabilities
2019
£m
8,999
(9,162)
(163)
56
(219)
2018
£m
8,487
(8,566)
(79)
223
(302)
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.
154
Centrica plc Annual Report and Accounts 2019
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 credit/(cost) (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)/gain from changes in financial assumptions
Actuarial gain/(loss) from experience adjustments
Exchange adjustments
Items included in the Group Cash Flow Statement:
Employer contributions
Contributions by employer in respect of employee salary sacrifice arrangements
Other movements:
Benefits paid from schemes
Other
Transfers from provisions for other liabilities and charges
2019
Pension
liabilities
£m
(8,566)
Pension
assets
£m
8,487
2018
Pension
liabilities
£m
(9,337)
Pension
assets
£m
8,451
(87)
(29)
(116)
260
(242)
–
229
(1,286)
388
–
–
–
285
(3)
(111)
–
–
–
–
241
204
–
–
–
–
320
29
(285)
3
–
(120)
(29)
(149)
(41)
(239)
–
42
912
(17)
1
–
–
277
6
(21)
–
–
–
–
218
(145)
–
–
–
–
216
29
(277)
(5)
–
31 December
(9,162)
8,999
(8,566)
8,487
(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 the current service cost, with a corresponding reduction in salary costs.
(ii) A £252 million past service credit was recognised in the year in relation to a rule amendment during December 2019 to the UK defined benefit pension scheme arrangements to offer
members an option to level up their ongoing pension, if they retire before the statutory retirement age, and an £8 million past service credit was recognised in relation to changes made
to future service benefits from June 2019. A £41 million past service cost was recognised in 2018 as a result of GMP equalisation.
In addition to current service cost on the Group’s defined benefit pension schemes, the Group also charged £75 million (2018: £58 million)
to operating profit in respect of defined contribution pension schemes, including a one-off defined contribution payment of £8 million, to
facilitate scheme changes, part of restructuring costs in note 7. This included contributions of £20 million (2018: £17 million) paid via a salary
sacrifice arrangement.
(f) Pension scheme assets
The market values of plan assets were:
31 December
Equities
Corporate bonds
High-yield debt
Liability matching assets
Property
Cash pending investment
Quoted
£m
188
2,646
1,015
1,430
–
695
2019
Unquoted
£m
346
–
1,288
1,075
316
–
Total
£m
534
2,646
2,303
2,505
316
695
Quoted
£m
1,991
1,118
595
1,581
–
102
2018
Unquoted
£m
351
–
1,360
994
395
–
Total
£m
2,342
1,118
1,955
2,575
395
102
5,974
3,025
8,999
5,387
3,100
8,487
Unquoted assets are valued by the fund managers with reference to the expected cash flows associated with the assets. These valuations are
reviewed annually as part of the CCCIF audit. Included within equities are £nil of ordinary shares of Centrica plc (2018: £1 million) via pooled
funds that include a benchmark allocation to UK equities. Included within corporate bonds are £nil (2018: £nil) 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 section (g) of this note, 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.
Centrica plc Annual Report and Accounts 2019
155
Financial Statements | Notes to the Financial Statements continued
22. Post-retirement benefits
Included within the Group Balance Sheet within non-current securities are £103 million (2018: £91 million) of investments, held in trust on behalf
of the Group, as security in respect of the Centrica Unfunded Pension Scheme. Of the pension scheme liabilities above, £62 million (2018:
£63 million) relate to this scheme. More information on the Centrica Unfunded Pension Scheme is included in the Remuneration Report on
pages 82 to 93.
(g) Pension scheme contributions
The Group estimates that it will pay £67 million of ordinary employer contributions during 2020 for its defined benefit schemes, at an average
rate of 19% of pensionable pay, together with £32 million of contributions paid via a salary sacrifice arrangement. At 31 March 2018 (the date
of the latest full agreed actuarial valuations) the weighted average duration of the liabilities of the Registered Pension Schemes was 22 years.
For the Registered Pension Schemes the latest actuarial valuation as at 31 March 2018 has been finalised with the Pension Trustees. The
technical provisions deficit was £1,402 million. The Group has committed to additional annual cash contributions to fund this pension deficit.
The overall deficit contributions, including the previously disclosed asset-backed contribution arrangements, totalled £223 million in 2019, and
will amount to £175 million per annum from 2020 to 2025, with a balancing payment of £93 million in 2026. The Group has paid £12 million
of pension strains in 2019. For redundancies between 1 July 2019 and 30 June 2021, a deferral arrangement is in place, up to a limit of
£240 million. As a result, there has also been a matching increase, to £1,235 million, of the security package over certain of the Group’s
assets, enforceable in the unlikely event the Group is unable to meet its obligations.
On a pure roll-forward basis, from 31 March 2018, using the same methodology and consequent assumptions, the technical provisions deficit
would be c.£1.6 billion at the reporting date. Note that the next triennial review is scheduled for 31 March 2021, and the valuation methodology
and assumptions may differ from those previously used.
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’s 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, and are based on the expected 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, as only certain
procurement and sales contracts are within the scope of IFRS 9 and included in note S3 and the volumes used in calculating the maturity
analysis in note S3 are estimated using valuation techniques, rather than being based on minimum contractual quantities.
The Group’s 20-year agreement with Cheniere to purchase 89bcf per annum of LNG volumes for export from the Sabine Pass liquefaction plant
in the US commits the Group to capacity payments of £3.9 billion (included in ‘LNG capacity’ below) between 2019 and 2039. It also allows the
Group to make up to £6.3 billion of commodity purchases based on market gas prices and foreign exchange rates as at the balance sheet
date. The first commercial delivery was September 2019.
During 2019, the Group signed a 20-year agreement to purchase LNG volumes from Mozambique LNG1 Company. The commercial start date
is 2025 and under this agreement the Group anticipates making £8.2 billion of commodity purchases, based on a mixture of market gas and
oil prices.
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Centrica plc Annual Report and Accounts 2019
23. Commitments and contingencies
31 December
Commitments in relation to the acquisition of property, plant and equipment:
Commitments in relation to the acquisition of intangible assets:
Renewable obligation certificates
Other intangible assets
Other commitments:
Commodity purchase contracts
LNG capacity
Transportation capacity
Other long-term commitments (i)
(i) Other long-term commitments include amounts in respect of executory contracts, power station tolling fees and the smart meter roll-out programme.
The maturity analysis for commodity purchase contract commitments at 31 December is given below:
31 December
<1 year
1–2 years
2–3 years
3–4 years
4–5 years
>5 years
2019
£m
299
3,756
762
2018
£m
392
4,326
592
46,411
48,055
4,282
1,117
747
4,371
1,013
669
Commodity purchase contract
commitments
2019
£billion
11.3
6.2
4.1
3.7
3.2
17.9
46.4
2018
£billion
13.9
7.9
5.2
4.0
4.0
13.1
48.1
The Group enters into lease arrangements for assets including property, vehicles and assets used within the exploration and production
business. Refer to note 1 for details.
The carrying amount, additions and depreciation charge associated with right-of-use assets is disclosed in note 13 and the interest expense
arising on the Group’s lease liability is disclosed in note 8. The total cash outflow in the year for lease arrangements was £240 million and the
maturity analysis of cash flows associated with the Group’s lease liability at the reporting date is shown in note S3.
The table below provides further information on amounts not included in the lease liability and charged to the Group Income Statement during
the year.
Year ended 31 December
Expense related to short-term leases
Expense related to variable lease payments (i)
(i) 2018 represents contingent rents paid.
2019
£m
47
23
2018
£m
N/A
59
During the year, the Group’s expense related to short-term lease commitments predominantly related to the hire of LNG vessels and exploration
and production drilling rigs. The commitment at the balance sheet date also relates to assets of a similar nature. The Group does not have any
material sub-lease or sale and leaseback arrangements. The Group does not have any material arrangements in which it acts as a lessor.
Centrica plc Annual Report and Accounts 2019
157
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.
As at 31 December 2019, £651 million (2018: £612 million) of letters of credit and on-demand payment bonds have been issued in respect
of decommissioning obligations included in the Group Balance Sheet.
(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
Shareholders’ equity
Capital
2019
£m
3,181
1,212
4,393
2018
£m
2,656
3,145
5,801
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 at least three 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 commercial paper or short-term
bank borrowings. 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 2019 (and 2018). BGIL’s capital management policy and plan is subject to review and approval by the BGIL board. Reporting
processes provide relevant and timely capital information to management and the board. A medium-term capital management plan forms
part of BGIL’s planning and forecasting process, embedded into approved timelines, management reviews and board approvals.
(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 gross debt (excluding non-recourse
debt) in the capital market and to maintain an average term to maturity in the recourse long-term debt portfolio greater than five years.
At 31 December 2019, the Group had undrawn committed credit facilities of £3,072 million (2018: £3,879 million) and £1,167 million (2018:
£1,079 million) of unrestricted cash and cash equivalents. 95% (2018: 93%) of the Group’s gross debt has been raised in the long-term debt
market and the average term to maturity of the long-term debt portfolio was 10.6 years (2018: 11.1 years).
The Group’s liquidity is impacted by the cash posted or received under margin and collateral agreements. The terms and conditions of these
agreements 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 section (c) of this note for the movement in cash posted or received as collateral.
The 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 102.
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Centrica plc Annual Report and Accounts 2019
24. Sources of finance
(c) Net debt summary
Net debt predominantly includes capital market borrowings offset by cash, cash posted or received as collateral, securities and
certain hedging financial instruments used to manage interest rate and foreign exchange movements on borrowings.
Presented in the derivatives and current and non-current borrowings, leases and interest accruals columns shown below are the
assets and liabilities that give rise to financing cash flows.
Other assets and liabilities
Current and
non-current
borrowings,
leases and
interest
accruals
£m
Cash and
cash
equivalents,
net of bank
overdrafts (i) (ii)
£m
Derivatives
£m
Gross debt
£m
Collateral
posted/
(received)
£m
Current and
non-current
securities (iii)
£m
Sub-lease
assets
£m
1 January 2018
(6,171)
266
(5,905)
2,737
336
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
Revaluation
Financing interest paid
Increase in interest payable and amortisation of borrowings
New finance lease agreements
Exchange adjustments
31 December 2018
–
56
1,516
–
39
288
(262)
(36)
(44)
–
–
–
56
(76)
(56)
(38)
1,478
(1,617)
–
25
(20)
–
–
–
–
64
268
(262)
(36)
(44)
441
–
(305)
–
–
4
(4,614)
233
(4,381)
1,128
Incremental lease liability recognised on transition
to IFRS 16 (iv)
Recognition of sub-lease asset on transition to IFRS 16 (iv)
(402)
–
–
–
(402)
–
–
–
–
–
–
(57)
–
–
–
–
11
290
–
–
1 January 2019 post-adoption of IFRS 16
(5,016)
233
(4,783)
1,128
290
Net cash inflow from sale and purchase of securities
Cash outflow from payment of capital element
of leases
Cash outflow from repayment of borrowings
Remaining cash inflow and movement in cash
posted/received under margin and collateral agreements
Revaluation
Financing interest paid
Increase in interest payable and amortisation of borrowings
New lease agreements and re-measurement
of existing lease liabilities
Business disposals and asset purchases
Exchange adjustments
31 December 2019
–
155
86
–
(57)
220
(229)
(47)
3
90
–
–
–
–
11
(10)
–
–
–
–
–
50
155
86
–
(46)
210
(229)
(47)
3
90
(155)
(86)
104
–
(243)
–
–
–
–
–
–
46
–
–
–
–
–
(4,795)
234
(4,561)
(4)
794
(10)
326
236
76
–
–
–
(6)
–
–
–
1
307
–
–
307
(51)
–
–
–
6
–
–
–
(6)
(1)
255
–
–
–
–
–
–
–
–
–
–
–
–
8
8
–
–
–
(3)
–
–
–
–
–
–
5
Net debt
£m
(2,596)
–
–
(139)
384
58
(37)
(262)
(36)
(28)
(2,656)
(402)
8
(3,050)
(1)
–
–
147
(40)
(33)
(229)
(47)
(3)
75
(3,181)
(i) Cash and cash equivalents includes £175 million (2018: £189 million) of restricted cash. This includes cash totalling £48 million (2018: £100 million) within the Spirit Energy business that
is not restricted by regulation but is managed by its own treasury department.
(ii) Cash and cash equivalents are net of £548 million bank overdrafts (2018: £140 million).
(iii) Securities balances include £124 million (2018: £126 million) of index-linked gilts which the Group uses for short-term liquidity management purposes. Securities balances also include
£77 million (2018: £68 million) debt instruments and £54 million (2018: £45 million) equity instruments, all measured at fair value, as described in note 1. Securities include no deposits
with maturities greater than three months (2018: £68 million).
(iv) Following the adoption of IFRS 16 on 1 January 2019, the Group has recognised incremental lease liabilities and sub-lease assets within net debt. See note 1 for further details.
Centrica plc Annual Report and Accounts 2019
159
Financial Statements | Notes to the Financial Statements continued
24. Sources of finance
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 received when contracts are in the money. These positions reverse when contracts are settled and the collateral is
returned. Collateral received or posted is included in the following lines of the Group Balance Sheet:
31 December
Collateral posted/(received) included within:
Trade and other payables
Trade and other receivables
Net derivative liabilities
Inventories
Net collateral posted
(d) Borrowings, leases and interest accruals summary
2019
£m
(35)
155
199
7
326
Coupon rate
%
Principal
m
Current
£m
Non-current
£m
2019
(548)
–
–
3.213
€100
Floating
US$80
(60)
3.680
6.375
4.000
6.400
5.900
4.375
Zero
7.000
5.375
4.250
5.250
5.250
3.000
HK$450
£246
US$302
£52
US$70
£552
€50
£770
US$367
£550
US$50
£450
€750
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(144)
–
–
(44)
(254)
(234)
(57)
(52)
(574)
(59)
(790)
(272)
(538)
(37)
(460)
(634)
Total
£m
(548)
(144)
–
(60)
(44)
(254)
(234)
(57)
(52)
(574)
(59)
(790)
(272)
(538)
(37)
(460)
(634)
2018
Current
£m
Non-current
£m
(140)
–
(90)
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
(149)
–
(63)
(45)
(255)
(237)
(56)
(55)
(553)
(60)
(769)
(283)
(537)
(38)
(449)
(672)
31 December
Bank overdrafts
Bank loans (> 5 year maturity)
Bonds (by maturity date):
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 (i)
16 October 2043
12 September 2044
25 September 2045
10 April 2075 (i) (iii)
10 April 2076 (iv)
Obligations under lease arrangements
Interest accruals
(60)
(166)
(83)
(857)
(4,005)
(4,065)
(337)
–
(503)
(83)
(90)
(59)
(85)
(4,072)
(4,162)
(159)
–
(218)
(85)
(4,486)
(5,343)
(374)
(4,380)
(4,754)
(i) Bonds or portions of bonds maturing in 2022, 2023, 2026, 2029, 2033 and 2075 have been designated in a fair value hedge relationship. See note S5 for details of hedge relationships.
(ii) €50 million of zero coupon notes have an accrual yield of 4.200%, which will result in a €114 million repayment on maturity.
(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.
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Centrica plc Annual Report and Accounts 2019
2018
£m
(157)
446
1
–
290
Total
£m
(140)
(149)
(90)
(63)
(45)
(255)
(237)
(56)
(55)
(553)
(60)
(769)
(283)
(537)
(38)
(449)
(672)
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
5,829,597,044 ordinary shares of 614/81 pence each (2018: 5,727,912,880)
2019
£m
360
2018
£m
354
During the year 102 million new ordinary shares were issued at an average price of 94.4 pence for the scrip dividends, total value of £96 million.
The closing price of one Centrica ordinary share on 31 December 2019 was 89.3 pence (2018: 134.9 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 (ii)
31 December (i)
Own shares (i)
Treasury shares (i) (ii)
2019
million
shares
5.8
1.6
1.0
(4.7)
3.7
2018
million
shares
5.3
8.2
1.1
(8.8)
5.8
2019
million
shares
31.3
–
(1.0)
(20.1)
10.2
2018
million
shares
42.1
–
(1.1)
(9.7)
31.3
(i) The closing balance in the treasury and own share reserve of own shares was £5 million (2018: £10 million) and treasury shares was £32 million (2018: £97 million).
(ii)
Includes shares purchased by employees under share purchase schemes for a value of £1 million.
26. Events after the balance sheet date
The Group updates disclosures in light of new information being received, or a significant event occurring, in the period between
31 December 2019 and the date of this report.
Dividends
The Directors propose a final dividend of 3.50 pence per ordinary share (totalling £204 million) for the year ended 31 December 2019. The
dividend will be submitted for formal approval at the Annual General Meeting to be held on 11 May 2020 and, subject to approval, will be paid
on 22 June 2020 to those shareholders registered on 11 May 2020.
King’s Lynn power station
On 23 December 2019, the Group agreed to sell its 382MW King’s Lynn CCGT power station to RWE Generation for headline consideration of
£105 million, adjusted for final working capital, based on a valuation date of 31 December 2019. The deal completed on 12 February 2020.
Centrica plc Annual Report and Accounts 2019
161
Financial Statements | Notes to the Financial Statements continued
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 54.
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. Unless otherwise stated, these accounting policies have been
consistently applied to the years presented.
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 (which is the Group’s Chief Operating Decision Maker as defined by IFRS 8: ‘Operating segments’) for the
purposes of evaluating segment performance and allocating resources.
The Group redefined its operating segments during the year, to reflect the way the business is now organised. Information relating to the prior
year has been represented in line with the new segmental structure.
Revenue
Energy supply to business and residential customers
The vast majority of contractual energy supply arrangements have no fixed duration, require no minimum consumption by the customer and can
be terminated by either party at any time. No enforceable rights and obligations exist at inception of the contract and arise only once the cooling
off period is complete and the Group is the legal supplier of energy to the customer. The performance obligation is the supply of energy over the
contractual term; the units of supply represent a series of distinct goods that are substantially the same with the same pattern of transfer to the
customer. The performance obligation is considered to be satisfied as the customer consumes based on the units of energy delivered. This is
the point at which revenue is recognised. In respect of energy supply contracts, the Group considers that it has the right to consideration from
the customer for an amount that corresponds directly with the invoiced value delivered to the customer through their consumption. The Group’s
assessment of the amount that it has a right to invoice 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 and 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.
The Group holds a number of energy supply contracts that specify a minimum consumption volume over a specified contractual term. The
transaction price for these contracts is the minimum supply volume multiplied by the contractually agreed price per unit of energy. Revenue from
the sale of additional volumes is considered to be variable and not included in the transaction price. Revenue for these contracts continues to be
recognised as invoiced.
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Centrica plc Annual Report and Accounts 2019
S2. Summary of significant accounting policies
Energy services provided to business and residential customers
Energy services relate to the installation, repair and maintenance of central heating, ventilation and air conditioning systems.
In the UK, delivery of an item is considered a separate performance obligation to the installation of the item, both satisfied at a point in time.
Delivery is the point at which control passes to the customer as the customer takes physical possession of the asset. It is also the point at which
the Group has the right to consideration. Delivery and installation usually occur at the same point in time and consequently revenue is recognised
for both performance obligations simultaneously.
Certain heating, ventilation and air conditioning (HVAC) system installations in North America are considered to be a single performance
obligation satisfied over time, representing the Group’s promise to deliver to the customer a functioning HVAC system. Revenue is recognised
on an input basis with reference to costs incurred.
Sales of own gas and liquid production
Revenue arising from the sale of produced gas is recognised in a manner consistent with energy supply contracts with the revenue recognition
profile reflecting the supply of gas to the customer. In respect of oil sales, each barrel of oil is considered a separate performance obligation
satisfied at a point in time – on delivery.
The rights and obligations identifiable within a contract where the Group holds sellers’ nomination rights are considered to be enforceable from
inception of the contract. The transaction price for the contract will include variable consideration based on forecast production and market
prices. The point at which the performance obligation is satisfied and revenue recognised is the point at which control of the commodity passes
to the customer according to the contractual trading terms, usually on shipment or delivery to a specified location.
Revenue arising from contracts outside the scope of IFRS 15
Revenue from sources other than the Group’s contracts with customers is recognised in accordance with the relevant standard, as
detailed below:
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.
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).
Cost of sales
Energy supply includes the cost of gas and electricity produced and purchased during the year for own-use contracts, 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.
Re-measurement and settlement of energy contracts
Re-measurement and settlement of energy contracts includes both realised (settled) commodity sales and purchase contracts in the scope
of IFRS 9, as well as unrealised (fair value changes) on active contracts, as detailed further in notes 1 and 2.
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 not arising in connection with the acquisition, construction or
production of a qualifying asset are expensed.
Centrica plc Annual Report and Accounts 2019
163
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S2. Summary of significant accounting policies
Foreign currencies
The consolidated Financial Statements are presented in pounds sterling, 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 initially 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 and exchange movements included in the Group Income Statement for the period. In previous periods, the Group utilised
net investment hedging and historic exchange differences will 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 monthly results of these (generally foreign) subsidiary undertakings, joint ventures and associates are translated into pounds sterling each
month at the average rates of exchange for that month. The closing exchange rates, and the average of the rates used to translate the results
of foreign operations to pounds sterling are shown below.
Exchange rate per pound sterling (£)
US dollars
Canadian dollars
Euro
Norwegian krone
Danish krone
Closing rate at
31 December
Average rate for the year ended
31 December
2019
1.33
1.72
1.18
11.65
8.83
2018
1.28
1.74
1.11
11.04
8.32
2019
1.28
1.69
1.14
11.25
8.52
2018
1.33
1.73
1.13
10.87
8.42
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 other 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 82 to 93, 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 On Track Incentive Plan. This scheme is applicable to senior executives, and
senior and middle management. Shares issued under the scheme vest subject to continued employment within the Group in two stages (half
after two years and the other half after three years). Employees leaving prior to the vesting date will normally forfeit their rights to unvested share
awards. The fair value of the awards is measured using the market value at the date of grant.
More information is included in the Remuneration Report on pages 82 to 93.
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Centrica plc Annual Report and Accounts 2019
S2. Summary of significant accounting policies
Business combinations and goodwill
The acquisition of subsidiaries is accounted for using the acquisition method (at the point the Group gains control over a business as defined
by IFRS 3). The cost of the acquisition is measured as the cash paid and the aggregate of the fair values, at the date of exchange, of other
assets transferred, liabilities incurred or assumed, and equity instruments issued by the Group in exchange for control of the acquiree.
The consideration transferred includes the fair value of any asset or liability resulting from a contingent consideration arrangement at the
acquisition date.
Acquisition-related costs are expensed as incurred. The identifiable assets, liabilities and contingent liabilities 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: ‘Non-
current assets held for sale and discontinued operations’. The Group recognises any non-controlling interests in the acquiree either at fair
value or at the non-controlling interests’ proportionate share of the recognised amounts of the 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 business combinations.
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.
Capitalisation begins when expenditure for the asset is being incurred and activities necessary to prepare the asset for use are in progress and
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.
Intangible assets with finite lives are amortised over their useful lives and are tested for impairment annually and whenever there is an indication
that the asset could be impaired. The amortisation period and 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 not amortised but tested for impairment annually, and whenever there is an indication that
the intangible asset could be impaired, either individually or at the CGU level. The indefinite life assessment is reviewed annually and, if not
supportable, 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
Strategic identifiable acquired brands are deemed to have indefinite lives where evidence suggests that the brand will generate net cash inflows
for the Group for an indefinite period.
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.
Centrica plc Annual Report and Accounts 2019
165
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S2. Summary of significant accounting policies
Exploration, evaluation, development and production assets
The Group uses the successful efforts method of accounting for exploration and evaluation expenditure. Exploration and evaluation
expenditures 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 is transferred to PP&E. If the prospects are
subsequently determined to be unsuccessful, 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
The Group’s joint ventures and associates (as defined in note 6) are accounted for using the equity method.
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: ‘Financial instruments – presentation’.
Property, plant and equipment
PP&E is included in the Group Balance Sheet at cost, less accumulated depreciation and any provisions for impairment.
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 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
Up to 50 years
Five to 20 years
Three to 10 years
Up to 30 years
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.
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S2. Summary of significant accounting policies
Impairment assumptions
The Group tests the carrying amounts of goodwill, PP&E and intangible assets (with the exception of exploration assets) for impairment at least
annually. 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.
Further information on the assumptions used in the VIU calculations and FVLCD calculations that resulted in impairment or impairment reversals
during the year can be found at note 7.
VIU – Key assumptions used
Pre-tax cash flows used in the VIU calculations are derived from the Group’s Board-approved business plans, and assumptions specific to the
nature and life of the asset. The Group’s business plans and assumptions are based on past experience and adjusted to reflect market trends,
economic conditions and key risks. Commodity prices used in the planning process are based in part on observable market data and in part on
estimates. 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
Unless stated otherwise in the table below, 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 shown below.
UK Home
%
UK Business
%
Ireland
%
North America
Home
(i)
%
North America
Business
(i)
%
Centrica Home
Solutions
%
Centrica
Business
Solutions
(turbines/engines
/battery) (ii)
%
Energy
Marketing &
Trading
%
Nuclear (ii)
%
2.0
7.8
2.0
7.8
1.2
7.4
2.1/2.0
2.1/2.0
8.7
9.0
2.0
10.8
N/A
9.0
2.0
8.4
N/A
8.4
UK Home
%
UK Business
%
Ireland
%
North America
Home
(i)
%
North America
Business
(i)
%
Centrica Home
Solutions
(iii)
%
Centrica
Business
Solutions
(turbines/engines
/battery) (ii)
%
Energy
Marketing &
Trading
%
Nuclear (ii)
%
2.1
8.2
2.1
8.2
1.4
7.8
2.2/2.0
2.2/2.0
2.2/2.1
9.1
11.0
12.3/11.1
N/A
8.2
2.1
9.9
N/A
9.2
2019
Growth rate to perpetuity
(including inflation)
Pre-tax discount rate
2018
Growth rate to perpetuity
(including inflation)
Pre-tax discount rate
(i) US/Canada respectively.
(ii) Cash flows arising after the plan period have been derived from forecasts to the end of the asset lives. Due to the nature of these finite-lived assets this provides a more appropriate
valuation in later years.
(iii) US/UK respectively.
Centrica plc Annual Report and Accounts 2019
167
Financial Statements | Notes to the Financial Statements continued
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 publicly available inflation forecasts and range from 1.1% to 2.2%.
(c) Key operating assumptions by CGUs using VIU
The key operating assumptions across all CGUs are gross margin, revenues and operating costs. These assumptions are tailored to the specific
CGU using management’s knowledge of the environment, as shown in the table below:
CGU
Gross margin
Revenues
Operating costs
All – base
assumptions
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.
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.
Market share: percentage immediately prior
to business plan.
North
America
Home
(Residential
energy
supply and
services)
Existing customers: 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.
New customers and renewals: based on
gross margins achieved historically.
North
America
Business
(Business
energy
supply and
trading)
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.
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
efficiency programme. Salary increases based on
inflation expectations.
Credit losses: historical assumptions regarding
realised cash losses have been updated to reflect
the current environment.
Customer acquisition: based on experience of
costs required to support acquisition, renewal and
other servicing activities.
As above.
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Centrica plc Annual Report and Accounts 2019
S2. Summary of significant accounting policies
CGU
Gross margin
Energy
Marketing &
Trading
Trading business:
Existing and new markets: management’s
estimate of future trading performance.
Revenues
As above.
Centrica
Business
Solutions
(turbines/
engines)
Based on forecast revenues, operations and
maintenance costs, grid network and
balancing system charges for the asset life.
Based on forward and contracted prices for
commodity, capacity market and grid
ancillary service contracts for the asset life.
No capacity market revenue until October
2019, but resuming prospectively thereafter.
Operating costs
Future development: increase in costs to support
growth forecasts, adjusted for planned business
process efficiencies.
Based on run-rate and forecast changes, including
expected inflation for the asset life.
FVLCD – key assumptions used
Centrica Business Solutions
A FVLCD calculation has been performed to value the customer CGU within Centrica Business Solutions. 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 strategic shape assumptions and,
thereafter, are based on long-term production and cash flow forecasts based on terminal values, 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 7.5% (2018: 8.5%) 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 above, with the exception of the adjustment required to determine an equivalent pre-tax discount rate.
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
Details of the Group’s accounting policy in respect of the IFRS 16: Leases which applied from 1 January 2019 are given in note 1.
In the prior year the determination of whether an arrangement is, or contains, a lease required an assessment of whether the fulfilment of the
arrangement was dependent on the use of a specific asset or assets and whether the arrangement conveyed a right to use the asset or assets.
Leases were classified as finance leases whenever the terms of the lease transferred substantially all the risks and rewards of ownership to the
lessee. All other leases were classified as operating leases. Assets held under finance leases were 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, were 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 were 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 were charged directly against income.
Payments under operating leases were charged to the Group Income Statement on a straight-line basis over the term of the relevant lease.
Centrica plc Annual Report and Accounts 2019
169
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S2. Summary of significant accounting policies
Inventories
Inventories of finished goods are valued at the lower of cost (using weighted-average 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.
Oil inventory is measured at fair value, being the spot price at the balance sheet date.
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 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. The asset is subject to impairment review as detailed above. Changes in estimates and
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 other 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 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 as well as the rules and regulations of the relevant tax authority in the jurisdiction of the dispute. Often
the Group is unable to predict whether an uncertain tax treatment will be accepted by the relevant authority. In such instances the effects of
uncertainty are reflected in management’s assessment of the most likely outcome of each issue, as reviewed and updated on a regular basis.
Each item is considered separately and on a basis that provides the better prediction of the outcome, unless the Group determines that it is
appropriate to group certain items for consideration. See note 9 for further details on uncertain tax provisions.
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Centrica plc Annual Report and Accounts 2019
S2. Summary of significant accounting policies
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, or the initial recognition of an asset or liability in a transaction which is not a business combination
and at the time of the transaction affects neither accounting profit nor taxable profit and loss. Temporary differences are differences between the
carrying amount of the Group’s assets and liabilities and their tax base.
Deferred tax liabilities may be offset against deferred tax assets within the same taxable entity or qualifying local tax group. Any remaining
deferred tax asset is recognised only when, on the basis of all available evidence, it can be regarded as probable that there will be suitable
taxable profits, within the same jurisdiction, in the foreseeable future, against which the deductible temporary difference can be utilised.
Deferred tax is provided on temporary differences arising on subsidiaries, joint ventures and associates, except where the timing of the reversal
of the temporary difference can be controlled and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or liability settled, based
on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Measurement of deferred tax liabilities and
assets reflects the tax consequences expected from the manner in which the asset or liability is recovered or settled.
Financial instruments
Financial assets and financial liabilities are recognised in the Group Balance Sheet when the Group becomes a party to the contractual
provisions of the instrument. Financial assets are derecognised when the Group no longer has the rights to cash flows, the risks and rewards of
ownership or control of the asset. Financial liabilities are derecognised when the obligation under the liability is discharged, cancelled or expires.
(a) Trade receivables
Trade receivables are initially recognised at fair value, which is usually the original invoice amount, and are subsequently held at amortised cost
using the effective interest method less an allowance for impairment losses. 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) Financial instruments at fair value through other comprehensive income
Financial assets at fair value through other comprehensive income are equity instruments that the Group has elected to recognise the changes
in fair value of in other comprehensive income. They are recognised initially at fair value in the Group Balance Sheet and are re-measured
subsequently at fair value with gains and losses arising from changes in fair value recognised directly in equity and presented in other
comprehensive income. Accrued interest or dividends arising on these financial assets are recognised in the Group Income Statement.
If the Group assesses the need to recognise a loss allowance on a financial asset carried at fair value through other comprehensive income, the
loss allowance is recognised in other comprehensive income; however, the recognition of a loss allowance does not impact the carrying value
of the asset on the Group’s balance sheet.
Cumulative gains and losses on equity instruments at fair value through other comprehensive income are not recycled to the Group
Income Statement.
Centrica plc Annual Report and Accounts 2019
171
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S2. Summary of significant accounting policies
(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 in order to eliminate asymmetry arising from the
measurement of an index-linked derivative. Other debt instruments and money market funds are required to be measured at fair value through
profit or loss under IFRS 9, as the assets are not held solely for the purpose of collecting contractual cash flows related to principal and interest.
Both mandatory and designated instruments 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 IFRS 9. The
assessment of whether a contract is deemed to be ‘own use’ is conducted on a Group basis without reference to underlying book structures,
business units or legal entities.
Certain purchase and sales contracts for the physical delivery of gas, power and oil are within the scope of IFRS 9 due to the fact that they net
settle or contain written options. Such contracts are accounted for as derivatives under IFRS 9 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 34 to 43 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 (the Group has not applied the hedge accounting requirements of IFRS 9).
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 there is a currently enforceable legal right of set-off, 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.
172
Centrica plc Annual Report and Accounts 2019
S2. Summary of significant accounting policies
(i) Hedge accounting
The Group continues to apply the hedge accounting requirements of IAS 39 and has not adopted IFRS 9 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.
(j) Impairment of financial assets
In accordance with IFRS 9, the Group has applied the expected credit loss model to financial assets measured at amortised cost and fair value
through other comprehensive income.
For trade receivables, contract assets and finance lease receivables, the simplified approach is taken and the lifetime expected credit loss
provided for.
For all other in-scope financial assets at the balance sheet date either the lifetime expected credit loss or a 12-month expected credit loss is
provided for, depending on the Group’s assessment of whether the credit risk associated with the specific asset has increased significantly
since initial recognition. As the Group’s financial assets are predominantly short term (less than 12 months), the impairment loss recognised is
not materially different using either approach. Further details of the assumptions and inputs used to calculate expected credit losses are shown
in note 17.
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 and the amount of electricity generated from AGR stations in the year. These costs 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 – 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 16 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 two to three years and for the PWR power station is 18 months.
(d) Nuclear Liabilities Fund (NLF) funding arrangements
Under the arrangements in place with the Secretary of State, the NLF will fund, subject to certain exceptions, qualifying uncontracted nuclear
liabilities and qualifying decommissioning costs.
In part consideration for the assumption of these liabilities by the Secretary of State and the NLF, the former British Energy Group agreed to pay
fixed decommissioning contributions each year and £150,000 (indexed to RPI) for every tonne of uranium in PWR fuel loaded into the Sizewell B
reactor after the date of these arrangements.
(e) NLF and nuclear liabilities receivables
The UK Government indemnity is provided to indemnify any future shortfall on NLF funding of qualifying uncontracted nuclear liabilities (including
PWR back-end fuel services) and qualifying nuclear decommissioning costs such that the receivable equals the present value of the associated
qualifying nuclear liabilities (apart from a small timing difference due to timing of receipts from NLF).
(f) Nuclear liabilities
Nuclear liabilities represent provision for liabilities in respect of the costs of waste management of spent fuel and nuclear decommissioning.
(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.
Centrica plc Annual Report and Accounts 2019
173
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
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 34 to 43.
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 IFRS 9 (see note S6).
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 IFRS 9 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 IFRS 9 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 IFRS 9 are monitored for internal risk management
purposes, only those energy contracts within the scope of IFRS 9 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.
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Centrica plc Annual Report and Accounts 2019
S3. Financial risk management
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 2019 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 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 and Japanese yen.
It is the Group’s policy to hedge material transactional exposures using derivatives (either applying formal hedge accounting or economic hedge
relationships) 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 2019, there were no material unhedged non-functional currency monetary assets or liabilities, firm commitments or
probable forecast transactions (2018: £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 2019, assuming that a reasonably possible change in the relevant risk variable had occurred at 31 December 2019, 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.
The sensitivity analysis has been prepared based on 31 December 2019 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 2019 are all constant. Excluded from this analysis are all non-financial
assets and liabilities and energy contracts that are not financial instruments under IFRS 9. 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.
Centrica plc Annual Report and Accounts 2019
175
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S3. Financial risk management
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)
2019
2018
Reasonably
possible
change in
variable (ii)
Base price (i)
%
Base price (i)
40
45
25
60
24
27
+/-15
+/-13
+/-7
+/-9
+/-4
+/-6
54
54
26
56
27
34
Reasonably
possible
change in
variable (ii)
%
+/-14
+/-12
+/-22
+/-20
+/-4
+/-6
2019
Impact on
profit (ii)
£m
2018
Impact on
profit (ii)
£m
39/(43)
18/(9)
287/(287)
280/(280)
(i) The base price represents the average forward market price over the duration of the active market curve used in the sensitivity analysis provided.
(ii) 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 other comprehensive income 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 relevant counterparty credit limits and updates these as necessary, based on a consistent
set of principles. It continues to operate within its limits. In respect of trading activities for 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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Centrica plc Annual Report and Accounts 2019
S3. Financial risk management
The Group is exposed to credit risk in its treasury, trading, energy procurement and downstream activities. The maximum exposure to credit risk
for financial instruments at fair value is equal to their carrying value and is shown by counterparty credit rating in the table below. Further details
of other collateral and credit security not offset against these amounts is shown in note S6.
2019
2018
Financial assets at
amortised cost
Financial assets at fair value
Financial assets at
amortised cost
Financial assets at fair value
Receivables
including
treasury,
trading and
energy
procurement
counterparties
£m
148
268
580
123
10
3,981
5,110
Cash and cash
equivalents
£m
–
699
8
–
–
14
721
Derivative
financial
instruments
with positive
fair values
£m
31
487
763
331
32
169
Cash and cash
equivalents
£m
621
–
–
–
–
–
621
1,813
Receivables
including
treasury,
trading and
energy
procurement
counterparties
£m
82
580
601
375
15
4,151
5,804
Derivative
financial
instruments
with positive
fair values
£m
13
655
738
154
61
57
Cash and cash
equivalents
£m
781
–
–
–
–
–
781
1,678
Cash and cash
equivalents
£m
–
454
15
–
–
18
487
31 December
AAA to AA
AA– to A–
BBB+ to BBB–
BB+ to BB–
B+ or lower
Unrated (i)
(i) The unrated counterparty receivables primarily comprise amounts due from downstream customers, 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 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. The impairment considerations of IFRS 9 are applicable to financial assets arising from treasury, trading
and energy procurement activities that are carried at amortised cost and equity instruments that are carried at fair value through other
comprehensive income (FVOCI). Equity instruments measured at FVOCI are not material for further disclosure.
Included in the table above within receivables including treasury, trading and energy procurement counterparties is £1,246 million of treasury,
trading and energy procurement assets. The Group’s risk assessment procedures and counterparty selection process ensure that the credit
risk on this type of financial asset is always low at initial recognition, and is expected to continue to be assessed as low throughout the asset life.
Therefore, the assumption that there has been no significant increase in credit risk since initial recognition applies, and accordingly the expected
credit loss modelled is the 12-month expected credit loss, and is not material for further disclosure.
Included within the table above is information about the exposure to credit risk arising from only certain of the Group’s energy procurement
contracts – those in the scope of IFRS 9. 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 IFRS 9 (note S6) that represents the maximum exposure
to credit risk in accordance with IFRS 7.
(b) Trade receivables and contract assets
The simplified approach of measuring lifetime expected credit losses has been applied to trade receivables and contract asset balances, which
are the focus of this disclosure. Therefore, consideration of the significance of any change in credit risk since initial recognition for the purpose
of applying this model is not required for any material component of the receivables balance.
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.
A sensitivity analysis on the further credit deterioration of receivables greater than 90 days past their due date is provided in note 17.
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 for
further information.
Centrica plc Annual Report and Accounts 2019
177
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S3. Financial risk management
Maturity profiles
Maturities of derivative financial instruments, provisions, borrowings and leases are provided in the following tables (all amounts are remaining
contractual undiscounted cash flows):
Due for payment 2019
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)
Leases: (ii)
Minimum lease payments
Capital elements of leases
Due for payment 2018
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
<1
year
£m
1 to 2
years
£m
2 to 3
years
£m
3 to 4
years
£m
4 to 5
years
£m
>5
years
£m
(353)
(59)
(30)
(8)
(5)
(14)
(4,506)
(2,651)
(1,763)
(1,812)
(2,033)
(1,602)
(4,378)
4,367
(152)
(808)
(171)
(163)
<1
year
£m
(1,721)
1,818
(28)
(834)
(132)
(127)
1 to 2
years
£m
(345)
341
(29)
(469)
(65)
(61)
2 to 3
years
£m
(34)
32
(10)
(391)
(37)
(35)
3 to 4
years
£m
(2)
–
(7)
(59)
96
(23)
(154)
(4,473)
(30)
(28)
4 to 5
years
£m
(95)
(89)
>5
years
£m
(193)
(90)
(10)
(4)
(1)
4
(4,323)
(3,280)
(2,363)
(1,756)
(2,018)
(3,629)
(4,630)
4,638
(109)
(435)
(68)
(59)
(1,001)
995
(68)
(267)
(76)
(68)
(910)
1,041
(34)
(875)
(59)
(57)
(120)
113
(23)
(472)
(19)
(19)
(2)
–
(6)
(61)
102
(6)
(401)
(4,669)
(14)
(13)
(2)
(2)
(i) Proprietary energy trades are excluded from this maturity analysis as the Group does 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.
(ii) The difference between the total minimum lease payments and the total capital elements of leases is due to future finance charges.
178
Centrica plc Annual Report and Accounts 2019
S4. Other equity
This section summarises the Group’s other equity reserve movements.
1 January 2018
Adjustment on adoption of IFRS 9
Actuarial gain
Employee share schemes:
Increase in own shares
Exercise of awards
Value of services provided
Impact of cash flow hedging
Taxation on above items
Share of other comprehensive loss
of joint ventures and associates, net of taxation
Exchange adjustments
Other movements
31 December 2018
Actuarial loss
Employee share schemes:
Exercise of awards
Value of services provided
Impact of cash flow hedging
Taxation on above items
Share of other comprehensive income
of joint ventures and associates, net of taxation
Exchange differences on translation of foreign operations
Exchange differences reclassified to Group Income
Statement on disposal
Other movements
31 December 2019
Cash
flow
hedging
reserve
£m
Foreign
currency
translation
reserve
£m
Actuarial
gains and
losses
reserve
£m
2
–
–
–
–
–
11
(2)
–
–
–
11
–
–
–
(6)
2
–
–
–
–
7
(172)
(1,286)
–
–
–
–
–
–
–
–
104
–
(68)
–
–
–
–
–
–
(110)
(18)
–
–
792
–
–
–
–
(135)
(1)
1
–
(629)
(465)
–
–
–
78
29
–
–
–
(196)
(987)
Financial
asset at
FVOCI
reserve
£m
31
(28)
–
–
–
–
–
–
–
–
(1)
2
–
–
–
–
–
–
–
–
2
4
Treasury
and own
shares
reserve
£m
Share-
based
payments
reserve
£m
Merger, capital
redemption
and other
reserves
£m
(142)
100
517
–
–
(11)
46
–
–
–
–
–
–
(107)
–
70
–
–
–
–
–
–
–
–
–
–
(51)
43
–
–
–
–
–
92
–
(60)
41
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
8
525
–
–
–
–
–
–
–
–
2
(37)
73
527
Total
£m
(950)
(28)
792
(11)
(5)
43
11
(137)
(1)
105
7
(174)
(465)
10
41
(6)
80
29
(110)
(18)
4
(609)
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 and 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.
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 2019 the cumulative nominal value of shares repurchased and
subsequently cancelled was £28 million (2018: £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.
Centrica plc Annual Report and Accounts 2019
179
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S5. Hedge accounting
The Group applies hedge accounting to address interest rate and foreign currency risk on borrowings.
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
Interest rate risk
Hedge
Fair value
Foreign exchange risk
Cash flow hedge
2019
Assets
£m
Liabilities
£m
105
131
(2)
(2)
Change in
fair value
£m
55
(44)
2018
Liabilities
£m
(10)
(1)
Assets
£m
59
185
Change in
fair value
£m
3
22
2019
Hedge
Timing of
nominal amount
Average rate
Nominal value
Hedged item
Change in
fair value
of hedged item
in year
£m
Cumulative
amount of fair
value hedge
adjustments on
hedged item
£m
Accumulated
foreign
exchange
gain/(losses) in
CFHR (i)
£m
Interest rate risk
Fair value
2022 – 2033
Foreign exchange risk
Cash flow hedge
2021 – 2032
Cash flow hedge
2036 – 2038
Fixed to floating
at LIBOR/US
IBOR +
1% - 5%
£50 million -
£550 million,
$250 million
Bonds (ii)
(57)
(85)
N/A
GBP to Euro
at 1.356
€50 million,
€750 million Euro bonds
GBP to Yen
at 151.49
¥20 billion
Yen bank
loans
42
1
N/A
N/A
25
(18)
2018
Hedge
Timing of
nominal amount
Average rate
Nominal value
Hedged item
Interest rate risk
Fair value
2022 – 2033
Foreign exchange risk
Cash flow hedge
2021 – 2032
Cash flow hedge
2036 – 2038
Fixed to floating at
LIBOR/US IBOR
+ 1% - 5%
£50 million -
£550 million,
$250 million
GBP to Euro at
1.356
€50 million,
€750 million
GBP to Yen at
151.49
¥20 billion
Bonds (ii)
Euro bonds
Yen bank
loans
In the years presented all amounts related to continuing cash flow hedge relationships.
(i)
(ii) The carrying amount of bonds designated as hedged items in hedging relationships is disclosed in note 24.
Change in
fair value
of hedged item
in year
£m
Cumulative
amount of fair
value hedge
adjustments on
hedged item
£m
Accumulated
foreign
exchange
gain/(losses) in
CFHR (i)
£m
2
(12)
(11)
(28)
N/A
N/A
N/A
30
(17)
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.
Impact of interest rate benchmark reform
The Group has elected to early adopt amendments to IFRS 9, IAS 39 and IFRS 7: ‘Interest rate benchmark reform’ during the year. The
amendments permit continuation of hedge accounting even if, in the future, the benchmark interest rate applicable to the hedge may not be
separately identifiable.
The Group has monitored developments and considered the impact of reform, concluding that the primary impact relates to fair value hedging
relationships in which fixed interest rates on bonds are swapped for floating interest rates linked to GBP and USD LIBOR, as detailed in the
above table.
180
Centrica plc Annual Report and Accounts 2019
S5. Hedge accounting
The Group will continue to apply the amendments until the uncertainty arising from the interest rate benchmark reforms with respect to the
timing and amount of the underlying cash flows to which the Group is exposed ends. The Group has assumed that the uncertainty will not
end until the Group’s contracts that reference IBORs are amended and appropriate fall-back language is introduced into relevant contracts.
Discussions with counterparties are in the early stages and will continue during 2020, along with the Group’s activities to ensure systems
and processes are ready and able to accommodate the changes.
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.
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 through other comprehensive
income are transferred to the Group Income Statement in the 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.
Centrica plc Annual Report and Accounts 2019
181
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
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 FVTPL
Debt instruments
Equity instruments
Cash and cash equivalents
2019
2018
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
Level 1
£m
Level 2
£m
Level 3
£m
Total
£m
1
–
–
124
77
26
–
1,241
228
1,470
108
235
–
–
–
621
–
–
–
–
28
–
108
235
124
77
54
621
6
–
–
126
68
20
–
1,248
150
1,404
59
215
–
–
–
781
2,303
–
–
–
–
25
–
175
59
215
126
68
45
781
2,698
Total financial assets at fair value
228
2,205
256
2,689
220
Financial liabilities
Derivative financial instruments:
Energy derivatives
Interest rate derivatives
Foreign exchange derivatives
(146)
(1,778)
(90)
(2,014)
(42)
(1,390)
(59)
(1,491)
–
–
(25)
(106)
–
–
(25)
(106)
–
–
(36)
(39)
–
–
(36)
(39)
Total financial liabilities at fair value
(146)
(1,909)
(90)
(2,145)
(42)
(1,465)
(59)
(1,566)
182
Centrica plc Annual Report and Accounts 2019
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
Total realised and unrealised gains/(losses):
Recognised in Group Income Statement
Purchases, sales, issuances and settlements (net)
Transfers between Level 2 and Level 3 (i)
Foreign exchange movements
31 December
Total (losses)/gains for the year for Level 3 financial instruments
held at the end of the reporting year
(i) Transfers between levels are deemed to occur at the beginning of the reporting period.
2019
Financial
assets
£m
Financial
liabilities
£m
2018
Financial
assets
£m
Financial
liabilities
£m
175
(59)
17
28
38
(2)
256
(14)
(10)
(26)
5
–
(90)
(2)
59
79
24
12
1
175
71
(33)
(11)
(4)
(8)
(3)
(59)
(32)
(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 the year was 1% (Europe) and 3% (North America) per annum (31 December 2018 average discount rate of 1% (Europe) and
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 Europe and North America. 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 2% (Europe) and 3% (North America) per annum (31 December 2018 average discount rate of 2% (Europe)
and 3% (North America) per annum).
Active period of markets
UK (years)
North America (years)
Gas
Power
Coal
Emissions
3
5
3
Up to 5
3
N/A
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 the volumetric exposures and 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
IFRS 9. The Group has numerous other commodity contracts which are outside of the scope of IFRS 9 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 into 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 IFRS 9, are also reviewed regularly as part of the overall risk management process.
Where the fair value at initial recognition for contracts which extend beyond the active period differs from the transaction price, a day-one gain or
loss will arise. Such gains and losses are deferred and amortised to the Group Income Statement based on volumes purchased or delivered over
the contractual period until such time as observable market data becomes available (see note S2 for further detail). The amount that has yet to be
recognised in the Group Income Statement relating to the differences between the transaction prices and the amounts that would have arisen had
valuation techniques used for subsequent measurement been applied at initial recognition, less subsequent releases, is immaterial.
Centrica plc Annual Report and Accounts 2019
183
Financial Statements | Notes to the Financial Statements continued
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 leases
2019
2018
Carrying value
£m
Fair value
£m
Fair value
hierarchy
Carrying value
£m
Fair value
£m
Fair value
hierarchy
(144)
(3,963)
(102)
(503)
(176)
(4,595)
(138)
(510)
Level 2
Level 1
Level 2
Level 2
(149)
(4,057)
(105)
(218)
(165)
(4,432)
(128)
(226)
Level 2
Level 1
Level 2
Level 2
Notes
24(d)
24(d)
24(d)
24(d)
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 and short-term loans are assumed to equal their book values due to the short-term nature of these amounts. The fair values of
obligations under 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 2019
Derivative financial assets
Derivative financial liabilities
Balances arising from commodity contracts:
Accrued and unbilled downstream and energy income
Accruals for commodity costs
Cash and financing arrangements:
Cash and cash equivalents
Bank loans and overdrafts
Securities
31 December 2018
Derivative financial assets
Derivative financial liabilities
Balances arising from commodity contracts:
Accrued and unbilled downstream and energy income
Accruals for commodity costs
Cash and financing arrangements:
Cash and cash equivalents
Bank loans and overdrafts
Securities
Related amounts not offset in the
Group Balance Sheet (i)
Gross amounts
of recognised
financial
instruments
£m
Gross amounts of
recognised financial
instruments offset
in the Group
Balance Sheet
£m
Net amounts
presented
in the Group
Balance Sheet
£m
Financial
instruments
£m
Collateral
£m
Net amount
£m
9,072
(9,404)
5,625
(5,146)
1,353
(703)
255
(7,259)
7,259
(3,280)
3,280
(11)
11
–
1,813
(2,145)
(332)
2,345
(1,866)
1,342
(692)
255
(505)
505
(186)
186
(548)
548
–
(35)
181
–
–
–
–
(26)
1,273
(1,459)
(186)
2,159
(1,680)
794
(144)
229
Related amounts not offset in the
Group Balance Sheet (i)
Gross amounts
of recognised
financial
instruments
£m
Gross amounts of
recognised financial
instruments offset
in the Group
Balance Sheet
£m
Net amounts
presented
in the Group
Balance Sheet
£m
Financial
instruments
£m
Collateral
£m
Net amount
£m
7,630
(7,518)
6,994
(6,604)
1,289
(310)
307
(5,952)
5,952
(4,129)
4,129
(21)
21
–
1,678
(1,566)
112
2,865
(2,475)
1,268
(289)
307
(292)
292
(264)
264
(140)
140
–
(157)
472
–
–
–
–
(26)
1,229
(802)
427
2,601
(2,211)
1,128
(149)
281
(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 where the offsetting Group Balance Sheet class is not included within the above table.
184
Centrica plc Annual Report and Accounts 2019
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) and with business customers
by British Gas Services (Commercial) Limited. 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. As the Group’s insurance contract portfolio is comprised of a
large number of contracts with small individual values, a high volume of claims with a relatively low unit cost results. The characteristics of the
business mean that material concentrations or aggregations of risk are relatively remote. 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.
The most significant insurance risk is an extreme weather event for an extended period, which has the propensity to increase claim frequencies.
The Group regularly assesses insurance risk sensitivities, the most significant relating to increases in breakdown frequency and increases in the
average cost of repair. A reasonably possible increase in either would not have a material impact on the results of the Group.
Revenue is recognised over the life of contracts (usually twelve months) 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 £20 million (2018: £18 million) and £341 million (2018: £398 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 (2018: £nil).
Total revenue
Expenses relating to FFS and insurance contracts
Deferred income
Accrued income
2019
£m
1,118
(949)
(86)
33
2018
£m
1,142
(1,019)
(83)
32
The Group also considers whether estimated future cash flows under the contracts will be sufficient to meet expected future costs. Any deficiency
is charged immediately to the Group Income Statement. Claims frequency is sensitive to the reliability of appliances as well as the impact of
weather conditions. The contracts are not exposed to any interest rate risk or significant credit risk and do not contain any embedded derivatives.
Centrica plc Annual Report and Accounts 2019
185
Financial Statements | Notes to the Financial Statements continued
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:
Associates:
Nuclear
Joint Ventures
2019
Purchase
of goods
and services
£m
Amounts
owed to
£m
2018
Purchase
of goods
and services
£m
(454)
(16)
(470)
(51)
(1)
(52)
(476)
(17)
(493)
Amounts
owed to
£m
(42)
(2)
(44)
During the year, there were no material changes to commitments in relation to joint ventures and associates.
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 2019.
Key management personnel comprise members of the Board and Executive Committee, a total of 17 individuals at 31 December 2019
(2018: 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 (ii)
Amounts receivable under long-term incentive schemes
Contributions into pension schemes
(i) Comparatives have been restated. Further detail is provided in the Remuneration Report on pages 82 to 93.
(ii) These emoluments were paid for services performed on behalf of the Group. No emoluments related specifically to services performed for the Company.
Directors’ interests in shares are given in the Remuneration Report on pages 82 to 93
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 (ii)
All other services
Fees in respect of pension scheme audits (iii)
Including £0.3 million (2018: £0.3 million) for the audit of the Ofgem Consolidated Segmental Statement.
(i)
(ii) Predominantly relates to the review of the condensed interim Financial Statements included in the interim results.
(iii) The pension scheme audit continues to be performed by PricewaterhouseCoopers LLP.
2019
£m
7.9
1.0
4.1
13.0
2018
£m
10.1
1.2
1.6
12.9
2019
£m
2018 (restated) (i)
£m
4.0
–
0.5
6.0
0.7
0.8
2019
£m
2018
£m
6.0
1.7
7.7
0.8
–
8.5
0.1
5.6
1.7
7.3
0.8
0.4
8.5
0.1
186
Centrica plc Annual Report and Accounts 2019
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 2019
Centrica Beta Holdings Limited
Centrica Holdings Limited
Centrica Trading Limited
Rhodes Holdings HK Limited (i)
(i) Established in 2019.
Principal activity
Holding company
Holding company
Country of incorporation/
registered address key (i)
Class of shares held
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Dormant
United Kingdom / A
Ordinary shares
Holding company
Hong Kong / AQ
Ordinary shares
Investments held indirectly by Centrica plc with 100% voting rights
31 December 2019
5016892 Ontario Ltd. (ii) (iii)
Accord Energy (Trading) Limited
Accord Energy Limited
Airtron Inc. (iv)
Alertme.com GmbH
Alertme.com Inc.
Astrum Solar Inc.
Atform Limited
Principal activity
Country of incorporation/
registered address key (i)
Class of shares held
Gas and/or oil exploration and production and/
or trading
Canada / B
Ordinary shares
Dormant
Dormant
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Home and/or commercial services
United States / C
Ordinary shares
Non-trading
Germany / D
Ordinary shares
Energy management products and services
United States / E
Ordinary shares
Home and/or commercial services
United States / F
Ordinary shares
Dormant
United Kingdom / A
Ordinary shares
AWHR America’s Water Heater Rentals LLC
Home and/or commercial services
United States / C Membership interest
Bord Gáis Energy Limited
Bounce Energy Inc.
Brae Canada Ltd. (iii)
British Gas Energy Procurement Limited
British Gas Finance Limited
British Gas Insurance Limited
British Gas Limited
British Gas New Heating Limited
Energy supply and power generation
Republic of Ireland / G
Ordinary shares
Energy supply
United States / C
Ordinary shares
Gas and/or oil exploration and production
Canada / B
Ordinary and
preference shares
Energy supply
Vehicle leasing
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Insurance provision
United Kingdom / A
Ordinary shares
Dormant
United Kingdom / A
Ordinary shares
Electrical and gas installations
United Kingdom / A
Ordinary shares
British Gas Services (Commercial) Limited
Servicing and installation of heating systems
United Kingdom / A
Ordinary shares
British Gas Services Limited
Home services
United Kingdom / A
Ordinary shares
British Gas Social Housing Limited
Servicing and installation of heating systems
United Kingdom / A
Ordinary shares
British Gas Solar Limited
British Gas Trading Limited
British Gas X Limited (v)
Business Gas Limited
Caythorpe Gas Storage Limited
CBS US Solar Fund 1, LLC
Centrica (IOM) Limited
Centrica (Lincs) Wind Farm Limited
Centrica Alpha Finance Limited
Centrica America Limited
Centrica Barry Limited
Centrica Brigg Limited
Dormant
United Kingdom / A
Ordinary shares
Energy supply
Energy supply
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Dormant
United Kingdom / A
Ordinary shares
Gas storage
United Kingdom / H
Ordinary shares
Distributed energy and power
United States / C Membership interest
Dormant
Isle of Man / I
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
Dormant
Dormant
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Power generation
United Kingdom / A
Ordinary shares
Power generation
United Kingdom / A
Ordinary shares
Centrica Business Solutions (Generation) Limited
Power generation
United Kingdom / A
Ordinary shares
Centrica Business Solutions Asset Management LLC (v)
Energy management products and services
United States / C
Ordinary shares
Centrica Business Solutions Belgium NV (ii)
Demand response aggregation
Belgium / J
Ordinary shares
Centrica Business Solutions BV
Energy management products and services
Netherlands / K
Ordinary shares
Centrica plc Annual Report and Accounts 2019
187
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S10. Related undertakings
31 December 2019
Principal activity
Country of incorporation/
registered address key (i)
Class of shares held
Centrica Business Solutions Canada Inc
Energy management products and services
Canada / B
Ordinary shares
Centrica Business Solutions Delivery LLC (v)
Energy management products and services
United States / C
Ordinary shares
Centrica Business Solutions Deutschland GmbH (ii)
Demand response aggregation
Germany / L
Ordinary shares
Centrica Business Solutions France SASU (ii)
Demand response aggregation
France / M
Ordinary shares
Centrica Business Solutions International Limited
Centrica Business Solutions Ireland Limited (v)
Holding company
United Kingdom / A
Ordinary shares
Holding company
Ireland / N
Ordinary shares
Centrica Business Solutions Italia Srl
Energy management products and services
Italy / O
Ordinary shares
Centrica Business Solutions Management Limited (v)
Holding company
United Kingdom / A
Centrica Business Solutions México S.A. de C.V.
Energy management products and services
Mexico / P
Ordinary shares
Centrica Business Solutions Romania Srl (ii)
Energy management products and services
Romania / Q
Ordinary shares
Centrica Business Solutions UK Limited
Energy management products and services
United Kingdom / A
Ordinary shares
Centrica Business Solutions UK Optimisation Limited (ii)
Demand response aggregation
United Kingdom / A
Ordinary shares
Centrica Business Solutions US Inc
Centrica Business Solutions Zrt
Energy management products and services
United States / C
Ordinary shares
Energy management products and services
Hungary / R
Ordinary shares
Centrica Combined Common Investment Fund Limited
Centrica Delta Limited
Centrica Directors Limited
Dormant
Dormant
Dormant
United Kingdom / A
Ordinary shares
Isle of Man / S
Ordinary shares
United Kingdom / A
Ordinary shares
Centrica Distributed Generation Limited
Power generation
United Kingdom / A
Ordinary shares
Centrica Energy (Trading) Limited
Centrica Energy Limited
Centrica Energy Marketing Limited
Centrica Energy Operations Limited
Centrica Energy Renewable
Investments Limited
Centrica Energy Trading A/S (ii)
Centrica Energy Trading GmbH (ii)
Centrica Energy Trading Pte. Ltd. (ii)
Wholesale energy trading
United Kingdom / A
Ordinary shares
Wholesale energy trading
United Kingdom / A
Ordinary shares
Wholesale energy trading
United Kingdom / A
Ordinary shares
Dormant
Dormant
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Energy Services and wholesale energy trading
Denmark / T
Ordinary shares
Energy Services and wholesale energy trading
Germany / U
Ordinary shares
Energy Services and wholesale energy trading
Singapore / V
Ordinary shares
Centrica Engineers Pension Trustees Limited
Dormant
United Kingdom / A
Ordinary shares
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 Hive Canada Inc.
Centrica Hive Limited
Centrica Hive SAS
Centrica Hive Srl
Centrica Hive US Inc.
Centrica HoldCo GP LLC
Centrica Ignite GP Limited
Centrica Ignite LP Limited
Centrica India Offshore Private Limited
Centrica Infrastructure Limited
Centrica Innovations UK Limited
Centrica Innovations US Inc.
Centrica Insurance Company Limited
Centrica Jersey Limited
Centrica KL Limited
Centrica KPS Limited
Centrica Lake Limited
Holding company
United Kingdom / A
Ordinary shares
Holding company
United Kingdom / W
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
Dormant
United Kingdom / A
Ordinary shares
Group financing
Jersey / X
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
Energy management products and services
Canada / B
Ordinary shares
Energy management products and services
United Kingdom / A
Ordinary shares
Energy management products and services
France / Y
Ordinary shares
Energy management products and services
Italy / Z
Ordinary shares
Energy management products and services
United States / C
Ordinary shares
Holding company
United States / C Membership interest
Investment company
United Kingdom / A
Ordinary shares
Investment company
United Kingdom / A
Ordinary shares
Business services
India / AA
Ordinary shares
Dormant
United Kingdom / W
Ordinary shares
Investment company
United Kingdom / A
Ordinary shares
Investment company
United States / C
Ordinary shares
Insurance provision
Isle of Man /
I
Ordinary and
preference shares
Dormant
Jersey / AB
Ordinary shares
Power generation
United Kingdom / A
Ordinary shares
Power generation
United Kingdom / A
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
188
Centrica plc Annual Report and Accounts 2019
S10. Related undertakings
31 December 2019
Centrica Leasing (KL) Limited
Centrica LNG Company Limited
Centrica LNG UK Limited
Centrica Nederland BV
Centrica NewCo 123 Limited
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
Centrica Secretaries Limited
Centrica Services Limited
Centrica Storage Holdings Limited
Centrica Storage Limited
Centrica Trinidad and Tobago Limited
Centrica Trust (No.1) Limited
Centrica Upstream Investment Limited
Centrica US Holdings Inc.
CH4 Energy Limited
CID1 Limited
CIU1 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
Dormant
LNG trading
LNG trading
Country of incorporation/
registered address key (i)
Class of shares held
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Holding company
Netherlands /AC
Ordinary shares
Dormant
United Kingdom / A
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
Dormant
Dormant
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Gas and/or oil exploration and production
United Kingdom / H
Ordinary shares
Dormant
United Kingdom / H
Ordinary shares
Holding company
Power generation
Dormant
Dormant
Dormant
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A Limited by guarantee
United Kingdom / A
Ordinary shares
United Kingdom / W
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
Non-trading
Dormant
Dormant
Dormant
Business services
Holding company
Nigeria /AD
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / H
Ordinary shares
Gas production and processing
United Kingdom / H
Ordinary shares
Business services
Trinidad and Tobago /AE
Ordinary shares
Dormant
Dormant
United Kingdom / A
Ordinary shares
United Kingdom / W
Ordinary shares
Holding company
United States / C
Ordinary shares
Dormant
Dormant
Dormant
Business services
Holding company
Holding company
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
South Africa /AF
Ordinary shares
Canada /AG
Ordinary shares
Canada / B
Ordinary shares
Energy supply and/or services
Canada /AH
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
Holding company
United States / C Membership interest
Home and/or commercial services
Canada / B
Ordinary shares
Home and/or commercial services
Canada / B
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 /AG
Ordinary shares
Energy supply and/or services
United States / C Membership interest
Energy supply and/or services
United States / C Membership interest
Distributed Energy Asset Solutions Limited
Dormant
United Kingdom / A
Ordinary shares
Distributed Energy Customer Solutions Limited
Energy Management products and services
United Kingdom / A
Ordinary shares
Drips Limited
Dyno Developments Limited
Dyno-Plumbing Limited
Dyno-Rod Limited
Dormant
Dormant
Dormant
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Operation of a franchise network
United Kingdom / A
Ordinary shares
Centrica plc Annual Report and Accounts 2019
189
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S10. Related undertakings
31 December 2019
Dyno-Security Services Limited
Dyno-Services Limited
ECL Contracts Limited
ECL Investments Limited
Electricity Direct (UK) Limited
ENER-G Cogen International Limited
ENER-G Nagykanizsa Kft
ENER-G Power2 Limited
ENER-G Rudox LLC
Energy For Tomorrow
FES Energy Solutions Limited (v)
First Choice Power LLC
Gateway Energy Services Corporation
GB Gas Holdings Limited
Generation Green Solar Limited
GF One Limited (vi)
GF Two Limited (vi)
Goldbrand Development Limited
Hillserve Limited
Home Assistance UK Limited
Home Warranty Holdings Corp.
Home Warranty of America Inc. (vii)
Home Warranty of America Inc. (vii)
Io-Tahoe LLC
Io-Tahoe UK Limited
Io Tahoe Ukraine LLC
Masters Inc.
Neas Energy Limited
Neas Invest A/S
Newco One Limited
North Sea Infrastructure Partners Limited
NSIP (Holdings) Limited
Principal activity
Country of incorporation/
registered address key (i)
Class of shares held
Dormant
Dormant
Dormant
Dormant
Dormant
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
Energy management products and services
Hungary / R
Ordinary shares
Energy management products and services
United States / C Membership interest
Holding company
United Kingdom / A
Ordinary shares
Not-for-profit energy services
United Kingdom / A
Limited by guarantee
Energy supply and/or services
Ireland / G
Ordinary shares
Energy supply and/or services
United States / AI Membership interest
Energy supply
United States / AJ
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
Dormant community benefit society
United Kingdom / A
Ordinary shares
In liquidation
In liquidation
Dormant
Dormant
United Kingdom / AK
Ordinary shares
United Kingdom / AK
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Non-trading
United Kingdom / A
Ordinary shares
Insurance provision
United States / C
Ordinary shares
Home and/or commercial services
United States / AL
Ordinary shares
Home and/or commercial services
United States / AM
Ordinary shares
Data management
United States / C Membership interest
Data management
United Kingdom / A
Ordinary shares
Data management
Ukraine / AN
Ordinary shares
Home and/or commercial services
United States / F
Ordinary shares
Energy services and wholesale energy trading
United Kingdom / A
Ordinary shares
Dormant
Dormant
Dormant
Dormant
Denmark / T
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / W
Ordinary shares
United Kingdom / W
Ordinary shares
P.H. Jones Facilities Management Ltd
Servicing and maintenance of heating systems
United Kingdom / A
Ordinary shares
P.H Jones Group Limited
Panoramic Power Ltd.
Pioneer Shipping Limited
Repair and Care Limited
REstore North America LLC
RSG Holding Corp.
SmartWatt Energy Inc. (v)
Solar Technologies Group Limited
Solar Technologies Limited
Soren Limited
South Energy Investments LLC (v)
Vista Solar, Inc
Energy management products and services
Israel / AO
Ordinary shares
Holding company
United Kingdom / A
Ordinary shares
LNG vessel chartering
United Kingdom / A
Ordinary Shares
Dormant
United Kingdom / A
Ordinary shares
Demand response aggregation
United States / AP Membership interest
Holding company
United States / C
Ordinary shares
Energy supply and/or services
United States / C
Ordinary shares
Dormant
Dormant
Dormant
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
United Kingdom / A
Ordinary shares
Investment company
United States / AR Membership interest
Distributed energy and power
United States / AS
Ordinary shares
190
Centrica plc Annual Report and Accounts 2019
S10. Related undertakings
Investments held indirectly by Centrica plc with 69% voting rights
31 December 2019
Bayerngas Norge AS
Bayerngas Produksjon Norge AS
Bowland Resources (No.2) Limited
Bowland Resources Limited
Elswick Energy Limited
NSGP (Ensign) Limited
Spirit Energy Danmark ApS
Spirit Energy Hedging Holding Limited
Spirit Energy Hedging Limited
Spirit Energy Limited
Spirit Energy Nederland BV
Spirit Energy Norge AS
Spirit Energy North Sea Limited
Spirit Energy North Sea Oil Limited
Spirit Energy Petroleum Danmark AS (viii)
Spirit Energy Production UK Limited
Spirit Energy Resources Limited
Spirit Energy Southern North Sea Limited
Spirit Energy Treasury Limited
Spirit Energy WOS Limited
Spirit Europe Limited
Spirit Infrastructure BV
Spirit North Sea Gas Limited
Spirit Norway Limited
Spirit Production (Services) Limited
Spirit Resources (Armada) Limited
Principal activity
Country of incorporation/
registered address key (i)
Class of shares held
Holding company
Finance company
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Dormant
Dormant
Holding company
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Finance company
Gas and/or oil exploration and production
Holding company
Construction, ownership and exploitation of infrastructure
Gas and/or oil exploration and production
Gas and/or oil exploration and production
Business services
Gas and/or oil exploration and production
Norway / AT
Norway / AT
United Kingdom / AU
United Kingdom / AU
United Kingdom / AU
Jersey / AV
Denmark / AW
United Kingdom / AU
United Kingdom / AU
United Kingdom / AU
Netherlands / AX
Norway / AY
United Kingdom / AU
United Kingdom / AZ
Norway / AT
United Kingdom / AU
United Kingdom / AU
United Kingdom / AU
United Kingdom / AU
United Kingdom / AU
United Kingdom / AU
Netherlands / AX
United Kingdom / AZ
United Kingdom / AU
United Kingdom / AZ
United Kingdom / AU
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary shares
Ordinary and
deferred 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
(i) For list of registered addresses, refer to note S10(d).
(ii) The following name changes were made during the year: 1773648 Alberta Ltd. to 5016892 Ontario Ltd., REstore NV to Centrica Business Solutions Belgium NV, REstore Deutschland
GmbH to Centrica Business Solutions Deutschland GmbH, REstore France SAS to Centrica Business Solutions France SASU, ENER-G Technologii Energetice Srl to Centrica Business
Solutions Romania Srl, REstore Flexpond UK Limited to Centrica Business Solutions UK Optimisation Limited, Neas Energy A/S to Centrica Energy Trading A/S, Neas Energy GmbH to
Centrica Energy Trading GmbH, Neas Energy Singapore Pte. Ltd to Centrica Energy Trading Pte. Ltd.
(iii) On 1 January 2020 5016892 Ontario Ltd. and Brae Canada Ltd. were merged into Direct Energy Marketing Limited.
(iv) During 2019 T.A. Kaiser Heating & Air, Inc. was merged into its parent Airtron Inc.
(v) Acquired or established in 2019.
(vi) GF One Limited and GF Two Limited are 75% indirectly owned by Centrica plc.
(vii) Home Warranty of America Inc. is registered as separate entities in the states of California and Illinois.
(viii) Spirit Energy Petroleum Danmark AS principally operates in Denmark.
Centrica plc Annual Report and Accounts 2019
191
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S10. Related undertakings
(b) Subsidiary undertakings – partnerships held indirectly by Centrica plc with 100% voting rights
31 December 2019
CF 2016 LLP
CFCEPS LLP
CFCPP LLP
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
Ignite Social Enterprise LP
WTU Retail Energy LP
(i) For list of registered addresses, refer to note S10(d).
Principal activity
Country of incorporation/
registered address key (i)
Class of shares held
Group financing
United Kingdom / A
Membership interest
Group financing
United Kingdom / A
Membership interest
Group financing
United Kingdom / A
Membership interest
Energy supply
Energy supply
Energy supply
Holding entity
United States / C
Membership interest
United States / AI
Membership interest
Canada / B
Membership interest
Canada / B
Membership interest
Group financing
United Kingdom / W
Membership interest
Group financing
United Kingdom / W
Membership interest
Group financing
United Kingdom / W
Membership interest
Social enterprise investment fund
United Kingdom / A
Membership interest
Energy supply
United States / C
Membership interest
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
Principal activity
Country of incorporation/
registered address key (i)
Class of shares held
Indirect
interest and
voting rights
(%)
31 December 2019
Joint ventures (ii)
Allegheny Solar 1 LLC
Barrow Shipping Limited
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
Vindpark Keblowo ApS
Associates (ii)
Energy supply and/or services
United States / BA
Membership interest
Energy supply and/or services
United Kingdom / BB
Ordinary shares
Development of an offshore windfarm
United Kingdom / A
Ordinary shares
Operation of an onshore windfarm
Poland / BC
Ordinary shares
Development of flexible power
generation sites
Republic of Ireland / G
Ordinary shares
Dormant
United Kingdom / A
Ordinary shares
Energy supply and/or services
United States / BC
Membership interest
Energy supply and/or services
United States / BC
Membership interest
Energy supply and/or services
United States / BC
Membership interest
Operation of an onshore windfarm
Denmark / BD
Ordinary shares
40.0%
50.0%
50.0%
50.0%
50.0%
50.0%
40.0%
40.0%
40.0%
50.0%
43.7%
50.0%
20.0%
20.0%
Better Home Care Services Limited (iii)
Other information technology service activities
United Kingdom / BE
Ordinary shares
C2 Centrica MT LLC (iii)
Lake Acquisitions Limited
Veolia CHP Ireland Limited
Energy supply and/or services
United States / BF
Membership interest
Holding company
United Kingdom / BG
Ordinary shares
Energy supply and power generation
Republic of Ireland / BH
Ordinary shares
(i) For list of registered addresses, refer to note S10(d).
(ii) Further information on the principal joint ventures and associate investments held by the Group is disclosed in notes 6 and 14.
(iii) Acquired or established in 2019.
All Group companies principally operate within their country of incorporation unless noted otherwise.
192
Centrica plc Annual Report and Accounts 2019
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
Millstream, Maidenhead Road, Windsor, SL4 5GD, United Kingdom
350 7th Avenue SW, Suite 3400, Calgary AB T2P3N9, Canada (i)
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
1 Warrington Place, Dublin 2, Republic of Ireland (ii)
Woodland House, Woodland Park, Hessle, HU13 0FA, United Kingdom
Third Floor, St George’s Court, Upper Church Street, Douglas, IM1 1EE, Isle of Man
Posthofbrug 12, 2600 Antwerp, Belgium
Wiegerbruinlaan 2A, 1422 CB Uithoorn, Netherlands
Neuer Wall 10, 20354 Hamburg, Germany (iii)
Place de la Défense 12, Maison de la Défense, 92974 Paris, France
1 The Seapoint Building, Clontarf, Dublin 3, Republic of Ireland
Milan (MI), Via Emilio Cornalia 26, Italy
Presidente Masaryk no. 61, Piso 7, Mexico, D.f. CP 11570, Mexico (iv)
Strada Martir Colonel Ioan Uta nr.28 camera 1, Municipiul Timisoara judet Timis, Romania (v)
H-1106 Budapest Jászberényi út 24-36, Hungary
33-37 Athol Street, Douglas, IM1 1LB, Isle of Man
Skelagervej 1, DK 9000 Aalborg, Denmark
Gustav-Mahler-Platz 1, 20354 Hamburg, Germany (vi)
220 Orchard Road, #05-01 Midpoint Orchard, Singapore 238852, Republic of Singapore
1 Waterfront Avenue, Edinburgh, Scotland EH5 1SG (vii)
47 Esplanade, St Helier, JE1 0BD, Jersey
3 Boulevard de Sebastopol, 75001, Paris, France
Via Paleocapa Pietro 4, 20121, Milano, Italy
G-74, LGF, Kalkaji, New Delhi, South Delhi, Delhi, 110019, India
26 New Street, St Helier, JE2 3RA, Jersey
Wiegerbruin Iaan 2a, 1422 CB Uithoorn, Netherlands (viii)
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
500 Burrard Street, Suite 2900, Vancouver BC V6C A3, Canada (ix)
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
15 Atir Yeda Street, Kfar Saba, 44643, Israel
WTS LLC, 67 East Park Place, Morristown, New Jersey 07960, United States
Level 54, Hopewell Centre, 183 Queens Road East, Hong Kong
6 Landmark Square, 4th Floor, Stamford CT 06901, United States
4640 Admiralty Way, 5th floor, Marine del Rey, California 90292, United States
Lilleakerveien 8, 0283 Oslo, Norway
First Floor, 20 Kingston Road, Staines-upon-Thames, TW18 4LG, United Kingdom
Sanne, IFC5, St Helier, JE1 1ST, Jersey (x)
Rådhuspladsen 16, 1550 Københaven V, Denmark
Transpolis Building, Polarisavenue 39, 2132 JH Hoofddorp, Netherlands
Veritasvien 25, 4007 Stavanger, Norway
IQ Building, 15 Justice Mill Lane, Aberdeen, AB11 6EQ, United Kingdom
1209 Orange Street, Wilmington, New Castle County, DE 19801, United States
C/O Wilkin Chapman LLP, The Maltings, 11-15 Brayford Wharf East, Lincoln, LN5 7AY, United Kingdom
Centrica plc Annual Report and Accounts 2019
193
Financial Statements | Notes to the Financial Statements continued
Supplementary information continued
S10. Related undertakings
Registered
address key
Address
BC
BD
BE
BF
BG
BH
Ul. Wysogotowska 23, 62-081 Przezmierowo, Wielkpolskie, Poland
Mariagervej 58B, DK 9500 Hobro, Denmark
24 Park Road South, Havant, Hampshire, PO19 1HB
850 New Burton Road, Suite 201, Dover, DE 19904
90 Whitfield Street, London, W1T 4EZ, United Kingdom
Innovation House, DCU Innovation Campus, 11 Old Finglas Road, Glasnevin, Dublin 11, Republic of Ireland
(i) 5016892 Ontario Ltd., Brae Canada Ltd., Centrica Business Solutions Canada Inc, DER Development No.10 Ltd., Direct Energy Holdings (Alberta) Inc., Direct Energy HVAC Services Ltd.,
Direct Energy Partnership and Direct Energy Resources Partnership changed their registered address during the year from 2323 32nd Avenue N.E., Suite 260, Calgary, AB T2E 6Z3,
Canada to the address listed above.
(ii) Greener Ideas Limited changed their registered address during the year from Webworks, Eglinton Street, Cork, Republic of Ireland to the address listed above.
(iii) Centrica Business Solutions Deutschland GmbH changed their registered address during the year from Graf-Adolf-Platz 12, 40213 Düsseldorf, Germany to the address listed above.
(iv) Centrica Business Solutions México S.A. de C.V. changed their registered address during the year from Av. Presidente Masaryk No 61 Int 503 Col Chapultepec Morales, Miguel Hidalgo
Ciudad de Mexico, Mexico 11570 to the address listed above.
(v) Centrica Business Solutions Romania Srl changed their registered address during the year from 15-23 Bucuresti Nord Street, Windsor Building, Ground Floor, Office No.1 Voluntari, Ilfov
County, Romania to the address listed above.
(vi) Centrica Energy Trading GmbH changed their registered address during the year from Schillerstr.7, 40721 Hilden (bei Düsseldorf), Germany to the address listed above.
(vii) Centrica Production Limited, Centrica Upstream Investment Limited, Finance Scotland 2016 Limited Partnership, Finance Scotland CEPS Limited Partnership and Finance Scotland CPP
Limited Partnership changed their registered address during the year from IQ Building, 15 Justice Mill Lane, Aberdeen, AB11 6EQ, United Kingdom to the address listed above.
(viii) Centrica Nederland BV changed their registered address during the year from Transpolis Building, Polarisavenue 39, 2132 JH Hoofddorp, Netherlands to the address listed above.
(ix) Direct Energy (B.C.) Limited changed their registered address during the year from 1185 West Georgia Street, Suite 1700, Vancouver BC, V6E 4E6, Canada to the address listed above.
(x) NSGP (Ensign) Limited changed their registered address during the year from 13 Castle Street, St Helier, JE4 5UT, Jersey to the address listed above.
(e) Summarised financial information
Material associates and joint arrangements
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
2019
2018
Associate
information
reported to
Group
£m
2,463
268
166
145
311
Unadjusted
20% share
£m
Fair value
and other
adjustments
£m
–
(58)
(46)
–
(46)
493
54
33
29
62
2019
Associate
information
reported to
Group
£m
2,446
233
153
(6)
147
Group
share
£m
493
(4)
(13)
29
16
Unadjusted
20% share
£m
Fair value
and other
adjustments
£m
–
(66)
(49)
–
(49)
489
46
31
(1)
30
2018
Associate
information
reported to
Group
£m
18,558
3,426
(674)
Unadjusted
20% share
£m
3,712
685
(135)
(13,057)
(2,611)
8,253
1,651
Fair value
and other
adjustments
(i)
£m
Associate
information
reported to
Group
£m
Fair value
and other
adjustments
(i)
£m
Unadjusted
20% share
£m
Group
share
£m
702
4,414
15,209
3,042
758
(1)
–
(105)
596
684
(135)
(2,716)
2,247
3,237
(670)
(9,833)
7,943
648
(134)
(1,967)
1,589
(1)
–
(115)
642
Group
share
£m
489
(20)
(18)
(1)
(19)
Group
share
£m
3,800
647
(134)
(2,082)
2,231
(i) Before cumulative impairments of £958 million (2018: £586 million) of the Group’s associate investment.
During the year, dividends of £nil (2018: £20 million) were paid by the associate to the Group.
Joint operations – fields/assets
31 December 2019
Cygnus
Location
Percentage holding
UK North Sea
61%
194
Centrica plc Annual Report and Accounts 2019
S11. Non-controlling interests
The Group has one subsidiary undertaking with a non-controlling interest: Spirit Energy Limited, through which the Group carries out the
majority of its exploration and production activities.
31 December
Non-
controlling
interests
%
Loss for
the year
£m
Total
comprehensive
loss
£m
Spirit Energy Limited
31%
(80)
(96)
Distributions
to non-
controlling
interests
£m
Non-
controlling
interests
%
Profit for
the year
£m
Total
comprehensive
income
£m
124
31%
59
60
Total
equity
£m
583
Distributions
to non-
controlling
interests
£m
–
Total
equity
£m
803
2019
2018
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
(Loss)/profit for the year
Other comprehensive (loss)/income
Total comprehensive (loss)/income
Summarised balance sheet
31 December
Non-current assets
Current assets
Assets of disposal groups classified as held for sale
Current liabilities
Liabilities of disposal groups classified as held for sale
Non-current liabilities
Net assets
Summarised cash flow
Year ended 31 December
Net (decrease)/increase in cash and cash equivalents
2019
£m
1,579
(258)
(52)
(310)
2019
£m
4,200
932
11
(606)
(6)
(2,651)
1,880
2019
£m
(57)
2018
£m
1,854
191
3
194
2018
£m
4,775
1,243
–
(949)
–
(2,479)
2,590
2018
£m
37
Centrica plc Annual Report and Accounts 2019
195
Company Financial Statements
Company Statement of Changes in Equity
1 January 2018
Adjustment on adoption of IFRS 9
Profit for the year
Other comprehensive income
Employee share schemes
Scrip dividend
Dividends paid to equity holders
31 December 2018
Profit for the year
Other comprehensive loss
Employee share schemes and other share transactions
Scrip dividend
Dividends paid to equity holders
31 December 2019
Share
capital
£m
348
Share
premium
£m
2,121
–
–
–
–
6
–
–
–
–
–
119
–
354
2,240
–
–
–
6
–
–
–
–
90
–
360
2,330
Capital
redemption
reserve
£m
26
–
–
–
–
–
–
26
–
–
2
–
–
28
Retained
earnings
£m
2,745
(14)
634
–
3
–
(673)
2,695
567
–
(10)
–
(561)
2,691
Other
equity
(note II)
£m
(92)
(28)
–
117
27
–
–
24
–
(59)
51
–
–
16
Total
equity
£m
5,148
(42)
634
117
30
125
(673)
5,339
567
(59)
43
96
(561)
5,425
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 3.50 pence per share (totalling £204 million) for the year ended 31 December 2019. 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 198 to 207 form part of these Financial Statements, along with note 25 to the consolidated Group Financial Statements.
196
Centrica plc Annual Report and Accounts 2019
Company Financial Statements
Company Balance Sheet
31 December
Non-current assets
Property, plant and equipment
Investments
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
Securities
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
Deferred tax 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 (i)
Other equity
Total shareholders’ equity
Notes
IV
V
VI
VII
XII
VI
VII
VII
IX
XI
X
VII
IX
XII
XI
II
2019
£m
15
2,262
71
241
108
103
2018
£m
24
2,258
44
208
154
216
2,800
2,904
13,770
13,422
109
11
434
124
76
11
713
–
14,448
17,248
14,222
17,126
(104)
(6,651)
(1)
(631)
(34)
(7,049)
(2)
(203)
(7,387)
(7,288)
(11)
(36)
(168)
(1)
(62)
(4,158)
(4,436)
(20)
(44)
(134)
–
(63)
(4,238)
(4,499)
(11,823)
(11,787)
5,425
360
2,330
28
2,691
16
5,425
5,339
354
2,240
26
2,695
24
5,339
(i) Retained earnings includes a net profit after taxation of £567 million (2018: £634 million).
The Financial Statements on pages 196 to 207, of which the notes on pages 198 to 207 form part, along with note 25 to the consolidated
Group Financial Statements, were approved and authorised for issue by the Board of Directors on 12 February 2020 and were signed on
its behalf by:
Iain Conn
Group Chief Executive
Chris O’Shea
Group Chief Financial Officer
Centrica plc Annual Report and Accounts 2019
197
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 2019, the following standard, amendments and interpretations are effective in the Company’s Financial Statements:
• IFRS 16, ‘Leases’;
• Amendments to IAS 19, ‘Plan Amendment, Curtailment or Settlement’.
The adoption of IFRS 16 had a minimal impact on the Company’s Financial Statements. The amendments to IAS 19 are detailed in note 1 of the
Group Financial Statements.
Other amendments effective during the year did not have any impact on the Company’s Financial Statements.
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, financial instruments designated at fair value through profit
or loss on initial recognition or required to be measured at fair value through profit or loss or other comprehensive income 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 Company does not have any critical accounting judgements. It is subject to estimation uncertainty related to its share of the Group’s
pension scheme surplus/deficit, as detailed further in note 22 of the consolidated Group Financial Statements. The valuation of the
Company’s investments is also a key source of estimation uncertainty. The Company’s net assets were higher than its market capitalisation
on 31 December 2019, and this was an indicator of impairment. However, the estimate of the recoverable amounts of these investments were
in excess of their carrying values and as a result, no impairment has been reflected.
198
Centrica plc Annual Report and Accounts 2019
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 82 to 93 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.
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. The Company’s impairment policies in relation to financial
assets are consistent with those of the Group, with additional consideration given to amounts owed by Group undertakings. Except for certain
loans due in greater than one year, all outstanding receivable balances are repayable on demand and arise from funding provided by the
Company to its subsidiaries. The Company deems it unlikely that net receivers of funding would be able to repay loan balances in full at the end
of the reporting period if the debt was called upon and in such circumstances the counterparty would either negotiate extended credit terms
with the Company or obtain external financing to repay the balance. As such, the expected credit loss is either considered immaterial based on
discounting the loan over the extended payment term, or has been calculated by applying a default loss rate based on the actual or proxy credit
rating of the counterparty. No change in credit risk is deemed to have occurred since initial recognition for amounts not repayable and therefore
a 12-month expected credit loss has been calculated based on the assessed probability of default.
The Company has applied the impairment requirements of IFRS 9 to financial guarantees issued to its subsidiary undertakings. Expected credit
losses on such arrangements have been calculated according to the nature of the guarantee and the Company’s perceived exposure at the
balance sheet date.
Centrica plc Annual Report and Accounts 2019
199
Company Financial Statements | Notes to the Company Financial Statements continued
I. General information and principal accounting policies of the Company
Leases
At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease, if the contract
conveys the right to control the use of an identified asset for a period of time in exchange for consideration. To assess whether a contract
conveys the right to control the use of an identified asset, the Company assesses whether:
• the contract involves the use of an identified asset;
• the Company has the right to obtain substantially all the economic benefits from use of the asset throughout the period of use; and
• the Company has the right to direct the use of the asset.
As a lessee
The Company recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured
at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date,
plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset
or the site on which it is located, less any lease incentives received. The right-of-use asset is subsequently depreciated using the straight-line
method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The
estimated useful lives of right-of-use assets are determined on the same basis as those of property and equipment. In addition, the right-of-use
asset is periodically reduced by impairment losses, if any, and adjusted for certain re-measurements of the lease liability.
The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounting using
the interest rate implicit in the lease or, if that rate cannot be readily determined, the Company’s incremental borrowing rate.
Lease payments included in the measurement of the lease liability comprise: fixed payments (including in-substance fixed payments), variable
lease payments that depend on an index or a rate (initially measured using the index or rate as at the commencement date), amounts expected
to be payable under a residual value guarantee, and the exercise price under a purchase option that the Company is reasonably certain to
exercise, lease payments in an optional renewal period if the Company is reasonably certain to exercise an extension option, and penalties for
early termination of a lease unless the Company is reasonably certain not to terminate early. Variable lease payments that do not depend on an
index or rate are recognised in profit or loss in the period in which the event or condition that triggers those payments occurs. The lease liability
is subsequently measured at amortised cost using the effective interest method. It is re-measured when there is a change in future lease
payments arising from a change in an index or rate, if there is a change in the Company’s estimate of the amount expected to be payable under
a residual value guarantee, or if the Company changes its assessment of whether it will exercise a purchase, lease-term extension or termination
option. When the lease liability is re-measured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset
or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
In the prior year, the determination of whether an arrangement is, or contains, a lease was based on the substance of the arrangement and
required an assessment of whether the fulfilment of the arrangement was dependent on the use of a specific asset or assets and whether the
arrangement conveyed a right to use the asset or assets. Leases were classified as finance leases whenever the terms of the lease transferred
substantially all of the risks and rewards of ownership to the lessee. All other leases were classified as operating leases.
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 notes 3(b) and 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. Note that as a
participant in these multi-employer schemes, the Company could be liable for other entities’ obligations (for example under section 75 of the
Pensions Act). See note 22 of the consolidated Group Financial Statements for details of the overall scheme obligations. 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.
200
Centrica plc Annual Report and Accounts 2019
I. General information and principal accounting policies of the Company
Taxation
Current tax, including UK corporation tax, is provided at amounts expected to be paid (or recovered) using the tax rates and laws that have
been enacted or substantively enacted by the balance sheet date.
Deferred tax is recognised in respect of all temporary differences identified at the balance sheet date, except for differences arising on:
• the initial recognition of an asset or liability in a transaction which is not a business combination and which at the time of the transaction
affects neither accounting profit nor taxable profit; and
• investments in subsidiaries where the Company is able to control the timing of the reversal of the difference and it is probable that the
difference will not reverse in the foreseeable future.
Temporary differences are differences between the carrying amount of the Company’s assets and liabilities and their tax base.
Deferred tax assets and liabilities are offset when the Company has a legally enforceable right to offset current tax assets and liabilities and the
deferred tax assets and liabilities relate to taxes levied by the same tax authority.
Deferred tax assets that are not eligible for offset against deferred tax liabilities are recognised only when, on the basis of all available evidence,
it can be regarded as probable that there will be suitable taxable profits in the foreseeable future, against which the deductible temporary
difference can be utilised.
Deferred tax is measured at the average tax rates that are expected to apply in the periods in which the asset is realised or the liability is settled,
based on tax rates and laws that have been enacted or substantively enacted by the balance sheet date. Measurement of deferred tax liabilities
and assets reflects the tax consequences expected from the manner in which the asset or liability is recovered or settled.
The tax expense for the year 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 34 to 43 and in note S3 to the 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.
Centrica plc Annual Report and Accounts 2019
201
Company Financial Statements | Notes to the Company Financial Statements continued
II. Other equity
1 January 2018
Adjustment on adoption of IFRS 9
Losses on revaluation of equity investments measured at fair value
through other comprehensive income
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 2018
Gains on revaluation of equity investments measured at fair value
through other comprehensive income
Actuarial loss
Employee share schemes:
Exercise of awards
Value of services provided
Cash flow hedges:
Net losses
Transferred to income and expense
Taxation on above items
31 December 2019
III. Directors and employees
Employee costs
Year ended 31 December
Wages and salaries
Other
Average number of employees during the year
Year ended 31 December
Administration
Power
Cash
flow
hedging
reserve
£m
Actuarial
gains and
losses
reserve
£m
Financial asset at
FVOCI reserve
(previously AFS)
£m
(1)
–
–
–
–
–
–
22
(10)
(2)
9
–
–
–
–
(6)
2
–
5
(82)
–
–
133
–
–
–
–
–
(25)
26
–
(72)
–
–
–
–
13
(33)
33
(28)
(2)
–
–
–
–
–
–
1
4
4
–
–
–
–
–
–
8
Treasury
and own
shares
reserve
£m
(142)
Share-
based
payments
reserve
£m
100
–
–
–
(11)
46
–
–
–
–
(107)
–
–
70
–
–
–
–
(37)
–
–
–
–
(51)
43
–
–
–
92
–
–
(60)
41
–
–
–
73
2019
£m
(21)
(18)
(39)
Total
£m
(92)
(28)
(2)
133
(11)
(5)
43
22
(10)
(26)
24
4
(72)
10
41
(6)
2
13
16
2018
£m
(20)
(16)
(36)
2019
Number
2018
Number
82
74
156
66
79
145
202
Centrica plc Annual Report and Accounts 2019
IV. Property, plant and equipment
Cost
1 January
Re-measurement of right-of-use asset
Disposals
31 December
Accumulated depreciation
1 January
Charge for year
31 December
NBV at 31 December
2019
£m
29
(2)
(1)
26
(5)
(6)
(11)
15
Included within the above balance is £15 million of assets held as right-of-use assets (2018: £23 million of assets held under finance leases).
V. Investments in subsidiaries
Cost
1 January
Employee share scheme net capital movement (i)
31 December
2019 (i)
£m
2018 (i)
£m
2,258
4
2,262
2,286
(28)
2,258
(i) Employee share scheme movement is 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, and Rhodes Holdings HK Limited, which is incorporated
in Hong Kong. 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.
Centrica plc Annual Report and Accounts 2019
203
Company Financial Statements | Notes to the Company Financial Statements continued
VI. Trade and other receivables
31 December
Amounts owed by Group undertakings
Prepayments
2019
2018
Current (i)
£m
13,763
7
13,770
Non-current (ii)
£m
65
6
71
Current (i)
£m
Non-current (ii)
£m
13,414
8
13,422
39
5
44
(i) The amounts receivable by the Company include £12,383 million (2018: £12,398 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 6.3% per annum during 2019 (2018: 2.8% and 5.7%). 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 £418 million (2018:
£128 million).
(ii) The amounts receivable by the Company due after more than one year include £20 million (2018: £20 million) that bears interest at a quarterly rate determined by Group treasury
and linked to the Group cost of funds. The quarterly rates ranged between 4.4% and 4.9% per annum during 2019 (2018: 3.7% and 4.1%). 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.
VII. Derivative financial instruments
31 December
Derivative financial assets
Derivative financial liabilities
2019
Current
£m
Non-current
£m
109
(104)
241
(36)
Total
£m
350
(140)
2018
Current
£m
Non-current
£m
76
(34)
208
(44)
Total
£m
284
(78)
VIII. Financial instruments
(a) Determination of fair values
The Company’s policy for the classification and valuation of financial instruments carried at fair value into one of the three hierarchy levels
determined in accordance with IFRS 13 are consistent with those of the Group, as detailed in note S6 to the Group Financial Statements.
(b) Financial instruments carried at fair value
31 December
Financial assets
Derivative financial assets held for trading:
Foreign exchange derivatives
Derivative financial assets in hedge accounting relationships:
Interest rate derivatives
Foreign exchange derivatives
Treasury gilts designated FVTPL
Debt instruments
Equity instruments designated FVOCI
Cash and cash equivalents
Total financial assets at fair value
Financial liabilities
Derivative financial liabilities held for trading:
Interest rate derivatives
Foreign exchange derivatives
Derivative financial liabilities in hedge accounting relationships:
Interest rate derivatives
Total financial liabilities at fair value
Level 1
£m
Level 2
£m
–
–
–
124
77
26
–
227
–
–
–
–
113
108
129
–
–
–
432
782
(23)
(115)
(2)
(140)
2019
Total
£m
113
108
129
124
77
26
432
1,009
(23)
(115)
(2)
(140)
Level 1
£m
Level 2
£m
–
–
–
126
68
22
–
216
–
–
–
–
42
59
183
–
–
–
699
983
(26)
(42)
(10)
(78)
2018
Total
£m
42
59
183
126
68
22
699
1,199
(26)
(42)
(10)
(78)
204
Centrica plc Annual Report and Accounts 2019
IX. Trade and other payables
31 December
Amounts owed to Group undertakings
Accruals and other creditors
2019
2018
Current (i)
£m
(6,616)
(35)
(6,651)
Non-current (ii)
£m
(158)
(10)
(168)
Current (i)
£m
Non-current (ii)
£m
(7,004)
(45)
(7,049)
(114)
(20)
(134)
(i) The amounts payable by the Company include £5,120 million (2018: £7,004 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 6.3% per annum during 2019 (2018: 2.8% and 5.7%). Other amounts payable by the Company are interest free.
(ii) The amounts payable by the Company due after more than one year include £120 million (2018: £100 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.
X. Deferred tax
1 January 2018
Credit/(charge) to income
Charge to equity
31 December 2018
(Charge)/credit to income
Credit to equity
31 December 2019
Retirement benefit
obligation
£m
Other
£m
Total
£m
7
8
(25)
(10)
(6)
12
(4)
(7)
(2)
(1)
(10)
3
–
(7)
–
6
(26)
(20)
(3)
12
(11)
Other deferred tax liabilities primarily relate to other temporary differences. All deferred tax crystallises in over one year.
XI. Bank overdrafts, loans and other borrowings
31 December
Bank loans and overdrafts
Bonds
Interest accruals
Lease obligations (2018: finance lease obligations)
2019
Current
£m
(483)
(60)
(82)
(6)
Non-current
£m
(144)
(4,005)
–
(9)
2018
Current
£m
Non-current
£m
(22)
(90)
(85)
(6)
(149)
(4,072)
–
(17)
(631)
(4,158)
(203)
(4,238)
Disclosures in respect of the Group’s financial liabilities are provided in note 24 to the Group Financial Statements.
Centrica plc Annual Report and Accounts 2019
205
Company Financial Statements | Notes to the Company Financial Statements continued
XII. 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 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 Group Financial Statements as the ‘Registered Pension Schemes’.
(b) Accounting assumptions, risks and sensitivity analysis
The accounting assumptions, risks and sensitivity analysis for the Registered Pension Schemes are provided in note 22 to the consolidated
Group Financial Statements.
(c) Movements in the year
2019
2018
Pension liabilities
£m
(1,370)
Pension assets
£m
1,461
Pension liabilities
£m
Pension assets
£m
(1,082)
1,052
(11)
29
(39)
–
(75)
–
47
(27)
–
–
–
43
3
32
(47)
–
(14)
(18)
(28)
–
–
–
–
28
(255)
388
–
32
(5)
25
(32)
–
(1,446)
1,492
(1,370)
1,461
2019
£m
108
(62)
46
2019
£m
3
42
(117)
(72)
32
(40)
2018
£m
154
(63)
91
2018
£m
388
(3)
(252)
133
(101)
32
1 January
Items included in the Company Income Statement:
Current service cost
Past service credit/(cost)
Interest on scheme liabilities
Expected return on scheme assets
Items included in the Company Statement of Comprehensive Income:
Actuarial (loss)/gain
Other movements:
Employer contributions
Benefits paid from schemes
Transfers
31 December
Presented in the Company Balance Sheet as:
31 December
Retirement benefit pension assets
Retirement benefit pension liabilities
Of the pension schemes liabilities, £62 million (2018: £63 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/(loss) arising on the scheme liabilities
Changes in assumptions underlying the present value of the schemes’ liabilities
Actuarial (loss)/gain recognised in reserves before adjustment for taxation
Cumulative actuarial gains/(losses) recognised in reserves at 1 January, before adjustment for taxation
Cumulative actuarial (losses)/gains recognised in reserves at 31 December, before adjustment for taxation
206
Centrica plc Annual Report and Accounts 2019
XII. Pensions
(e) Defined benefit pension scheme contributions
Note 22 to the Group Financial Statements provides details of the triennial review carried out at 31 March 2018 in respect of the UK Registered
Pension Schemes and the future pension scheme contributions, including asset-backed arrangements, agreed as part of this review. 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 2020 at an average rate of 19% of pensionable pay together
with contributions via the salary sacrifice arrangement of £3 million.
(f) Pension scheme assets
31 December
Equities
Corporate bonds
High-yield debt
Liability matching assets
Property
Cash pending investment
Asset-backed contribution assets
Group pension scheme assets (i)
Company share of the above
(i) Total pension scheme assets for the UK pension schemes.
Quoted
£m
188
2,646
1,015
1,430
–
695
–
2019
Unquoted
£m
346
–
1,288
1,075
316
–
738
Total
£m
534
2,646
2,303
2,505
316
695
738
Quoted
£m
1,991
1,118
595
1,581
–
102
–
2018
Unquoted
£m
351
–
1,360
994
395
–
802
Total
£m
2,342
1,118
1,955
2,575
395
102
802
5,974
3,763
9,737
5,387
3,902
9,289
2019
£m
1,492
2018
£m
1,461
XIII. Commitments
At 31 December 2019, the Company had commitments of £101 million (2018: £135 million) relating to contracts for outsourced services. The
Company’s commitment in respect of its agreement with Cheniere is detailed in note 23 to the consolidated Group Financial Statements.
In 2019 Centrica LNG Company Limited and the Company executed an agreement to transfer the LNG Sale and Purchase Agreement with
Sabine Pass Liquefaction from the Company to Centrica LNG Company Limited. No commitment in respect to this agreement remains in
the Company.
XIV. Related parties
During the year the Company accepted cash deposits on behalf of the Spirit Energy group of companies giving rise to a Trade and other
payables balance of £312 million (2018: £532 million).
Centrica plc Annual Report and Accounts 2019
207
Gas and Liquids Reserves (Unaudited)
The Group’s estimates of reserves of gas and liquids are reviewed as part of the full year reporting process and updated accordingly.
A number of factors affect the volumes of gas and liquids reserves, including the available reservoir data, commodity prices and future costs.
Due to the inherent uncertainties and the limited nature of reservoir data, estimates of reserves are subject to change as additional information
becomes available.
The Group discloses 2P gas and liquids reserves, representing the central estimate of future hydrocarbon recovery. Reserves for Centrica
operated fields are estimated by in-house technical teams composed of geoscientists and reservoir engineers. Reserves for non-operated fields
are estimated by the operator, but are subject to internal review and challenge.
As part of the internal control process related to reserves estimation, an assessment of the reserves, including the application of the reserves
definitions, is undertaken by an independent technical auditor. An annual reserves assessment has been carried out by 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 Spirit Energy are Kvitebjørn, Statfjord, Ivar Aasen, Cygnus, Maria, South and North Morecambe, Rhyl and Chiswick. The
principal non-Spirit Energy field is Rough. 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 2019
Revisions of previous estimates (ii)
Disposals of reserves in place (iii)
Production (iv)
31 December 2019
Estimated net 2P reserves of liquids
(million barrels)
1 January 2019
Revisions of previous estimates (ii)
Production (iv)
31 December 2019
Estimated net 2P reserves
(million barrels of oil equivalent)
31 December 2019 (v)
(i) The movements represent Centrica’s 69% interest in Spirit Energy.
(ii) Revision of previous estimates include those associated with North and South Morecambe, North Sea fields and Norwegian fields.
(iii) Reflects the disposal of interests in the Valemon and Sindre assets.
(iv) Represents total sales volumes of gas and oil produced from the Group’s reserves.
(v)
Includes the total of estimated gas and liquids reserves at 31 December 2019 in million barrels of oil equivalent.
Liquids reserves include oil, condensate and natural gas liquids.
Spirit Energy (i)
698
128
(14)
(129)
683
Rough
103
–
–
(40)
63
Total
801
128
(14)
(169)
746
Spirit Energy (i)
Rough
Total
69
23
(10)
82
–
–
–
–
69
23
(10)
82
Spirit Energy (i)
196
Rough
10
Total
206
208
Centrica plc Annual Report and Accounts 2019
Five Year Summary (Unaudited)
Year ended 31 December
2015 (restated) (i)
(ii) (iii)
£m
2016 (restated) (i)
(ii) (iii)
£m
2017 (restated) (i)
(ii) (iii)
£m
2018 (restated) (i)
(ii) (iii)
£m
Group revenue included in business performance (i)
27,971
27,102
28,035
27,831
Operating profit before exceptional items and certain re-measurements:
Centrica Consumer (iii) (iv)
Centrica Business (iii) (iv)
Upstream (iii) (iv)
Exceptional items and certain re-measurements after taxation
(Loss)/profit 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 (ii)
Net current (liabilities)/assets (ii)
Non-current liabilities
Net (liabilities)/assets of disposal groups held for sale
Net assets
Net debt (note 24)
Cash flows
Year ended 31 December
Cash flow from operating activities before exceptional payments
Payments relating to exceptional charges in operating costs
Net cash flow from investing activities
938
159
301
1,398
(1,717)
(747)
Pence
(14.9)
17.2
12.0
2015 (ii)
£m
3,824
7,790
(521)
(9,718)
(33)
1,342
(4,747)
2015
£m
2,278
(81)
(611)
899
369
199
1,467
777
1,672
Pence
31.4
16.8
12.0
2016 (ii)
£m
4,383
8,218
1,220
885
99
256
1,240
(407)
328
Pence
5.9
12.5
12.0
2017 (ii)
£m
4,326
7,190
1,705
750
75
567
1,392
(416)
183
Pence
3.3
11.2
12.0
2018 (ii)
£m
4,456
7,435
284
(11,173)
(9,789)
(8,227)
196
2,844
(3,473)
2016
£m
2,669
(273)
(803)
–
3,432
(2,596)
2017
£m
2,016
(176)
32
–
3,948
(2,656)
2018
£m
2,182
(248)
(1,007)
927
2019 (ii)
£m
26,825
505
217
179
901
(1,531)
(1,023)
Pence
(17.8)
7.3
5.0
2019
£m
4,033
5,826
(696)
(7,474)
106
1,795
(3,181)
2019
£m
1,548
(298)
(503)
747
Cash flow before cash flow from financing activities
1,586
1,593
1,872
(i) 2018 Group revenue included in business performance has been restated to include the net result of certain commodity purchases and sales trades that are deemed to be speculative in
nature. Further details are given in note 1. Earlier periods have not been restated and therefore are not presented on a comparable basis.
(ii) Results for the years ended 2019, 2018 and 2017 are presented in accordance with IFRS 15: ‘Revenue from contracts with customers’. Results for earlier periods have not been restated
and therefore are not presented on a comparable basis.
(iii) Results have been restated to reflect the new operating structure of the Group. See note 1 for further details.
(iv) Adjusted operating profit has been restated to include the impact of business performance interest and taxation of joint ventures and associates.
Centrica plc Annual Report and Accounts 2019
209
Ofgem Consolidated Segmental Statement
Independent Auditor’s Report to the Directors of Centrica plc and its Licensees
In our opinion the accompanying statement (the ‘Ofgem Consolidated Segmental Statement’ or ‘CSS’) of Centrica plc and its Licensees
for the year ended 31 December 2019 is prepared, in all material respects, in accordance with:
• the requirements of Ofgem’s Standard Condition 19A of the Electricity and Gas Supply Licences and Standard Condition 16B of the
Electricity Generation Licences established by the regulator Ofgem; and
• the basis of preparation on pages 217 to 219.
We have audited the Ofgem Consolidated Segmental Statement of Centrica plc and its Licensees (as listed in footnote (i)) (the Group) for
the year ended 31 December 2019 in accordance with the terms of our engagement letter dated 22 July 2019. The Ofgem 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 and the Electricity and Gas Supply Licenses and Standard Condition 16B of the Electricity Generation Licences (together, the
‘Licences’) and the basis of preparation on pages 217 to 219.
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 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 Financial Reporting Council’s (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 217 to 219 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 Electricity and Gas 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 the other information. The other information comprises the information included in the annual report, other than
the CSS and our auditor’s report thereon. Our opinion on the CSS 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 217 to 219
and for such internal control as the Directors determine is necessary to enable the preparation of the CSS that are 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 related 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 have 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 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 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.
210
Centrica plc Annual Report and Accounts 2019
Independent Auditor’s Report to the Directors of Centrica plc and its Licensees
Use of this report
This report is made solely to the Company’s Directors, as a body, in accordance with our engagement letter dated 22 July 2019 and solely for
the purpose of assisting the Directors in reporting on the CSS to the Regulator Ofgem. We permit this report to be displayed on the Centrica plc
website www.centrica.com and within the December 2019 Annual Report & Accounts (see footnote (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, or for the opinions we have formed. The materiality level we used in planning and performing our audit was £20 million.
The engagement partner on the audit resulting in this independent auditor’s report is Dean Cook.
Deloitte LLP
12 February 2020
London
(i) British Gas Trading Limited, Neas Energy Limited, Centrica Barry Limited, Centrica KPS Limited, Centrica PB Limited and Centrica KL Limited.
(ii) 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.
Centrica plc Annual Report and Accounts 2019
211
Ofgem Consolidated Segmental Statement continued
Introduction
The Ofgem Consolidated Segmental Statement (CSS) and required regulatory information on pages 212 to 221 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 2019, 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 2019 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 2019 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.
212
Centrica plc Annual Report and Accounts 2019
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 2019 within the operating segments
shown above. The individual supply and generation licences held in subsidiaries, joint ventures or associates of Centrica plc during 2019 are
detailed below:
Licensee
British Gas Trading Limited
Neas Energy Limited (i)
Centrica Brigg Limited
Centrica Barry Limited
Centrica KPS Limited
Centrica Distributed Generation Limited
Centrica PB Limited
Centrica KL Limited
EDF Energy Nuclear Generation Limited (ii)
Licence
Supply
Supply
Exempt
Generation
Generation
Exempt
Generation
Generation
Generation
Ownership
100%
100%
100%
100%
100%
100%
100%
100%
20% Associate
(i) Neas Energy holds a supply licence but currently does not supply any UK customers.
(ii) The Group holds a 20% investment in Lake Acquisitions Limited which indirectly owns 100% of EDF Energy Nuclear Generation Limited.
Centrica plc Annual Report and Accounts 2019
213
Ofgem Consolidated Segmental Statement continued
Ofgem consolidated segmental statement
Year ended 31 December 2019
Electricity Generation
Unit
Nuclear
Thermal
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
Aggregate
Generation
Business
797.3
728.6
68.7
Electricity Supply
Gas Supply
Domestic Non-Domestic
Domestic Non-Domestic
3,166.3
3,088.2
78.1
1,574.1
1,574.1
–
3,642.0
3,569.0
73.0
467.2
467.2
–
Aggregate
Supply
Business
8,849.6
8,698.5
151.1
534.8
496.5
38.3
262.5
232.1
30.4
(358.3)
(244.3)
(602.6)
(3,157.7)
(1,547.5)
(3,415.6)
(424.3)
(8,545.1)
(90.7)
(144.9)
(214.4)
(45.1)
–
(169.3)
(53.2)
(8.9)
176.5
(149.4)
27.1
10.2
(91.4)
(0.2)
(58.5)
(32.7)
(8.0)
(48.4)
18.2
(50.0)
(31.8)
4.2
(235.6)
(305.8)
(45.3)
(58.5)
(202.0)
(61.2)
N/A
194.7
(199.4)
(4.7)
N/A
(1,093.3)
(1,516.0)
(601.3)
(1,678.6)
(804.0)
(1,045.6)
(248.1)
(112.7)
(3,621.3)
(3,478.3)
(731.0)
(354.7)
(938.6)
(92.4)
(2,116.7)
(722.4)
(62.6)
(548.4)
(65.9)
8.6
(44.2)
(35.6)
16.6
(423.0)
(26.3)
(142.2)
(55.7)
26.6
(10.8)
15.8
10.8
(41.9)
(65.1)
(691.4)
(60.3)
226.4
(54.3)
172.1
–
(1,187.3)
(20.3)
(63.5)
(51.2)
42.9
(4.4)
38.5
(174.3)
(1,445.5)
N/A
304.5
(113.7)
190.8
N/A
2,783.2
484.3
£m
£m
£m
£m
£m
£m
£m
£m
£m
£m
£/MWh, P/th
£m
£m
£m
TWh, MThms
‘000s
N/A
N/A
N/A
5,359.0
463.3
6,586.0
189.0
N/A
Supply EBIT
Supply PAT
Supply PAT
margin
£m
margin
(1.1)%
(28.7)
(0.9)%
1.0%
12.7
0.8%
4.7%
139.1
3.8%
8.2%
31.2
6.7%
2.2%
154.3
1.7%
2018 Summarised CSS
Year ended 31 December 2018
Electricity Generation
Electricity Supply
Gas Supply
Total revenue
EBIT
Unit
£m
£m
Nuclear
540.8
45.7
Thermal
236.7
(28.3)
Supply EBIT
Supply PAT
Supply PAT
Aggregate
Generation
Business
777.5
17.4
margin
£m
margin
Domestic Non-Domestic
Domestic Non-Domestic
3,054.9
1,393.4
3,860.3
48.4
10.7
417.8
1.6%
39.4
1.3%
0.8%
8.6
0.6%
10.8%
337.6
8.7%
431.2
28.8
6.7%
23.9
5.5%
Aggregate
Supply
Business
8,739.8
505.7
5.8%
409.5
4.7%
214
Centrica plc Annual Report and Accounts 2019
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.
• ‘Scheduling decisions’ means the decision to run individual generation units.
• ‘Responsible for interactions with the Balancing Market’ means interactions with the Balancing Mechanism in electricity.
• ‘Interacts with wider market participants to buy/sell energy’ means the business unit is responsible for interacting with wider market
participants to buy/sell energy, not the entity responsible for the buy/sell decision itself, which falls under ‘Responsible for implementing
hedging policy/makes decisions to buy/sell energy’.
• ‘Matches own generation with own supply’ means where there is some internal matching of generation and supply before either generation
or supply interact with the wider market.
• ‘Forecasts total system demand’ means forecasting total system electricity demand or total system gas demand.
• ‘Forecasts customer demand’ means forecasting the total demand of own supply customers.
• ‘Bears shape risk after initial hedge until market allows full hedge’ means the business unit which bears financial risk associated with hedges
made before the market allows fully shaped hedging.
• ‘Bears short-term risk for variance between demand and forecast’ means the business unit which bears financial risk associated with too little
or too much supply for own customer demand.
Centrica plc Annual Report and Accounts 2019
215
Ofgem Consolidated Segmental Statement continued
Business functions table
Year ended 31 December 2019 – 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
Supply
Another part
of business
–
–
(output)
(demand)
(output)
(demand)
–
–
–
–
–
(bilateral)
(market and
bilateral)
(market and
bilateral) (ii)
–
–
(iv)
–
–
–
–
–
–
(iv)
(ii)
–
–
–
(ii) (iii)
–
(iv)
–
–
–
–
(i) The table reflects the business functions that impact our UK segments.
(ii) 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, part of Centrica Business, and also conducts trading for
the purpose of making profits in its own right. The Supply segment is also able to enter into market trades directly as part of its within day balancing activities (as well as external bilateral
contracts).
(iii) ‘Matches own generation with own supply’ is undertaken in ‘Another part of the business’ (by CEL at market referenced prices), outside of the Generation and Supply segments.
(iv) A separate team forecasts the wholesale price for the benefit and use of the entire Group. This team does not formally reside in any particular segment but their costs are recharged
across the Group.
Key:
Function resides and profit/loss recorded in segment.
– Neither function nor profit/loss reside in segment.
216
Centrica plc Annual Report and Accounts 2019
Basis of preparation
The following notes provide a summary of the basis of preparation of the 2019 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
2019, included in the Centrica plc Annual Report and Accounts 2019 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 in the Centrica plc Annual Report
and Accounts 2019.
For the Generation segment, we have included the financial results from all activities that relate to our generation licences. For clarity the
following judgements have been made:
• 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 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 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 2018 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 2019, 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.
Centrica plc Annual Report and Accounts 2019
217
Ofgem Consolidated Segmental Statement continued
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:
− £78.1 million (2018: £89.0 million) in Domestic Electricity Supply and £73.0 million (2018: £80.4 million) in Domestic Gas Supply primarily
relating to New Housing Connections and smart meter installations;
− £30.4 million (2018: £19.5 million) in Thermal principally relating to Supplementary Balancing Reserve (SBR), Short Term Operating Reserve
(STOR), Triad revenue and Capacity Market income; and
− £38.3 million (2018: £13.3 million) revenue in Nuclear not directly related to energy sales, such as capacity market income and provision
of miscellaneous services.
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,
over-the-counter (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 turbines/engines 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.
OTC
Exchange
Broker supported market of standardised products, predominantly performed via screen-based trading. These
transactions are between two parties, leaving both parties exposed to the other’s default with no necessary
intermediation of any exchange. An internal OTC price may be provided where market liquidity prevents external
trading, with prices that are reflective of market conditions at the time of execution.
Regulated electronic platform (notably ICE, APX, and N2EX) where standardised products are traded on exchange
through the intermediary of the clearing house which becomes the counterparty to the trade. Membership of a
clearing house is required which entails posting of cash or collateral as margin.
WACOF/WACOE/WACOG
• For Generation this represents a proxy for the weighted average input cost of gas, carbon and nuclear fuel, shown as £/MWh, used by the
Generation business. Gas for turbines/engines 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 £35.7 million incurred by Gas Domestic Supply in 2019, which enables
the segment to secure supply by giving the ability to bring gas into the UK from overseas (2018: £38.3 million).
• Environmental and social obligation costs for Domestic Supply include ROCs, FIT, ECO and UK Capacity Market costs. Non-Domestic
Supply includes the cost of LECs, ROCs, FIT and UK Capacity Market costs. Within the Domestic and Non-Domestic segments, the costs
of LECs, FIT, ROCs and UK Capacity Market costs 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.
218
Centrica plc Annual Report and Accounts 2019
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.
• 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.
Treatment of joint ventures and associates
The share of results of joint ventures and associates for the year ended 31 December 2019 principally arises from the Group’s interests in the
entities listed on page 213.
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.
Exceptional items and certain re-measurements
Restructuring costs, impairment charges and onerous provisions that have been identified as exceptional items, and mark-to-market
adjustments in the Centrica plc Annual Report and Accounts 2019, 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 2019.
A reconciliation of the Segmental Statement revenue, EBIT and depreciation to the 2019 audited Centrica plc Annual Report and Accounts has
been included in accordance with paragraphs 4(b) & (c)/19A.4(b) & (c) and 6/19A.6.
Centrica plc Annual Report and Accounts 2019
219
Ofgem Consolidated Segmental Statement continued
Reconciliation to Centrica plc Annual Report and Accounts
The reconciliation refers to the segmental analysis of the 2019 Centrica plc Annual Report and Accounts in note 4.
Supply segment
Domestic
Non-Domestic
Generation
segment
Electricity
Notes
2019
2019
Gas
2019
Electricity
2019
Gas
2019
Upstream
Consumer
2,290.4
11,956.0
(1,793.9)
(5,147.7)
496.5
262.5
6,808.3
–
Business
13,759.4
(11,455.6)
2,303.8
(262.5)
759.0
6,808.3
2,041.3
–
3,166.3
3,642.0
1,574.1
467.2
492.6
(454.3)
–
–
–
–
–
–
–
–
797.3
3,166.3
3,642.0
1,574.1
467.2
179.0
(160.5)
18.5
(31.8)
505.0
(368.5)
136.5
–
(13.3)
136.5
217.1
(194.6)
22.5
31.8
54.3
–
8.6
(35.6)
172.1
15.8
38.5
–
–
–
–
(4.7)
(35.6)
172.1
15.8
38.5
1
2
3
4
5
1
2
3
4
Centrica plc Annual Report and Accounts
Segmental Analysis (i)
Segment revenue
Less non-UK and non-Generation/Supply
Segment revenue after non-UK and non-Generation/Supply
Reallocate Centrica Business Generation element
Segment revenue after non-UK and non-Generation/Supply and reallocation
of Generation element from Centrica Business to Upstream
)
m
£
(
e
u
n
e
v
e
R
Gas and Electricity allocation
Include share of JVs and associates
Exclude intra-segment revenues
Ofgem Consolidated Segmental Statement
Centrica plc Annual Report and Accounts
Segmental Analysis (i)
Segment EBIT
Less non-UK and non-Generation/Supply
Segment EBIT after non-UK and non-Generation/Supply
Reallocate Centrica Business Generation element
)
m
£
(
I
T
B
E
Segment EBIT after non-UK and non-Generation/Supply and reallocation
of Generation element from Centrica Business to Upstream
Gas and Electricity allocation
Exclude share of JVs’ and associates’ interest and tax
Ofgem Consolidated Segmental Statement
220
Centrica plc Annual Report and Accounts 2019
Reconciliation to Centrica plc Annual Report and Accounts
Generation
segment
Supply segment
Domestic
Non-Domestic
Notes
2019
2019
Electricity
Gas
2019
Electricity
2019
Gas
2019
Centrica plc Annual Report and Accounts
Segmental Analysis (i)
Segment depreciation and amortisation
Less non-UK and non-Generation/Supply
Segment depreciation and amortisation after non-UK and non-
Generation/Supply
Reallocate Centrica Business Generation element
Segment depreciation and amortisation after non-UK and non-
Generation/Supply and reallocation of Generation element from Centrica
Business to Upstream
)
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
Gas and Electricity allocation
Include share of JVs and associates
Ofgem Consolidated Segmental Statement
Upstream
Consumer
Business
(753.0)
(753.0)
–
(50.0)
(218.0)
119.5
(98.5)
–
(145.4)
80.2
(65.2)
50.0
(50.0)
(98.5)
(15.2)
–
(44.2)
(54.3)
(10.8)
(149.4)
(199.4)
–
–
–
(44.2)
(54.3)
(10.8)
(4.4)
–
(4.4)
1
2
3
4
(i) The tables reconcile the Generation segment to Upstream, the Domestic Supply segment to Centrica Consumer and the Non-Domestic Supply segment to Centrica Business from note 4
to the 2019 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. Centrica Business includes generation activity from the Group’s thermal power assets.
3. The share of Domestic and Non-Domestic Revenues, Operating Profit (EBIT) and Depreciation (including amortisation) as provided in note 4
of the Centrica plc Annual Report and Accounts 2019, has been split between Gas and Electricity.
4. £492.6 million of revenues relating to the Group’s share of joint ventures and associates in Generation are included in the CSS for Nuclear
revenues. £(2.5) million of EBIT in the Generation segment relates to losses from associates for Nuclear. Additionally, costs relating to the
Group’s share of joint ventures and associates: £90.7 million direct fuel costs, £214.4 million direct costs, £40.6 million indirect costs and
£149.4 million depreciation and amortisation are included. Note also that financing costs and tax of £8.6 million are initially included in the
Upstream segmental EBIT associated with nuclear. The results of joint ventures and associates are shown separately in the Centrica plc
Annual Report and Accounts 2019 in notes 6 and 14.
5. £454.3 million of intra-segment revenues between the joint ventures and associates and the Generation segment (included in the
£492.6 million of joint venture and associate revenues) are excluded from the CSS.
Centrica plc Annual Report and Accounts 2019
221
Other Information
Other 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 to 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
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 the Annual Review,
on the day they are published. You will also receive alerts to let you
know that you can cast your AGM vote online. You can manage
your shareholding online by registering 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.
222
Centrica plc Annual Report and Accounts 2019
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/ar19
Dividends
Centrica dividends can be paid directly into your bank or building
society account instead of being dispatched 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.
2020 calendar
7 May 2020
11 May 2020
11 May 2020
22 June 2020
24 July 2020
Ex-dividend date for 2019 final dividend
Record date for 2019 final dividend
Trading Update
AGM
Payment date for 2019 final dividend
Half-year results announcement
Additional Information – Explanatory Notes (Unaudited)
Definitions and reconciliation of adjusted performance measures
Centrica’s 2019 consolidated 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 a business performance measure of operating profit, after adjusting for depreciation and amortisation. It provides a
performance measure in its own right, and provides a bridge between the Income Statement and the Group’s key cash metrics.
Year ended 31 December
Group operating profit
Exceptional items included within Group Operating profit 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
EBITDA
I/S
I/S
I/S
4(d)
4(d)
2019
£m
(849)
1,750
12
880
326
2,119
(i) Comparatives have been restated on transition to IFRS 15: ‘Revenue from contracts with customers’. See note 1 for further details.
The table below shows how EBITDA reconciles to AOCF.
EBITDA
Profit on disposals (ii)
Decrease in provisions (ii)
Cash contributions to defined benefit pension schemes,
net of service cost income statement charge (ii)
UK pension deficit payments
Employee share scheme costs
Re-measurement of energy contracts (ii)
Net movement in working capital (ii)
Taxes paid
Dividends received from joint ventures and associates
Margin cash movements
Adjusted operating cash flow
4(f)
C/F
C/F
C/F
4(f), 24(c)
(i) Comparatives have been restated on transition to IFRS 15: ‘Revenue from contracts with customers’. See note 1 for further details.
(ii) These line items relate to business performance only and therefore differ from amounts quoted in the IFRS Financial Statements.
2018
(restated) (i)
£m
Change
987
405
(3)
736
322
2,447
2019
£m
2,119
(2)
(191)
(233)
235
41
(213)
119
(92)
1
46
1,830
13%
2018
(restated) (i)
£m
2,447
(12)
(154)
(75)
98
43
41
(47)
(61)
22
(57)
2,245
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223
Other Information | Additional Information – Explanatory Notes (Unaudited) continued
Definitions and reconciliation of adjusted performance measures
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
Upstream adjusted operating cash flow
Non E&P adjusted operating cash flow
E&P adjusted operating cash flow
Capital expenditure (including small acquisitions)
Net disposals
Free cash flow
4
2019
£m
635
(48)
587
(480)
34
141
2018
£m
1,012
(49)
963
(497)
17
483
Change
71%
E&P free cash flow is E&P’s adjusted operating cash flow, as defined in note 2 and reconciled in note 4(f), less the business’s capital
expenditure and net disposals as defined above.
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
Taxation on profit – business performance
Exclude taxation on interest – business performance
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 liabilities associated with retirement benefit obligations
and derivative financial instruments
Effect of averaging and other adjustments
Average capital employed
ROACE
4
I/S
B/S
22
24
19
2019
£m
901
(218)
(61)
(18)
604
1,795
(583)
163
3,415
332
(8)
1,350
6,456
9%
2018
£m
1,392
(461)
(65)
(29)
837
3,948
(803)
79
2,889
(112)
130
215
6,346
13%
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.
224
Centrica plc Annual Report and Accounts 2019
Responsible Business – Performance Measures
Non-financial key performance indicators (KPIs)
We engaged PricewaterhouseCoopers LLP (PwC) to undertake a limited assurance engagement using the 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’. PwC have provided an unqualified opinion
in relation to six KPIs that are identified with the symbol ‘†’ and feature on pages 2, 46, 50 to 51 and below. A limited assurance
engagement is substantially less in scope than a reasonable assurance engagement in terms of the risk assessment procedures
which include an understanding of internal control, as well as the procedures performed in response to the assessed risks. Non-financial
performance and, in particular, greenhouse gas quantification is subject to more inherent limitations than financial information. It is
important to read the responsible business information in the Annual Report and Accounts 2019 in the context of PwC’s full limited
assurance opinion and Centrica’s Basis of Reporting, which are available at centrica.com/assurance.
Read more on Delivering our
Responsible
Business Ambitions on
Pages 48 to 54
Read more about our wider
non-financial performance at
centrica.com/datacentre
Progress against our 2030 Responsible Business Ambitions
Key: Progress against Ambitions
On track
Behind
Our Ambition for Customers: Delivering for our customers
2030 Ambition
2022 Milestone
2019 (Year 1 Progress)
Status
Help customers understand and manage their energy better
Deliver two innovations
Give customers peace of mind through tailored propositions
and connected technologies
Develop solutions to help our customers run their world
Deliver two innovations
Deliver two innovations
6 innovations
10 innovations
6 innovations
Make it simpler for people to deal with us in ways that work
for them
Support more customers via digital
channels
49% of customers using
online account
management
Our Ambition for Climate Change: Enabling the transition to a lower carbon future
2030 Ambition
2022 Milestone
2019 (Year 1 Progress)
Status
Help our customers reduce emissions by 25%, by direct (3%)
and indirect action (baseline: 2015)
Deliver 7GW of flexible, distributed and low carbon
technologies as well as provide system access and
optimisation services
Be net zero by 2050 and communicate our pathway
to it by 2030
Help our customers reduce emissions
by 15%, by direct (2%) and indirect
action (baseline: 2015)
Deliver 4GW of flexible, distributed and
low carbon technologies as well as
provide system access and
optimisation services
Reduce our internal carbon footprint by
35% by 2025 (baseline: 2015)
3.9% (i)
2.7GW†
55,145tCO2e†
(39% reduction against
baseline)
(i) Direct savings only. We intend to enhance our understanding and disclosure of indirect customer carbon savings relating to decarbonising the energy system and
advocating for cleaner energy policies. Read how we are advocating for cleaner energy policies on page 17.
Included in PwC’s limited assurance engagement referenced above.
†
Our Ambition for Colleagues: Building the workforce of the future
2030 Ambition
2022 Milestone
2019 (Year 1 Progress)
Status
Inspire and develop 100,000 people with essential STEM
(Science, Technology, Engineering and Maths) skills
Attract and develop more women into STEM with 40%
of STEM recruits to be female
Aspire for senior leadership to reflect the full diversity of our
labour markets
Help one million carers stay in or return to work via active
promotion of carer-positive policies
Inspire and develop 35,000 people with
essential STEM skills
Attract and develop more women into
STEM with 25% of STEM recruits to be
female
Aspire for 33% female and 10% ethnic
minority representation in senior
leadership
Actively promote carer-positive policies
to help carers stay in or return to work
11,409 people (i)
17%
29% female
10% ethnic minority (ii)
1,000 carers
(i) May involve double counting if someone has undertaken more than one STEM activity.
(ii) Based on 63% of employees who voluntarily disclosed that they are from a Black, Asian, Mixed/Multiple or other ethnic group across the UK and North America,
which constitutes the majority of our workforce.
Centrica plc Annual Report and Accounts 2019
225
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Other Information | Responsible Business – Performance Measures continued
Our Ambition for Communities: Creating stronger communities
2030 Ambition
2022 Milestone
2019 (Year 1 Progress)
Status
Deliver £5 billion of value for communities through new and
distributed energy technologies
Deliver £300 million in energy efficiency savings to public and
essential services
Encourage our people to share their skills by volunteering over
100,000 days
Deliver 2,500 skills development opportunities for young people
not in education or employment
Deliver £0.5 billion of value for
communities through new and
distributed energy technologies
Deliver £30 million in energy efficiency
savings to public and essential services
Encourage our people to share their
skills by volunteering over 20,000 days
Deliver 700 skills development
opportunities for young people not in
education or employment
£27.6 million
£2.5 million
2,452 days
362 young people
Progress across our Responsible Business Foundations
Customers
Metric
Brand NPS (i)
Complaints per 100,000
customers (i)
Vulnerable customers helped
through the UK Warm Home
Discount scheme
Customer safety incidents
2019
+15.1 (ii)
3,429 (iv)
2018
+10.0 (iii)
3,453 (v)
618,881
629,500
What’s next
Continue to deliver new services and solutions that satisfy the changing
needs of our customers
Maintain focus on driving down complaints by improving customer
service
Continue to ensure customers in vulnerable circumstances receive the
help they need to stay warm, safe and debt-free
28
26
Deliver strong customer safety performance through our focus on
training, tools and work practices
(i) Measure linked to Executive Director remuneration arrangements. See pages 88, 91 and 93 for more information.
(ii) Aggregated scores across UK Home +8, North America Home +29, Ireland +23, Centrica Home Solutions +39, UK Business +1 and North America Business +32 and
weighted by customer numbers. UK Home NPS differs from +12 communicated elsewhere in the Annual Report due to a change in methodology to focus on a British
Gas only score.
(iii) Aggregated scores across UK Home +1, North America Home +32, Ireland +33, Centrica Home Solutions +38, UK Business -12 and North America Business +28
and weighted by customer numbers. Assured by PwC for the 2018 Annual Report. See centrica.com/responsibilitydownloads to view PwC’s assurance statement
and Centrica’s Basis of Reporting. Elsewhere in the Annual Report, UK Home has been restated to +9 to show the British Gas only score.
(iv) Aggregated scores across UK Home Energy Supply 5,182 as reported to Ofgem, UK Home Services 2,388 as reported to the FCA, Ireland 4 as reported to the
Commission for Regulation of Utilities, Water and Energy (CRU), North America Home Energy 65 as reported by various regulatory bodies, UK Business 3,825 as
reported to Ofgem and North America Business 27 as reported by various regulatory bodies and weighted by customer accounts.
(v) Aggregated scores across UK Home Energy Supply 5,097, UK Home Services 2,827, Ireland 6, North America Home 83, UK Business 4,149 and North America Business 28.
226
Centrica plc Annual Report and Accounts 2019
Environment
Metric
2019
2018
What’s next
Total carbon emissions (i)
Scope 1 emissions
Scope 2 emissions
Scope 3 emissions
Total carbon intensity by
revenue
Annual customer carbon
savings from measures
installed
Total energy use
2,283,514tCO2e †
2,246,167tCO2e †
37,347tCO2e †
127,209,632tCO2e
101tCO2e/£m
1,737,122tCO2e (ii)
1,698,388tCO2e (ii)
38,734tCO2e (ii)
126,137,878tCO2e (ii)
74tCO2e/£m (iii)
2,629,198tCO2e
906,801tCO2e
Continue to measure, report and reduce our emissions and those of
our customers through our 2030 Responsible Business Ambitions –
in particular, to be net zero by 2050 and communicate our pathway to
it by 2030
Continue to analyse the impact of our strategy on decoupling carbon
emissions from value creation
Help reduce customer emissions by 25%, by direct (3%) and indirect
action as part of our 2030 Responsible Business Ambitions
10,095,173,370kWh† (iv) 7,278,127,491kWh (v)
Total water use
Total waste generated
Environmental non-compliance (x) 42
516,836m3 (vi)
27,596 tonnes (viii)
463,955m3 (vii)
30,212 tonnes (ix)
60
Reduce our internal carbon footprint by 35% by 2025 (baseline: 2015)
and work to continuously improve our disclosure against the
Streamlined Energy and Carbon Reporting (SECR) requirement
Effectively monitor, manage and reduce our water and waste
consumption as well as our incidence of environmental non-
compliance
Included in PwC’s limited assurance scope referenced on page 225.
†
(i) Comprises Scope 1 and Scope 2 emissions as defined by the Greenhouse Gas Protocol.
(ii) Assured by PwC for the 2018 Annual Report. See centrica.com/responsibilitydownloads to view PwC’s assurance statement and Centrica’s Basis of Reporting.
(iii) Restated due to a change in accounting methodology.
(iv) Comprises UK & Offshore 3,130,631,079kWh and Non-UK energy use 6,964,542,291kWh.
(v) Comprises UK & Offshore 1,642,646,626kWh and Non-UK energy use 5,635,480,865kWh.
(vi) Comprises office water 132,791m3 and process water 384,045m3.
(vii) Comprises office water 129,908m3 and process water 334,047m3.
(viii) Comprises office waste 1,878 tonnes and operational waste 25,718 tonnes.
(ix) Comprises office waste 1,973 tonnes and operational waste 28,239 tonnes.
(x) Includes breaches of environmental authorisation including permit, licence and consent coupled with wider environmental legislation where we are either required to
notify the regulator or where an authority or regulator is involved. The majority of incidents relate to offshore activities.
Centrica plc Annual Report and Accounts 2019
227
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Other Information | Responsible Business – Performance Measures continued
Colleagues
Metric
Total recordable injury
frequency rate (TFRIFR) per
200,000 hours worked (i)
Lost time injury frequency rate
(LTIFR) per 200,000 hours
worked (i)
Process safety incident
frequency rate (Tier 1 and 2)
per 200,000 hours worked (i)
Significant process safety
events (Tier 1)
Fatalities
Female and male employees
Employees from ethnic
minorities
Gender pay gap (v)
Gender bonus gap (vi)
2019
1.06
0.58
0.08
0
2018
1.02 (ii)
0.49 (ii)
0.06 (ii)
1 (ii)
0
29% female
71% male
12% (iii)
14% mean
30% median
29% mean
23% median
0 (ii)
29% female
71% male
12% (iv)
15% mean
31% median
15% mean
9% median
Employee engagement (i)
43% favourable
55% favourable (ii)
Retention
80%
85%
Absence per full time
employee (vii)
14 days
13 days
What’s next
Drive down our TRIFR and LTIFR by growing our safety culture to deliver
an incident-free workplace, enabled through targeted safety interventions
in key performance areas as well as full implementation of our improved
management system
Ensure operational controls and operator competences across our assets
are robust, with effective performance management in place
Maintain zero fatalities
Empower people with future skills and build a more inclusive workforce,
including through our 2030 Responsible Business Ambitions:
• inspire and develop 100,000 people with essential STEM skills;
• attract and develop more women into STEM with 40% of STEM recruits
to be female;
• aspire for senior leadership to reflect the full diversity of our labour
markets; and
• help one million carers stay in or return to work via active promotion of
carer-positive policies.
Work towards our long-term engagement target to meet or exceed the
external global benchmark of 72% by focusing on improving employee
experience, which includes connecting colleagues with our purpose and
enabling them to perform at their best
Support employees through restructuring and improve retention by
focusing on enhancing employee experience and talent development
Strive to drive down absence by continuing to embed good management
practices and ensure our people have access to the right support, with a
particular focus on proactive mental health provision
(i) Measure linked to Executive Director remuneration arrangements. See pages 89, 91 and 93 for more information.
(ii) Assured by PwC for the 2018 Annual Report. See centrica.com/responsibilitydownloads to view PwC’s assurance statement and Centrica’s Basis of Reporting.
(iii) Based on 63% of employees who voluntarily disclosed that they are from a Black, Asian, Mixed/Multiple or other ethnic group across the UK and North America,
which constitutes the majority of our workforce.
(iv) Based on 65% of employees who voluntarily disclosed their ethnicity.
(v) Based on hourly rates of pay for all employees at full pay (including bonus and allowances) at the snapshot dates of 5 April 2018 and 2019. Read our Gender Pay
Statement to find out more at centrica.com/genderpay.
(vi) Includes anyone receiving a bonus during the 12-month period leading up to the gender pay gap snapshot date and who are still employed on the snapshot date.
(vii) Relates to absence from sickness rather than wider forms of absence such as bereavement.
Communities
Metric
2019
2018
What’s next
Total community contributions
£166.7 million (i)
£148.1 million (ii)
Help create stronger communities and tackle pressing social issues,
including through our flagship charity partnerships with Carers UK, Focus
Ireland and the Children’s Miracle Network Hospitals in North America
Continue to assess sustainability risks among our strategic and
higher-risk suppliers
59 (low risk)
54 (low risk)
9
14
Average sustainability risk
rating of assessed suppliers
(score out of 100) (iii)
Ethical site inspections
undertaken for higher risk
suppliers
Employees committed to
uphold Our Code
82%
96%
Ensure all of our people uphold Our Code as part of our commitment to
doing the right thing and acting with integrity
(i) Comprises £164.0 million in mandatory and £0.3 million in voluntary contributions which largely support vulnerable customers, £1.4 million in contributions to our
flagship charity partners alongside £1.1 million contributed to other charitable causes. Unlike mandatory and voluntary contributions which are solely funded by the
business, charitable donations additionally include contributions from third parties such as employee fundraising. Aggregated component values differ to total due
to rounding.
(ii) Restated following a re-alignment of methodology to focus on our strategic donation areas. Comprises £139.8 million in mandatory and £6.2 million in voluntary
contributions, £1.0 million in contributions to our flagship charity partners alongside £1.1 million contributed to other charitable causes.
(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.
228
Centrica plc Annual Report and Accounts 2019
Glossary
$
Refers to US dollars unless specified otherwise
2P reserves
Proven and probable reserves
AGM
AIP
AOCF
bcf
CHP
CCGT
CO2e
CPI
CSS
CUPS DB
CUPS DC
Annual General Meeting
Annual Incentive Plan
Adjusted operating cash flow
Billion cubic feet
Combined heat and power
Combined cycle gas turbine
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
Data analytics The process of examining data sets to draw conclusions
and insights about the information they contain
LNG
LTIFR
Liquefied natural gas
Lost time injury frequency rate
mmboe
Million barrels of oil equivalent
mmth
NGO
NPS
NFRD
PP&E
ppt
Million therms
Non-governmental Organisation
Net promoter score
Non-Financial Reporting Directive
Property, Plant and Equipment
Percentage point
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
PRA
PRT
PWR
RBD
Prudential Regulatory Authority
Petroleum Revenue Tax
Pressurised Water Reactor
Reconciliation by difference
DEEPAC
EBITDA
EBT
EP
EPS
EU
Direct Energy Employee Political Action Committee
ROACE
Return on average capital employed
Earnings before interest, tax, depreciation and amortisation
Employee Benefit Trust
Economic profit
Earnings per share
European Union
ROC
RPI
RRJ
RRS
SAYE
Renewable Obligation Certificate
Retail Price Index
Risk Requiring Judgement
Risk Requiring Standards
Save As You Earn
EU ETS
European Union Emissions Trading Scheme
SHESEC
Safety, Health, Environment, Security and Ethics Committee
FCA
FRS
GDPR
GPS
GW
GWh
HVAC
IAS
IFRS
KPI
kWh
Financial Conduct Authority
Financial Reporting Standards
General Data Protection Regulation
Global Positioning System
Gigawatt
Gigawatt hours
Heating, ventilation and air conditioning
International Accounting Standards
International Financial Reporting Standards
Key performance indicators
Kilowatt hour
SIP
STEM
tCO2e
TCFD
Share Incentive Plan
Used in reference to skills relating to the subjects of science,
technology, engineering and maths
Tonnes of carbon dioxide equivalent
Task Force on Climate-related Financial Disclosures
the Company Centrica plc
the Group
Centrica plc and all of its subsidiary entities
TRIFR
Total Recordable Injury Frequency Rate
TSR
TWh
VIU
Total shareholder return
Terawatt hour
Value in use
LGBTQ+
Lesbian, Gay, Bisexual, and Trans plus. The ‘plus’ is inclusive of
other groups such as asexual, intersex and questioning
WBCSD
World Business Council for Sustainable Development
WRI
World Resources Institute
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Designed by SALTERBAXTER MSL
This report is printed on recycled silk papers made from
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are based in the European Union and manufacture
papers independently audited and certified by the
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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 of the Company’s 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 the
Company. These statements and forecasts involve risk and uncertainty because
they relate to events and depend on circumstances that will occur in the future.
There are a number of factors that could cause actual results or developments to
differ materially from those expressed or implied by these forward-looking
statements and forecasts.
Past performance is no guide to future performance and persons needing advice
should consult an independent financial adviser.
Centrica plc
Registered office:
Millstream
Maidenhead Road
Windsor
Berkshire
SL4 5GD
Company registered
in England and Wales
No. 3033654
centrica.com